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In a wondrous moment as the Red Sea separates, Japan’s bookstores have reserved shelf space for a genre of literature that has, fittingly, generated almost no demand for the past three decades: inflation and what to do about it.
Titles such as “Inflation Japan: The Coming Era of Endlessly High Prices” and “A World of Inevitable Inflation” strike a common tone of cautionary tale and grandiose. According to this work, Japan’s entry into a sustained 20-month period of consumer price hikes after years of stagnation and deflation at the end of 2021 represents not only a profound economic transformation, but also a psychological, social and epochal one. All in all, this feels about right. Japan’s experience of deflation has been strangely protracted and strangely damaging. If it’s really over now, even as the country braces for inflation to become the next problem, there’s a lot of weirdness to be gleaned from the system.
Meanwhile, Beijing may conclude that Japan’s inflation-related release phenomenon merits particularly close scrutiny as the two economies climb the stairs: Japan is shedding the last tentacles of deflation from its ankles, while China appears to stumble resignedly into its arms.
China’s descent into deflation was confirmed last week amid a major spate of difficult economic news from the economy, which is generating over a third of global growth. Worryingly high youth unemployment, low house prices and a highly indebted corporate sector are holding back demand and were the backdrop to weak consumer prices turning slightly but undeniably negative in July.
For some, this overlap provided another clue to a now intriguing intellectual exercise: they compared Beijing’s economic challenges today to those of Tokyo in the early 1990s, its “lost decades,” and came to the same conclusion—like Moody’s economist Stefan Angrick it does they are “eerily similar”.
The list of similarities and whether aging China will now repeat Japan’s problems over a similarly long period of time can seem compelling.
The bursting of Japan’s asset price bubble in the late 1980s produced a cohort of troubled banks and indebted companies such as those that China is now amassing. The threat of a so-called balance sheet recession that marked Japan’s lost decades now appears to be a major threat to Chinese companies. Just as their Chinese counterparts are doing to some extent today, 30 years ago companies in Japan were unwilling to borrow or invest, having paid off their debts, and ultimately persuaded their workforces to live up to expectations of significant wage growth to take back.
Japanese households lost confidence to spend; competition destroyed pricing power; Demand weakened and deflation ensued. In the eyes of those who see Japanification, China is now experiencing the same thing.
But are fears of a long, Japanese-style deflationary slide in China misplaced? Economists at Citibank and elsewhere warned investors not to read too much into a single month’s consumer price data, especially as the collapse in pork prices may have been the single biggest reason.
But the risk of this becoming longer-term still exists, and the longer it stays that way, the more relevant Japan’s experience will be. Because as important and helpful as the analysis and advice in all of these newly published inflation books is, the greatest enlightening value is that it needs to be written in the first place.
Many of them offer advice on how to invest at a time when doing nothing no longer works. The way Japanese households have invested most of their savings in cash – and have come under little pressure to do so – is one of the most pervasive behavioral consequences of deflation that may now be unraveling all of a sudden.
These books are written practically as guides for the inhabitants of a country that has suddenly become economically alien to them. China should take this as a measure of how ingrained some habits of living with deflation can be and how far beyond initial projections it may take to end.
But a second important revelation lies in the tone the books inevitably strike. Inflation may still be far from being a bad problem for Japan, but it can – and probably should – be seen as a worse problem than deflation ever was.
Beijing, on the other hand, is fully aware of this, which is why it should be relatively relaxed about even a longer tournament with falling prizes. In 30 years, deflation as a crisis in Japan has scarcely caused a shred of serious public unrest: inflation can cause problems overnight.
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