The world's most radical experiment in monetary policy isn't workingDeflation is bad for an economy because it undermines economic growthJohn Lyons & Miho Inada | The WSJ February 27, 2017
Japanese national flags flutter in front of buildings at Tokyo's business district in Japan.Photo: Reuters
During Japan’s go-go 1980s, Hiromi Shibata once blew a month’s
salary on a cashmere coat, wore it a few times, then retired it.
Today, her daughter’s idea of a shopping spree is scrounging
through her mom’s closet in Shizuoka, a provincial capital.
“About a third of my wardrobe is hand-me-downs from my mom,”
says 26-year-old Nanako Shibata, who lives in Tokyo. To save on
the 112-mile trip home, she rides the bus instead of the speedy
bullet train, once a symbol of Japan’s rise.
The US appears to be leading other parts of the globe out of an
extended era where central banks relied heavily on low and
negative interest rates and stimulus to jump-start growth and
keep prices from falling. The Federal Reserve has raised US
interest rates, and the
European Central Bank is considering easing its stimulus.
Japan remains definitively stuck, despite a long and
aggressive experiment with ultralow rates. A quarter-century
after its property bubble burst, a penny-pinching generation has
come of age knowing only economic malaise, stagnant wages and
deflation—a condition where prices fall instead of rise.
The belief that deflation will continue has become so ingrained
it has presented seemingly insurmountable challenges to monetary
policy, a lesson for other countries that are traveling a
similar path.
“It is hard to change the deflationary mind-set even with
radical policies,” says Frederic Neumann, co-head of Asia
economics for
HSBC. “I would argue
Japan will remain in its funk and will remain there for many
years.”
Japan is nearly four years into a Central Bank stimulus
effort involving printing trillions of yen and guiding interest
rates into negative territory, perhaps the globe’s most
aggressive such efforts under way. Bank of
Japan governor Haruhiko Kuroda’s shock-and-awe stimulus,
launched in April 2013, fizzled after a short-lived spurt of
growth and rising prices.
Japan fell back into deflation last year. More recently, the
inflation rate has been bouncing around near zero.
In November, Mr. Kuroda postponed his goal of reaching 2%
inflation, all but admitting he is out of ideas. He said in a
series of speeches last year that an entrenched “deflationary
mind-set” stifled hope that wages or prices will rise, limiting
the impact of monetary policies such as negative rates. Mr.
Kuroda declined to comment through a spokesman.
Japan’s inflation rate has ticked above zero in recent months,
which economists attribute to the election of U.S. President
Donald Trump, a stronger dollar and higher oil prices—not
economic fundamentals in
Japan. Few see
Japan returning to robust growth and rising prices.
Deflation is bad for an
economy because it undermines economic growth. Businesses
earn less, so they invest less, cut wages and stop hiring. Amid
the economic uncertainty, consumers stop spending, furthering
the downward spiral.
The idea behind ultralow rates is that they jolt consumers and
businesses into spending by kindling inflation. But Japan’s
deflationary expectations have become so routine that consumers
and businesses refrain from spending no matter how low the
central bank goes. There is evidence, in fact, that rock-bottom
rates are backfiring by frightening consumers into saving for
perilous economic times, not spending.
In an era of central-bank improvisation, no other nation has
pushed the envelope as much. The Bank of
Japan was the first to lower its benchmark rate to near zero
in 1999, long before Europe, the U.K. and the U.S. did so in
response to the 2008 financial crisis. In 2001,
Japan began flooding its financial system with cash to try
to spur inflation and growth, a practice called quantitative
easing that was later adopted in the West.
Mr. Kuroda in 2013 began pumping so much money into the
financial system—eventually around $700 billion a year—that some
investors worried hyperinflation or asset bubbles would form.
That hasn’t happened. Last year, the Bank of
Japan followed the
European Central Bank in guiding rates into negative
territory, a radical attempt to force banks to lend more money
by making it costly if they don’t.
Japan’s predicament today was almost unthinkable during its
1980s boom, when Japanese tycoons bought trophy properties such
as New York’s Rockefeller Center and Tokyo real-estate prices
were the world’s highest. In 1989,
Japan initiated interest-rate hikes that popped real-estate
and stock-market bubbles.
Since then, annual growth has averaged less than 1% amid
periodic recessions. Prices began falling in the late 1990s.
Japan’s
economy dropped to the world’s third-largest after
fast-growing China surpassed it as No. 2. The Nikkei
stock-market average is around half its 1989 peak. Property
prices have fallen broadly for a quarter of a century.
Frozen-dessert maker Akagi Nyugyo ran an apologetic
advertisement last year after implementing a 9 cent increase,
its first in 25 years. Japanese companies are sitting on nearly
$2 trillion in cash, idle money that officials contend should be
invested in
Japan.
The deflationary landscape is deeply imprinted on the 20 million
Japanese between ages 20 and 34 who grew up after prices started
falling. Wage increases, rising stocks or banks that pay decent
interest on deposits are all hypotheticals to them. They live in
a world where anything they buy today might be had for less
tomorrow. Their instinct is to do the safe thing and economize.
They reject the consumerism of their parents’ generation as
excess. Some live with roommates in group homes, a new
phenomenon for Japan, and dine on $3 beef bowls. If they spend
on anything, it is travel. In a deflationary society,
experiences don’t lose value, while anything you buy does.
Some older Japanese who knew the privations of the postwar years
see a worrisome lack of ambition in younger people.
Japan uses the term “neets” to describe young people “not in
education, employment or training,” while “freeters” work
unstable part-time or contract jobs. Japanese “parasite singles”
never leave their parents’ home, and women complain about
“herbivore men” uninterested in the opposite sex.
“Their problem is they are too comfortable,” says Heizo
Takenaka, a former
economy minister. “Their expectations are low. We wanted to
own the excellent cars. But they don’t seem to want to.”
Many economists believed the Bank of Japan’s 2013 stimulus would
be enough to jolt the nation out of its downward spiral of weak
growth and falling prices. Mr. Kuroda and others in Prime
Minister Shinzo Abe’s government point to an initial burst of
inflation and growth as signs the stimulus will eventually work.
Others say the monetary policies worked until they were
undermined by a 2014 sales-tax increase.
A Bank of
Japan survey in October found only 5% of respondents planned
to spend more next year, while 48% intended to cut.
Keita Kameyama, a 30-year-old civil servant in Kagawa, a rural
province, has been saving around 25% of his $40,000 salary each
year to eventually marry his longtime girlfriend. He lives at
home with his mother, drives an old Honda and rarely shops.
The central bank’s stimulus measures had no effect on Mr.
Kameyama’s spending. He still salts away his money in
plain-vanilla bank accounts. He fears Japan’s long stagnation
will wipe out his pension, and worries he won’t have enough
money to care for his mother—a growing concern in a country with
twice as many people over 60 than between 20 and 34.
He sees bank accounts, which offer minuscule interest rates on
deposits despite negative short-term rates, as the only way to
save. Hyakujushi Bank, Ltd. the biggest in Kagawa, pays only
0.05% on deposits and has paid less than 1% since 1995.
“People in Kagawa love to save,” says Mr. Kameyama. “I have
heard [the Bank of Japan] is trying very hard to get people to
spend their money, but I don’t think I will be opening my
wallet.”
Many young Japanese economize because they simply don’t have
enough money. More are working low-paying and temporary jobs
with no benefits.
“Companies aren’t growing, and they have aging workforces that
they can’t fire,” says Takuji Okubo, an economist and founder of
the
Japan Macro Advisors research group. “So there’s no room to
hire young people.”
Automobile, beer and cosmetics firms have slashed young-adult
advertising and market to retirees instead, says Yohei Harada,
head of the youth-marketing unit at Tokyo advertising agency
Hakuhodo Inc. “The role of parents and children is getting
reversed, where the parents from the bubble generation still act
like children and want to buy the fancy car, while their
children in the post-bubble generation worry about their
parents’ spending,” he says.
Takashi Saito, a 33-year-old unmarried entrepreneur, was living
in group apartment in Tokyo in 2015 when he decided to start a
business. His idea: an online clothing-rental company for women
who want a varied wardrobe but don’t want to pay for it. For $45
a month, clients rent three articles of clothing at a time,
which they can return for others when they like.
Mr. Saito thought it would be easy to get a loan because Japan’s
low-rate policies are meant to spur banks to lend more to small
businesses. It wasn’t.
He asked
Japan Finance Corp., a state-owned institution set up to
lend to small businesses, for $200,000. After much haggling, he
got less than $50,000. A year later, as the business grew, he
asked for more. He was rejected.
Japan Finance Corp. declined to comment.
Bank analysts say Japanese lenders have become more
conservative, particularly with startup companies that have no
collateral, because low rates cut into profits. In the 11-months
after Japan’s rates went negative last year,
Japan Finance Corp.’s loan portfolio shrank.
Mr. Saito raided savings, borrowed from family and is hoping for
venture capital.
Japanese clothing brand Uniqlo became a hit in the deflation
era, appealing to a nation of penny pinchers with inexpensive
casual wear. But customers stopped buying Uniqlo after price
increases in 2015, forcing the retailer to cut prices to win
back sales.
Uniqlo founder Tadashi Yanai blames negative rates and other
central bank policies, such as quantitative easing, for worrying
consumers. “It’s anxiety about the future,” he said in an
interview. “They have to stop negative rates. That’s idiotic.”
J.P. Morgan Chase & Co.’s
Japan economist, Masaaki Kanno, says the deflation mind-set
is entrenched because it is rational. With wages unchanged for
25 years, young adults don’t believe they will earn more in the
future.
Some economists contend the government should try even more
fiscal stimulus and monetary easing. Others argue the stimulus
has already saddled
Japan with so much debt—now 230% of gross domestic
product—that it could end in an economic collapse.
Ms. Shibata, the Tokyo resident who raids her mother’s closet,
recently cut her hours at a job-placement service to three days
a week. To do so, she moved into an apartment that rents for
half what she was paying. She has stopped shopping altogether.
She sees no point in pouring her time into a career. She is
pursuing contemporary dance instead.
“I think it’s not fair if I get consumed completely by a
company,” says Ms. Shibata. “Nowadays, we can hardly expect a
raise.”
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