Deflating Japan

Local tabloids may be running scare stories about "hyperinflation" as food prices jump, but in Japan the shadow of deflation is worrying the authorities as much as, if not more than, any general rise in inflationary pressure.

The soaring cost of agricultural commodities is hitting many countries around the world and Japan is suffering as it produces only 40 percent of the food it consumes, the lowest among major industrialized nations. Rising freight costs are also a burden for a country heavily reliant on imports.

Consumers now pay 17 percent more for instant noodles than a year ago, 13 percent more for spaghetti and 10 percent more for mayonnaise.

To people who've watched consumer prices fall for nearly a decade, that might look like hyperinflation.

But in reality overall inflation is running at just 1.0 percent a year - the highest in a decade, perhaps, but still much lower than 3.5 percent in the euro zone, 4 percent in the United States and 8.7 percent in China.

Core inflation, excluding fresh food but including oil products, is also just 1.0 percent, despite high energy prices.

Tame wage growth has capped service costs while prices of appliances such as flat-screen television sets and personal computers continue to fall due to tough competition, offsetting the rise in food and energy prices in the consumer price index.

"Wages must increase for the rise in food and energy prices to spread to other items and push up consumer price inflation," says Koichi Haji, chief economist at NLI Research Institute.

"But that doesn't seem to be happening now."

Indeed, the "core-core" consumer price index, which excludes both food and energy prices, was down 0.1 percent in February from a year earlier and has been dropping for two years.

The gross domestic product deflator, one of the broadest measures of price pressures in the economy, has yet to turn positive after a decade of declines. It fell 1.3 percent in the final quarter of 2007 from a year earlier.

That has stopped the government declaring an end to deflation and cast doubt on the Bank of Japan's contention that consumer price inflation will gradually pick up as the economy recovers.

Worse, from the Bank of Japan's view, it makes it very hard to raise interest rates to a more "normal" level. After holding short-term rates near zero for five years to fight deflation, the central bank has managed just two quarter-point increases in as many years to take its overnight policy rate to 0.50 percent.

Rice not rising

Even the rise in food prices is not that dramatic in Japan, overall, compared with other Asian countries. Excluding volatile fresh items such as raw vegetables, meat and seafood, food prices rose just 0.3 percent last year, which puts the tabloids' warnings about hyperinflation into perspective. Back in 1974, food prices soared 27 percent as companies showed no restraint in passing on higher energy and raw material costs to consumers, sending overall inflation to 23 percent.

Some companies took advantage, raising prices by more than was needed to cover cost increases, aggravating the situation and leading to what was dubbed an "inflation frenzy".

It's a different story today, as companies go out of their way to avoid price increases for fear of scaring away consumers, who have a much wider selection of products to choose from than three decades ago.

With wages barely rising, consumers remain frugal and are sensitive to even meagre price rises, economists say.

Big supermarkets see rising food costs as an opportunity to lure consumers away from less competitive rivals.

Aeon Co Ltd, Japan's second-biggest retailer, launched discount campaigns last August that included freezing prices of daily necessities. It also cut some fruit prices after the yen's recent rise made imports cheaper.

"The pressure on companies to keep prices low is enormous," says Azusa Kato, an economist at BNP Paribas.

Food price moves are uneven. While cooking oil and imported cheese are getting steadily more expensive, the price of rice, the traditional Japanese staple, was 2.4 percent lower in February than a year earlier.

Rice fell 1.8 percent last year and has dropped about 9 percent since 2000 as the public turns to more Western food.

"It's not that prices of everything are going up at once like during the 'inflation frenzy' era," says Masaaki Sato, director of the Internal Affairs ministry's price statistics office, which is in charge of compiling consumer price data.

"It's a completely different situation. Rises in food prices are very moderate."

Agencies

(China Daily 04/14/2008 page11)