Japan Expects Consumer Price Increase

Consumer prices show signs of picking up in Japan that has been plagued by deflation since the mid 1990s. Consumer prices in July decreased by 0.2% in July over the same period of last year, the slightest decrease since 2001. The Japanese government also projected that if this trend continues, consumer price growth rate will move into a positive territory in September or October.

The Bank of Japan also announced that it would not implement monetary tightening even though consumer prices continue to rise for a while in order to maintain the momentum of the consumer price rise.

Can Japan succeed in its desperate efforts to stimulate its economy by increasing consumer prices by all means?

▽ Easing of monetary policies

Hukui Dosihiko, the governor of the Bank of Japan, announced that the bank will maintain the current policy of monetary easing even though consumer prices keep rising in coming months. This can be seen as the bank`s strong commitment to monetary easing amid rising speculations on the possible change in the bank`s policy due to clear signs of economic recovery.

Consumer price growth rate has been around –1 to –2 % for several years. But the decrease of the growth rate has slightly slowed down this year. But the Nihon Keizai Shimbun, Japan`s economic daily, reported that even this small decrease has a significant meaning as it occurred with fees for public services such as electricity and transportation being the same.

The Japanese government has an optimistic view that consumer price growth rate is likely to turn around in September or October when the damage from cold weather starts to be reflected rice prices.

Experts analyze that consumer price increase itself has a significant psychological meaning in Japan as the country suffers from the prolonged recession. The increase will send the signal of consumer price increase to Japanese consumers who own personal financial assets of 1400 trillion yen but don`t consume, which will in turn facilitate consumption.

Japanese banks strongly hope that consumer price increase would bring about more expectation of inflation, which will in turn increase consumption. Then, this will improve corporate performance, which will pull Japan out of inflation.

▽ Bipolarization of consumption

The expectation that Japan will soon escape from inflation was also reflected in numbers. The Nikkei Stock Average increased for four days in a row until Thursday. The index closed at 11,033.32 yen Thursday, up by 43.21 yen from yesterday.

Economic indicator in July release by the Interior Ministry on the day stood at 80 (a figure above 50 means the economy is doing well), reaffirming that the economy is on the rise. The International Monetary Fund revised Japan’s GDP growth rate upward from 0.8% in April to 2.0 % recently. The Japanese government is expecting that the economy`s growth rate can be at around 3%.

Middle classes and upper classes are opening their wallets in Japan. 100 yen shops, where all the goods are sold at 100 yen, are still crowded with people and race to the bottom is fierce. But with rising stock prices, middle classes as well as upper classes are buying high-end products.

In the auto industry, cars equipped with accident prevention system, which is at least 800,000 yen more expensive than a standard model, is selling better than a standard model. Department stores, which has been bent on discount sales, now try to sell luxury items especially to people aged over 40 who have strong purchasing power by renovating their shops in a more sophisticated way.

But the consumption is still polarized between the consumption of high-end goods and low-priced goods, which means that middle classes` consumption will determine the increase in consumption in Japan.

parkwj@donga.com