Japan: A Perspective on the "Deflation Mindset"

In the world's third largest economy, the populace is reluctant to spend money.

The monetary easing that the Bank of Japan initiated in 2013 is no match for a stubborn deflationary mindset. Japan's CPI has hovered in the minus column for seven months in a row through September.

BOJ Governor Haruhiko Kuroda had hoped Japan would be experiencing 2% inflation by now, but the lack of significant progress has prompted the BOJ to push the timeline for that goal to "around fiscal 2018."

Here's Nov. 7 commentary from the Japan Times:

[BOJ Governor] Kuroda said it's not easy to dispel the deflation mindset — which he appears to view as a mentality embedded among consumers and businesses as a result of the deflation that gripped the nation since the 1990s to anticipate prices to fall and, based on that expectation, hesitate to spend or invest more. He acknowledged it was "regrettable" that the target could not be reached in two years, although he lays the blame chiefly on the global slowdowns in emerging economies and the steep fall in crude oil prices.

Price and consumption statistics point to intensifying deflationary sentiments. The nationwide consumer prices excluding perishables in September fell 0.5 percent from a year ago for the seventh month of decline in a row. Even the index on prices not including food and energy stopped rising for the first time since the same month three years ago. Consumer spending per household in September fell 2.1 percent in real terms for the seventh consecutive monthly decline. …

No matter how the central bank or the government try to fan inflationary expectations, consumers will hesitate to spend more if their wages are not increasing enough and they don't see their future income rising. Companies will not be investing more unless they see new and increasing demand in their market. While the Abe administration likes to tout pay raises by Japanese firms under its watch as the sharpest in years, people's wages on a net basis declined for four years in a row to 2015 — until they begun to pick up in recent months, partly as falls in prices have deepened. There are views that decline in wages since the 1990s was chiefly to blame for the protracted deflation in this country. If the mindset of consumers and business management is indeed the problem, you will have to tackle what's behind the mentality.

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