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Japan and the In-"Convenience" of Deflation

In Robert Prechter's first edition of Conquer the Crash, he noted:

Since Japan's boom ended in 1990, its regulators have been using every presumed macroeconomic "tool" to get the Land of the Sinking Sun rising again, as yet to no avail.

Fast forward more than 15 years, and the world's third largest economy is still struggling with a deflationary psychology.

Read this excerpt from a March 6, 2018 Bloomberg article titled "Convenience-Store Squeeze Shows Deflation Dilemma Facing BOJ":

Convenience-store owners are on the front lines of Japan's battle with a "deflationary mindset," one compounded by a declining population. As the Bank of Japan repeatedly urges businesses to fatten paychecks to help stoke inflation, convenience-store chains are turning to automation and other means to absorb higher labor costs.

The reluctance to pass on those costs to customers, the BOJ says, is a key reason inflation remains well below its 2 percent target despite years of extraordinary monetary stimulus.

"It's very hard to predict when companies will stop absorbing these costs," according to [the] head of Japan economics at Bank of America Merrill Lynch. "The short answer is, when the deflation mindset changes."

Yet with the unemployment rate at 2.4 percent, the labor market is getting so tight that wages and prices are beginning to budge. Workers are moving into better-paying jobs and permanent, full-time employment, Bank of America Merrill Lynch said in a recent report. Meanwhile, the minimum wage that serves as something of a benchmark among retailers rose by around 11 percent between 2013 and 2017, part of the government's efforts to improve paychecks overall.

And that's where productivity comes in. If workers are more productive, companies can absorb higher wages without denting profits, salary earners spend more and the BOJ's 2 percent inflation target becomes a reality. But if the deflationary mindset never changes, the risk is those productivity increases fail to trigger broad wage gains or stronger inflation.

You can read the entire article by following the link below: https://www.bloomberg.com/news/articles/2018-03-05/convenience-store-squeeze-shows-deflationary-dilemma-facing-boj

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