Deflation doesn’t only cause Japanese consumers to hold back on retail spending.
It also causes large corporations to delay capital expenditures as well, since they anticipate lower prices in the future.
Thus crushing deflation in Japan has led to a shocking 24.8% drop in capital expenditures during the third quarter, according to latest government data. Worse yet, this was an acceleration of the previous 21.7% drop during Q2.
WSJ: Capital spending, which accounts for around 15% of GDP, isn’t likely to recover much while managers are worried about falling prices and the yen, analysts said.
“If I were an executive in charge of capital expenditures at a firm, I wouldn’t increase spending much for the time being as the recently rising yen makes the outlook very unstable for the export-reliant economy,” said Norio Miyagawa, an economist at Shinko Research Institute.
The finance ministry’s data showed that investment in the manufacturing sector fell at a record 40.7% pace, while outlays by automakers, whose bottom line is highly sensitive to exchange rates because of their reliance on exports, tumbled 59.7%.
Now you know why Ben Bernanke is so intent to stave off deflation in the U.S.