One of the principal arguments touted by Japanese policymakers (and the economists cheering them on) for why deflation is a bad thing and therefore must be overcome is that it depresses consumer spending.
The idea is that if Japanese consumers expect lower prices a year from now, they are less likely to make a purchase today.
As Hiroko Tabuchi puts it in today’s New York Times…
A big obstacle in Japan’s path, [Japanese Prime Minister Shinzō Abe] says, has been the entrenched attitudes and behaviours in the country after so many years of falling prices. “It is not easy to alter a deflation mind-set that has been in place here for over 15 years,” Mr. Abe told Parliament last month.
For most countries, moderately rising prices are a normal part of life. A Big Mac hamburger in the United States, which went for about $US2.50 in 1998, now costs over $US4.50. Since the turn of the century, American consumer prices have risen from 1.5 to 4 per cent a year.
But in Japan, overall prices have not risen since the late 1990s. The Big Mac still costs about the same here as it did in 1998: about 300 yen, or almost $US3. The price of another popular fast-food offering — the beef-and-rice bowl from the Yoshinoya restaurant chain — has fallen from 400 yen in the late 1990s to 280 yen today. During that time, average worker incomes have also fallen.
Is this actually true?
Are there actually “entrenched attitudes and behaviours in the country after so many years of falling prices,” as Abe and Tabuchi suggest?
While the concept may make sense in theory — setting aside the problems with the reasoning that one might put off a hamburger purchase today because one expects it to be cheaper a year from now — it isn’t borne out in the actual data, at least in the case of Japan.
The Bank of Japan conducts a quarterly “Opinion Survey” in which it asks consumers about, among other things, their views on prices — how they feel prices have changed over the past year, and how they expect prices to change over the coming year.
If it were true that deflation depresses consumer spending through the expectations channel — and that this were ingrained the mind-set of Japanese consumers — one might expect the survey to reveal that (a) many respondents experienced falling prices over the past year, or at least (b) many respondents expect prices to fall over the coming year.
However, an examination of the last 10 years of survey results suggests neither (a) nor (b) appear to be true.
Chart 1 challenges the assertion that a significant portion of the population has even experienced deflation in the last 10 years.
It shows that the number of survey respondents reporting that prices had fallen over the past year peaked in the first quarter of 2010 at 40%.
This was clearly temporary, however — and came at a time of extraordinary Japanese yen strength, given the strains on the global economy in the wake of the global financial crisis.
Moreover, as chart 2 shows, the vast majority of those reporting deflation at the time (36% of all consumers) characterised prices as down “slightly,” whereas only 4% of all consumers characterised prices as down “significantly.”
What should jump out from both charts is that according to the latest survey data, only 2.7% of Japanese consumers feel like prices have gone down “slightly” over the past year, while an even smaller 0.2% believe prices have gone down “significantly.” The rest say prices have gone up or have been unchanged.
This should be enough to dispel the idea that deflation expectations have become entrenched and are depressing consumer spending, if only because it’s plainly evident that very few Japanese consumers are actually experiencing deflation.
Let’s take a look at expectations though too, just to be sure.
Chart 1 shows that, at present, only 3.5% of Japanese consumers expect a “slight” drop in prices over the next year, whereas an even smaller 0.6% expect a “significant” drop ahead.
Moreover, as chart 3 illustrates, even at the height of the deflationary mood in Japan during the first quarter of 2010, only 16.2% of Japanese consumers expected a “slight” drop in prices over the subsequent year, and only 0.7% expected a “significant” drop was coming.
On average, over the last 10 years, 6.4% of consumers expect a “slight” drop in prices in the subsequent year, while 0.4% of consumers expect a “significant” drop.
To sum it up: 4.1% of Japanese consumers currently expect deflation. Over the past 10 years, that number has averaged 6.8%. The remaining 95.9% (93.2% on average) expect prices to go up or remain unchanged.
In the Times, Tabuchi cites Yusa Nishimura, whose “purse could be undermining Prime Minister Shinzo Abe’s economic recovery plan for Japan.”
“As often as she can, Ms. Nishimura tucks away 500-yen coins, worth a little under $US5,” writes Tabuchi.
“Ms. Nishimura, 23, even has a folder that displays them so Japan’s highest-denomination coins are easier to count. Cash nest eggs like Ms. Nishimura’s made sense in slow-growing Japan, where during 15 years of deflation her money was worth more as time went on. The spa getaway she planned to splurge on was likely to get cheaper if she waited longer.”
But Ms. Nishimura appears to be one of only 4.1% of Japanese consumers who fear deflation.
As Nomura chief economist Richard Koo put it in a 2013 report on Abenomics, “the government’s view that the economy will improve as long as deflation can be defeated depends entirely on a change in the behaviour” of those like Ms. Nishimura — the tiny slice of Japanese consumers hoarding money in anticipation of lower prices.