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The Yomiuri Shimbun (Dec. 1, 2009)
Use all policy tools to rescue economy
Falling prices resulting from deflation may seem like a blessed rain after the drought for salaried workers pinching pennies in the economic downturn and pensioners.
But deflation is an awful, intractable disease that wreaks havoc on an economy. It is dangerous to make light of it.
Recently, a simple lunch combo offered by a convenience store--instant noodles in a cup plus a piece of fried chicken--has proved a hit with salaried workers looking to save money.
Lawson Gate City Ohsaki convenience store, located in front of JR Osaki Station in Tokyo, is crowded with salaried workers at lunchtime. Not a few of the men among them presumably opt for cup noodles to save time and money.
But cup noodles alone seems a paltry lunch. Most of them buy one more item under the hit "plus one" offer--a new fried chicken product called L Chiki that went on sale this spring.
A single L Chiki nugget weighs about 100 grams, almost the same as Lawson's regular fried chicken nugget, but costs 128 yen, 40 yen less than the regular nugget. According to Ryosuke Kobayashi, 26, head of the Osaki shop, the new product has proved popular because it is cheap and filling, and its sales are between 150 percent and 200 percent greater than the regular product.
The new fried chicken product is cheap because imports of low-priced Brazilian chicken have jumped, causing a collapse in the price of chicken, including Japanese chicken. Following the worldwide economic slump that began last year, demand for Brazilian chicken in the United States and European countries, which had been major importers of the product, decreased, and the price-busting chicken began to be imported into Japan in large volumes.
This prompted convenience stores to offer low-priced fried chicken products. They have found themselves waging a price war with boxed-meal chain store operators, which are luring customers with fried chicken lunches priced at about 300 yen.
The consumer price index, meanwhile, continues to fall, declining 2.2 percent in October from a year earlier, marking the eighth consecutive monthly fall. Prices of food--a daily necessity--had been thought to be resistant to deflation, but food prices have been below those of the previous year for five months in a row.
Although this downward trend in food prices may be a blessing for consumers, people on the other side of the shop counter are being buffeted by unprecedentedly strong headwinds.
Price wars hit small firms
Takayoshi Isoda, 74, president of chicken wholesaler Torishin in Tokyo's Itabashi Ward, deplores the current situation. "The price of Brazilian chicken is almost half that of last year," he pointed out.
Ninety percent of the chicken Isoda's firm trades in is from Brazil. As major chicken wholesalers have mounted a price-cutting offensive against smaller firms, Isoda is told by his clients, "Sorry, we want to buy chicken from a company that sell the cheapest product." His company's sales of chicken, mainly for commercial use, have tumbled due to a fall in selling prices.
The prices did not rebound in November, although the year-end, when demand usually spikes, is around the corner, with sales for that month only about 70 percent of last year's.
"I've been in this business for 50 years, and this is the first time we've found ourself in such a serious situation," Isoda said.
The price competition has been intensifying to attract bargain-seeking customers.
Supermarkets and major retailers have added to the lineups of their own-brand products, which are much cheaper than similar well-known brand-name products. Some major retail shops sell own-brand 350-milliliter cans of cola and tea for as little as 30 yen.
The deflationary trend in the clothing sector is also notable. For instance, prices of low-priced jeans were progressively slashed to just 880 yen by such retailers as Aeon Co. and Daiei Inc., 850 yen by Seiyu GK and 690 yen by Don Quijote Co.
"I just try clothes on at department stores. I actually buy the clothes from Internet shops, which are cheaper," a female office clerk said, describing how she husbands her limited resources.
Department store sales have declined for 20th straight months through October, with sales of clothing marking the sharpest decline. Some department stores even sell men's suits for less than 10,000 yen in a bid to regain lost ground.
Major retailers can maintain their businesses even in the face of fierce price wars, but small and midsize businesses tend to be driven into a corner in such a situation.
The results of a survey by Shoko Chukin Bank, whose clients are small businesses, showed that business sentiment among small and midsize enterprises turned downward in October for the first time in nine months, supporting the theory that the business recovery appears to have ground to a halt.
The main cause is a decline in sales due to the downward trend in retail prices. It seems inevitable that small businesses will have to accelerate their restructuring efforts.
Consumption will deteriorate if employment and wages are curtailed further at small and midsize companies, which employ 80 percent of the Japanese workforce.
Deflationary threat looms
There are signs that the nation is on the brink of falling into a deflationary spiral, in which shortage of demand pushes down commodity prices, accelerating economic deterioration.
In response, the government again declared last month that the economy is experiencing deflation, pointing out a demand shortage of as much as 40 trillion yen.
In spite of this, the Cabinet of Prime Minister Yukio Hatoyama has frozen the implementation of parts of the fiscal 2009 supplementary budget, including public works projects, stoking fears that the demand shortage will depress the economy even further in the coming year.
The government has proposed the provision of child-rearing allowances and the elimination of tolls on expressways as measures to stimulate domestic consumption. But many question whether these measures will produce positive effects quickly, and whether they are sustainable.
The steep appreciation of the yen and drops in stock prices we saw last week increase deflationary pressure. Hatoyama held an emergency meeting with concerned Cabinet ministers on Sunday at which he instructed them to include measures to deal with the strong yen and bearish market in a planned second supplementary budget for this fiscal year.
Bank of Japan Gov. Masaaki Shirakawa on Monday belatedly acknowledged that the nation was in a state of deflation, saying the central bank will "make utmost efforts to overcome deflation."
The government and central bank are finally preparing to work together to use every available policy tool to combat deflation. A package of comprehensive antideflationary measures must be implemented without delay.
(From The Yomiuri Shimbun, Dec. 1, 2009)