In a miraculous, parting-of-the-Red-Sea moment, Japan’s bookshops have set aside shelf space for a genre of literature that has, appropriately, generated roughly zero demand for the past three decades: inflation and what to do about it.
Titles such as Inflation Japan: the Coming Era of Endless High Prices and A World of Inescapable Inflation, strike a common, cautionary and grandiose tone. In the judgment of these works, Japan’s late 2021 entry into a sustained, 20-month stint of consumer price increases after years of stagnation and deflation represents not only a profound economic shift but a psychological, social and epochal one too. On balance, that feels about right. Japan’s experience with deflation was weirdly protracted and weirdly pernicious. If it is now truly over, there is an awful lot of weirdness to work out of the system even as the country is braced for inflation to become the next problem.
Beijing, meanwhile, may decide that Japan’s inflation-linked publishing phenomenon is worth a particularly close study as the two economies pass on the stairs: Japan swatting deflation’s last tentacles off its ankles just as China seems to be stumbling resignedly into its embrace.
China’s descent into deflation was confirmed last week as part of a wider onslaught of tough economic news from the economy that generates over a third of global growth. Alarmingly high youth unemployment, weak property prices and a heavily indebted corporate sector are all hurting demand, and were the backdrop against which weak consumer prices turned mildly but undeniably negative in July.
For some, this crossover provided yet another data point in what has become a compelling intellectual exercise: comparing Beijing’s economic challenges now with those of Tokyo in the early 1990s years of its “lost decades” and concluding — as Moody’s economist Stefan Angrick does — that they are “eerily similar”.
The list of the similarities, and the question of whether ageing China will now replicate Japan’s woes over a similarly protracted timescale, can look persuasive.
The bursting of Japan’s late 1980s asset-price bubble produced a cohort of troubled banks and indebted companies of a type that China is now accumulating. The threat of so-called balance sheet recession, which defined Japan’s lost decades, now appears to loom heavily over corporate China. As their Chinese counterparts are to some extent doing now, businesses in Japan 30 years ago became unwilling to borrow or invest as they paid down debt, and ultimately convinced their workforces to lower expectations of serious wage growth.
Japanese households lost the confidence to spend; competition destroyed pricing power; demand weakened and deflation ensued. China, in the eyes of those who see Japanification, is now experiencing the same.
But are fears of a long, Japan-style deflationary descent for China misplaced? Economists at Citibank and elsewhere cautioned investors against reading too much into a single month’s consumer price data, particularly since plunging pork prices may have been the single biggest culprit.
But the risk of this becoming longer term is still there, and the longer it remains, the more Japan’s experience is relevant. Because however important and helpful the analysis and advice in all those newly published inflation books may be, the biggest revelatory value is that they need to be written at all.
Many of them offer advice on how to invest for an era where doing nothing no longer works. The way in which Japanese households have allocated the majority of their savings to cash — and come under little pressure to adjust that — is among the most embedded behavioural consequences of deflation that may now unwind quite suddenly.
These books are written as guides, in effect, for inhabitants of a country that has suddenly become economically foreign to them. China should see that as a measure of how deeply entrenched some habits of living with deflation can become, and how far beyond early projections it can take to end it.
But a second, important, revelation lies in the tone the books necessarily strike. Inflation may still be a good distance from being a bad problem for Japan, but it can — and probably should — be cast as a worse one than deflation ever was.
Beijing, meanwhile, knows this perfectly well, which is why it may be comparatively relaxed about even quite a long joust with falling prices. In 30 years, deflation as a crisis caused barely a flicker of serious public unrest in Japan: inflation can spark trouble overnight.
leo.lewis@ft.com
Source: Economy - ft.com
