JAPAN'S PRICES STILL FALLING BUT IS IT REALLY DEFLATION?

During the final quarter of 2004, Japan was hit by three tropical storms. The worst was "Typhoon Tokage". This series of storms damaged part of Japan's harvest crop, and as a result vegetable prices increased. So consumers slowed down on purchases of vegetables.

Then winter came along and it was warmer than usual. Result: Consumers bought less clothing than usual. These were the reasons cited by the Associated Press (AP) and Bloomberg News (Bloomberg) as they reported on slowing consumer spending in the final quarter of 2004. During 2004, retail sales declined eight out of the 12 months as compared with the same month the previous year. Looking at monthly sales as they compared with the previous month, declines were noted only six times.

When department stores compared their monthly results with the same months the year before, 11 out of the 12 months showed declines. Supermarkets using a similar year-on-year comparison showed declines all 12 months.

Sales of convenience stores, and chain stores overall presented a similar picture. Sales of electric appliances were especially poor. There were monthly declines from the previous year in all months some of the declines quite dramatic. But then there were the new passenger car registrations. They were up over the previous year six months out of 12. November, registrations jumped 9.6 percent. Most vigorous of all were outlays for overseas travel. Eight out of the nine months for which statistics were available, overseas travel showed positive increases over the year before. For April, May, and June, increases were 74.5 percent, 109.7 percent, and 83.6 percent respectively. Turning attention, now, to the chart on page 1, two conclusions are obvious. The first obvious idea is that these broad household expenditures have declined sharply from highs posted in the late 80s and early 90s. This is emphasized by the steeply declining (red) trend line. Second, declines in household spending this big are at the root of all the talk about Japan's famous "deflation". We put quotes around the word deflation because we have some issues with the subject.

Specifically, we see the word 'disastruous' linked to Japan's falling prices (seven of the past 10 years including this year's IMF forecast decline of -0.1 percent and flat prices in 1996). But over the 21 year period of the chart on page 1, average unemployment has been 3.5 percent hardly the mark of an economy on the brink of disaster.

Another fact to bear in mind: At the end of World War II in 1945, Japan was in ruin. And it went from ruin to become the world's second biggest economy in a matter of a few decades. To that point, we are reminded of the recent "Deflation and Depression: Is There an Empirical Link?" a paper published by the Federal Reserve Bank of Minneapolis (January 2004). This paper says "No!" and presents the data to prove it. About Japan specifically, the paper says lack of growth in recent years probably has more to do with the country finally achieving parity and more with other developed nations.

Another look at the chart on page 1 could be instructive by counting back four years from the end and visualizing the trend line one might superimpose.

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