Japan Teeters on Edge of Deflationary Abyss?
stratfor.biz
Summary
A bank operating in Japan has issued the country's first
negative-interest loan, indicating that Japan's deflationary
spiral likely will continue.
Analysis
ABN Amro issued Japan's first negative-interest loan on Jan. 24
to Societe Generale and BNP. At less than 0.01-percent interest,
the borrowers are required to pay back less than the 15 billion
yen ($125 million) they actually borrowed.
Stratfor asserted previously that the Sept. 11 attacks had
damaged Japan's long-term economic picture so badly that the
country would find it impossible to recover without a massive
social upheaval that could destroy Japan's current social
contract. Should Japanese corporations accept negative interest
in their own operations, the country's deflation will worsen.
With the Japanese government already occasionally issuing bonds
that earn zero-percent interest, negative-interest loans very
well could be a step toward economic oblivion.
Deflation can take many forms, but it usually results from excess
supply coupled with inadequate demand. In some cases, deflation
can be healthy for an economy. For example, the United States has
experienced some deflationary effects over the past decade as
trade liberalization allowed more and cheaper Asian goods to
compete on the U.S. market. The stiff competition ensured that
Asian suppliers continued to innovate in a virtuous circle of new
technological development and implementation. This enhanced U.S.
economic health while keeping demand high and contributing to
high U.S. productivity levels.
Japan, on the other hand, has experienced a different type of
deflation.
Japanese corporate expansion is based largely on market share,
not profitability. This encouraged the development of massive
over-capacity, driving prices down in a manner similar to the
United States' own deflationary pressures. But Japan lacked the
consumer optimism that fueled the 1990s boom in the United
States. Instead, Japan's economy sank into repeated recessions,
but maintained high inventories, ensuring that companies couldn't
claw their way into profitability. A social stigma against
layoffs kept many production lines open despite stubbornly
sluggish demand, compounding the oversupply problem.
This built a public perception that prices would gradually
decline with time. Consumers began deferring purchases on the
correct expectation that prices would continue to decline. That
in turn starved Japanese firms of the income they needed to
invest in new products or expand their businesses, resulting in
yet more of the same product and compounding the oversupply --
and deflation -- problems.
There are a number of ways to get out of the deflation rut, but
nearly all would necessitate a surge in consumer demand to drive
prices up. The Japanese government has been less than helpful in
this manner. Its deficit spending has never been aggressive
enough -- or focused in the right direction -- to create
sustained growth. One option that might have worked before would
have been driving the yen down with a dramatic currency printing.
Such an action would force competitive devaluations across Asia
that could trigger a repeat of the 1998 financial crisis. It also
would -- at least in theory -- force consumers to spend because
they fear a cheaper yen will eat away at the value of their
savings.
That is no longer a realistic option. The beginning of negative-
interest loans indicates that Japan's corporations have succumbed
to the same mindset as Japanese consumers. If credit becomes
cheap enough for negative interest, then it makes more sense for
companies either to add to their already sky-high debt to fund
operations instead of seeking profitability and financial
solvency. Congruently, companies also will put off expansion
plans in the hopes of even better credit terms in the future.
The three pillars of the Japanese economy -- consumers, business
and the government -- are stagnant. Consumer confidence, beset by
rising unemployment and shrinking incomes, cannot recover.
Companies are mired in debt and plagued by a financial system
that cannot be reformed without causing its collapse. Meanwhile,
the government has engaged in so much deficit spending since the
end of the Cold War -- about 119 trillion yen ($1 trillion) --
that more spending is needed simply to keep the economy afloat.
Overcoming the downfall of any these three economic pillars would
be possible, but overcoming all three against the backdrop of
activity-sapping deflation -- now in its 40th month -- is
unlikely. |
