Japan still hasn't deflated enough
theglobeandmail.com
NEIL REYNOLDS
OTTAWA --
They say that one of the most popular TV shows in deflationary Japan was a reality-based variety show called Zenigata Kintaro. In this series, still going strong, comedians take up residence in the homes of poor families and examine the way these folk live -- how they earn money, how they spend it. The families deemed the poorest win cash prizes. Very entertaining. The show demonstrates that deflation doesn't necessarily impair people's sense of humour. Or improve it, either. Now that Japan has officially exited its long recession (with a faster growth rate in the past three months of 2005 than either Europe or North America), it's a good time to look at the country's deflation experience. After all, the only people in Canada with memories of deflation are well into their 70s. What's it like to live through a decade of deflation anyway? Isn't deflation supposed to be disastrous or something? Why are the Japanese still laughing?
The Japanese handled deflation with remarkable aplomb. No soup lines. No riots. No revolution. In other words, no Dirty Thirties. Zenigata Kintaro merely suggests a deep interest in the lives of low-income people or, at least, a deep curiosity. But it conveys none of the excruciating despair of the Great Depression -- you can sing Big Rock Candy Mountain, a funny song, only with splinters in your heart:
O, the buzzing of the bees
In the cigarette trees
Near the soda water fountain
At the lemonade springs
Where the bluebird sings
On Big Rock Candy Mountain.
It's all a matter of degree. Bank of Canada Governor David Dodge once observed that there's not much evidence that zero inflation is all that much better than 1- or 2-per-cent inflation. Mr. Dodge was mathematically correct. Given the difficulty inherent in perfection, 2-per-cent inflation may unfortunately be as close to price integrity as we can get. Mr. Dodge's observation, though, must hold for deflation as well. Deflation, after all, is the other end of the same teeter-totter.
The question now is actually whether Japan has deflated enough. The answer is that it probably hasn't. You can intuit this simply by observing that wringing speculative excesses out of an economy should hurt, and, given its past excesses, Japan hasn't yet suffered nearly enough.
Japan's excesses were traumatic enough. Supermarkets, after all, were selling melons for $100 (U.S.). Before the price bubble burst, it was said that the U.S. could have paid off one-third of its entire foreign debt simply by selling its embassy in downtown Tokyo, where land was going for several million dollars a square foot. When U.S. jeweller Tiffany & Co. bought its leased property on Tokyo's ultra-affluent Ginza strip a couple of years ago, it paid a mere $20,000 a square foot. So prices indeed have fallen. (Between 1991 and 2001, Japan's land price index fell from 105.1 to 33.1, a 68-per-cent decline.) But the government and the central bank have repeatedly assumed the losses, adding the cumulative costs to the national debt. Successive governments have resorted to one record-setting stimulus package after another, rising from $50-billion in 1991 to $500-billion in 1999, when the 19 biggest banks finally got the public to pay off their bad loans, deferring the cost forward. Japan's public debt now stands at 170 per cent of GDP.
(Canada's public debt, by comparison, is 31 per cent of GDP; U.S. public debt is 64.7 per cent -- although the U.S., which calculates debt statistics differently, puts Canadian debt at 68.2 per cent, right alongside its own.)
Mark Japan's "lost decade" down to classic Keynsian economics. In hard times, borrow and spend. In the process, Japanese governments essentially socialized all of the losses inherent in one of the greatest financial bubbles ever experienced. They feared deflation more than debt -- probably, as a matter of principle, an enormous error. They have swapped an asset bubble for a public-debt bubble.
Bloomberg columnist William Pesek, who lives in Japan, captured the Japanese dichotomy perfectly last week when he asked whether Japan's biggest economic need wasn't more deflation -- more authentic deflation.
"Even after years of sliding costs, Japanese arguably pay the world's highest prices for goods and services," Mr. Pesek wrote. "This is still a place where consumers feel broke unless they have $300 in their wallets.
"All deflation has done -- and it has been very mild -- is make a wildly expensive country a bit less wildly expensive."
Why the disproportionate fear of deflation? Mr. Pesek says Japan fears deflation, ahead of all other risks, because it's the force that could compel "fundamental change" in the country's economy. The most important change of all, of course, being prices set in a competitive marketplace, using money that hasn't been corrupted. And that, all redundancy aside, is the honest truth. Otherwise, people will seek escape in fantasy lands where they hang the jerk who invented work, where all the hens lay soft-boiled eggs, where handouts grow on bushes and all the bars give away free lunches.
neilreynolds@rogers.com |
