Record fall in Japan consumer prices fuels deflation fears

Ping!

Interesting situation...

Anybody have any economic theories?

Yeah, too much supply, not enough demand.

Now maybe sushi will become reasonably priced....

NVDave will be able to help you out.

Well my Japanese DVD habit is about to become a whole lot cheaper.

Poster monday has the nut of it: too much supply, not enough demand. This means that a manufacturer has no “pricing power” and in an effort to move their merchandise they cut their profit margins. At some point, a manufacturer has to make decisions as to how much more inventory and raw inputs they can afford to buy if their input cost do not go down, so you see things like “just in time” inventory control (invented in Japan since the ‘89-’90 crash) come into being.

Then you start to see hiring stop, wage increases stop, benefit expansion stop, etc. As the jobless rate goes up, people start “hoarding cash” even more, refusing to spend anything they can avoid spending. Wash, lather, repeat.

Deflations are inevitably about too much capacity for the sustainable demand. This is why allowing excess expansion fueled by credit expansion is so detrimental to fiat money economies. Example: the auto industries around the world. The US auto market rate of annual sales achieved nearly 17 million units sold per year - much of everything above 9 to 10 million units per year was sold based on easy credit availability. Some of it was east auto company financing, some of it was home equity extraction with HELOC’s (and the attending tax benefit of using a HELOC for discretionary purchasing), some of it was fueled off easy corporate bond financing, etc.

So the auto companies (and not just the US auto companies) grew to expect a 16+ million unit/year market was the “norm” and that their expansion would come as a result of market share gains against the competition.

Wrong assumption, as it turns out. We have something like 1.2 cars registered in the US for every licensed driver — in other words, we have more drivable cars on the road than there are buttocks to sit behind the drivers’ seats. This is in part due to work/muni/gov’t fleets and personal cars duplicating what people are driving, but on the whole, the market for 16 million+ cars/year just isn’t there - unless there’s easy, easy credit.

Well, that’s no longer the case. So auto companies all over the world (US, Japan, Korea, Germany) are having to a) cut prices, b) strip inventories, c) ratchet down input buying, d) lay off or furlough employees (even in Japan!) in order to slash costs down to where they’re not bleeding from their eyeballs.

Prior to the Depression, there was a huge run-up in production capacity and ag commodity production. New methods were coming into manufacturing all over the world, the tractor was making ag production ramp up very quickly, etc. The way we got rid of that excess production capacity in the entire world and created the wonderful economic boom times of the 1950’s was by using rather blunt instruments of economic policy in the form of B-17’s, B-24’s and B-29’s. By 1946, the US was about the only economy in the world ready to start supplying manufactured goods for consumers - which we did with gusto.

That’s not going to happen this time. There will be no huge ramp-up in a wartime production binge, fueled by government debt. The governments now are trying to spur consumption, but they’re doing this very, very poorly and inefficiently. And the other trouble is we now have this “interweb thingie — you know, with all those tubes...” that keeps people informed of the truth of the economic stats, not what the press and the government would like to have you believe.

Now, in places like Japan, the consumer is so shell-shocked from 19 years of outright deflation (or at the least, disinflation), 0% returns on their savings, home equity collapse, real estate collapses, zombie banks being propped up by the government, the entire nation going from a net lender nation to a net debtor nation as the government has pissed money into the sky in an effort to make people consume again. Trouble is, the consumers won’t spend. They’re saving money and putting it to work in the most bizarre places.

And when I was sent to Tokyo on business in the 90’s, I saw freeway overpasses that simply ended in the sky — literally overpasses and bridges to nowhere. Make-work projects writ MOST large. The engineers I was meeting with were getting rather cynical about it (as I understood through our translators) - they just explained what these projects were, waved their hands or shrugged their shoulders in dismissal.

A couple years ago, when the USD/Yen started to shift (ie, the USD started to appreciate), I read of a most amusing tale: The Japanese government discovered that there were networks of housewives who were playing the FX (currency foreign exchange) market. Now, as many of you know, I trade - most every day - but in stocks, options on stocks and bonds. I don’t do FX trading. That’s varsity-level stuff, and for small players, a great way to go broke. It is a huge, liquid market where moves up and down have to do with political and macro-economic perceptions of huge players. Anyone playing with less than a billion dollars is merely a bug in the grass, and liable to be stepped on and squashed.

In this market, Japanese housewives were playing with the household grocery money.

Why?

Because a decade+ of having ZERO return on their savings was driving them to look for gains - some return on their money, something to do with their savings, this huge wad of cash they’d been building up - other than put it into the futon and sleep on it.

They saw how the US stock market imploded after the dot-bomb scare. The Japanese stock market has been moribund until very recently - and now it is right back down again to the levels of early this decade. The return on bonds in Japan isn’t great, and their bond market isn’t as accessible as the US bond market is for retail investors.

But the FX market? Oh, sure, small brokers will take your money and your orders for futures in the FX market - like any casino.

The thing was, as long as the USD was going down against the Yen, this was a pretty good market for them. Put in some money, lever up 10:1 and watch your money grow like a weed.

Then the shift happened - and they got smacked down pretty hard. And then it came as something of a national shock how many housewives had been playing FX day traders with the grocery money and the household computer.

Such are the effects of living in even a disinflationary environment with a central bank that keeps pushing on a rope.

The way we got rid of that excess production capacity in the entire world and created the wonderful economic boom times of the 1950’s was by using rather blunt instruments of economic policy in the form of B-17’s, B-24’s and B-29’s. By 1946, the US was about the only economy in the world ready to start supplying manufactured goods for consumers - which we did with gusto.

Could "using rather blunt instruments" be done artificially rather than with real B-17's?

Great insights, and I agree.

Thanks for another extremely informative post. You are a Freeper treasure.

Great post. Those Japanese housewives were referred to as "Mrs. Watanabe". NVDave, you hit the nail on the head with these women and how they were playing the currency and commodities markets. Here is a great article on these women and how a Japan caught up in deflation started one last bubble (i.e. Yen Carry Trade): Japan’s fearless women speculators.

The article is long, but worth the read if you want to see what can happen after a country's housing/asset bubble pops. The difference between Japan and the U.S. is that we don't have $16trillion in personal savings to start another bubble...we put that into cars and houses!