World Business

Could rising prices kick-start the world’s second-largest economy?

by Ian Rowley and Kenji Hall

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Talk to almost any Japanese consumer, and you’re agreeable to hear a litany of complaints about skyrocketing food and vigor prices. Though such bellyaching force be common enough in other parts of the world, in Japan rising prices are event altogether just discovered after a decade-long struggle with deflation.

So why, at that time, do some economists think a shift to inflation could boost Japan’s economy? At in the beginning snatch a momentary look, the idea might seem far-fetched. The Japanese consumer is now remunerative nearly $1.70 a liter ($6.40 a gallon) for gasoline and has seen prices for the sake of staples such as soy sauce and sustenance go up 10% to 30% since be unexhausted year. You would think people would be sarcastic back on spending.

But economists who see benefits in swelling prices in favor of Japan base their prediction steady consumer expectations. When the country was struggling with deflation, consumers assumed prices would continue to fall. So they squirreled away cash and put off buying a new car or washing machine in anticipation of lower prices to come. Now that prices are going up, consumers might take the opposite append, since they could end up gainful more the longer they wait for to buy something. "Inflation is Japan’s dream arrive conformable to fact," says Jesper Koll, an economist and CEO of Tantallon Research Japan.

Welcoming inflation is hardly the conventional profundity, especially as wage growing in Japan remains sluggish. But equitable detractors express the theory holds up after the country’s long battle with deflation. For now, though, few Japanese seem to be rushing out to buy things. In May, domestic spending dropped 3.3% year over year, according to government statistics. "My shopping habits haven’t changed much," declared Mari Yamaguchi, a 30-year-old housewife in Tokyo. "I recently bought extreme cereal, curried meat, and soy sauce, whether or not it were not that we’re limited to what we can corrupt because our house isn’t tumid and we don’t have much storage space."

Arguably, consumers have no reason to fear widespread inflation just yet. To be sure, the consumer price index posted a 1.5% mount in May, its biggest gain in more than a decade, but-end that was due to some one-time tax changes. And wholesale prices were up 5.6% in June, the chiefly in 27 years, following May’s 4.8% rise, according to Bank of Japan statistics released adhering July 10. But if you strip out volatile food and energy prices, "the CPI is still 0.1%," says Masaaki Kanno, chief economist at JPMorgan (JPM) in Tokyo. "At the moment there’s no spillover effect to other items."

However, there are signs that price hikes may be in the offing. So far, companies have been absorbing higher costs for fear of losing customers to rivals, but that may not last. Last month, Japanese media reported that Toyota Motor ™ may increase prices adhering all its domestic models in the coming weeks. The last time Toyota did that was in 1974. Toyota is Japan’s biggest manufacturer and other companies could follow its conduce. Nissan Motor (NSANY) CEO Carlos Ghosn said on June 24 that the automaker was near a decision on raising prices in Japan, and suggested that other carmakers, faced with soaring fresh materials costs, are considering similar measures.

Even if consumers were to start spending freely again, where would they influence the specie? Koll and others point to Japan’s $14 trillion in household assets. Roughly moiety of that is stashed away taken in the character of pay in money, mostly in low-interest postal savings accounts, which typically earn inferior than 1% per year in interest. Those low rates didn’t matter in like manner abundant during deflation as the value of consumer savings was still insurrection in certain terms. But with the Japanese central bench holding elucidation interest rates at 0.5%, the returns upon savings in real terms are moving into negative territory.

Inflation could have other ramifications. It might convince consumers to shift funds away from ordinary postal and bank savings accounts into higher-yielding securities. Some of that might end up going to the private sector, instead of being channeled into unneeded public works projects.

Investors, meanwhile, are hopeful that inflation can spur improved profitability at Japanese companies. In a modern note to clients, Virgil Adams, a senior research analyst at Matthews International Capital Management, predicted that vain-glory would spawn a kind of corporate Darwinism in Japan. Companies that can’t pass on their rising costs to consumers might have to merge in order to gain scale and become more based on competition, Adams wrote.

That’s long overdue in sectors such as the pharmaceutical assiduousness, through 1,200 different manufacturers. The three biggest drugmakers combined constitute only half the size of Johnson & Johnson (JNJ), Adams explained. The largest retailer in Japan is singly 10% of the size of the biggest U.S. retailer.

Much harder to evaluate, though, is exactly when Japanese consumers will shift from worrying about boil prices and to actually spending.