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In a remarkable turn of events, Japan’s bookstores have made room on their shelves for a genre of literature that, until recently, had enjoyed no demand for the past three decades: inflation and strategies to combat it.
Titles such as Inflation Japan: the Coming Era of Endless High Prices and A World of Inescapable Inflation share a common, cautionary, and grandiose tone. According to these works, Japan’s recent sustained period of consumer price increases after years of stagnation and deflation represents not only a significant economic shift but also a psychological, social, and epochal transformation. This assessment seems appropriate considering the prolonged and harmful effects of deflation that Japan experienced. While the nation braces itself for the arrival of inflation as the next challenge, there is much peculiar and unprecedented ground to cover in rectifying the system.
Meanwhile, Beijing may find value in closely examining Japan’s publishing phenomenon related to inflation. As the two economies pass one another on the path, Japan is successfully extricating itself from deflation’s grasp just as China seems to be reluctantly falling into its clutches.
China’s descent into deflation was confirmed last week, adding to a barrage of worrisome economic news from the country that contributes more than a third of global growth. Disturbingly high youth unemployment, plummeting property prices, and a heavily indebted corporate sector are all negatively impacting demand. Amidst this backdrop, consumer prices in July experienced a mild but undeniable decline.
For some observers, this occurrence provides another significant data point in the ongoing exercise of comparing China’s current economic challenges to Japan’s “lost decades” in the early 1990s. Economist Stefan Angrick from Moody’s notes the “eerie similarity” between the two situations.
The list of similarities sparks questions about whether China, as an aging nation, is destined to replicate Japan’s woes over an extended period. The bursting of Japan’s asset-price bubble in the late 1980s led to the accumulation of troubled banks and indebted companies, much like what China is currently experiencing. The threat of a balance-sheet recession, a hallmark of Japan’s lost decades, looms heavily over corporate China. Similar to their Japanese counterparts, Chinese businesses are now becoming averse to borrowing or investing as they prioritize debt reduction. This shift ultimately convinces employees to lower their expectations of significant wage growth.
Japanese households lost confidence in spending, competition eroded pricing power, demand weakened, and deflation persisted. Those who subscribe to the theory of Japanification believe that China is now following a similar path.
However, should we be concerned about a prolonged, Japan-style deflationary decline in China? Economists at Citibank and other institutions caution against making sweeping conclusions based on a single month of consumer price data, especially since plunging pork prices likely played a significant role in the decline.
Nevertheless, the risk of long-term deflation persists, and the longer it persists, the more relevant Japan’s experience becomes. The fact that there is now a proliferation of newly published books on inflation speaks volumes. Many of these books offer guidance on how to invest in an era where doing nothing is no longer effective. The prevalence of cash as the primary savings vehicle for Japanese households, with little pressure to change, is a deeply ingrained behavioral consequence of deflation that may suddenly unravel.
These books serve as guides for people in a country that has suddenly become economically foreign to them. China should recognize the profound impact that long-term deflation can have on ingrained habits and how challenging it can be to overcome.
Another important revelation lies in the tone adopted by these books. While inflation may not yet pose a significant problem for Japan, it is cast as a far worse issue than deflation ever was. Beijing is keenly aware of this, which is why it may remain relatively calm even in the face of an extended period of falling prices. Over 30 years, Japan barely experienced any serious public unrest due to deflation, whereas inflation can quickly spark turmoil.
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