What Japan can teach us about deflation

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After Japan's years of excess throughout the 1980s, when £100 taxi rides home after a night carousing through the ruinously expensive bars of the Ginza were a daily occurrence for many, the average Japanese was rather glad when deflation set in.

Greatly tempered by a shrinking national economy, job insecurity and contracting bonuses, Japanese still felt the burst of the bubble economy in 1990 which meant that their yen went further. It seemed to take several years for the effects to trickle down to people who were not high-flying bankers, real estate moguls or speculators.

But when deflation did bite, it bit hard.

For the eight years after 1990, Japan was caught in a deflationary spiral - with some economists suggesting that the same scenario might again be looming on the horizon in 2009.

The up-side was initially clear to see; car makers developed small and efficient cars, brewers developed beer with a higher malt content that sidestepped tax definitions and was therefore cheaper and the convenience store really came into its own.

"All of a sudden there was a convenience store on every street corner, selling everything that you could ever need and much cheaper than ever before," said financial analyst Hugh Ashton. "People suddenly had a more realistic appreciation of what something was worth and gone were the days of the Y200 (£1.40) banana."

It did not hurt that they were open around the clock. In tandem with this was the rise of stores that sold a vast range of goods - generally poorly made and essentially disposable - for Y100 (70p).

While these new consumer theme parks thrived, the old-fashioned mom-and-pop stores that had sustained local communities for generations but charged a couple of yen more than their new rivals quickly went out of business.

Retirees found that the real value of their hard-earned savings was rising, despite the fact that they were being held in bank accounts with interest rates of less than one-tenth of a percent. But the change fostered a sense of unease in the public. Employees with blue-chip firms became concerned when annual pay rises that they had taken for granted failed to materialise or when the twice yearly bonuses, generally of three months' pay, were reduced to two months. And then to one month.

The desire to spend dried up as well and, instead of putting their savings in banks that began to show an alarming tendency to go bust, people literally began to stash their life savings beneath the futon. Even today, stories regularly appear in the national press of a demolition team knocking down an old building and coming across plastic bags stuffed with Y10,000 notes.

In the property market, prices declined dramatically at the same time as rents went down, leaving home-owners unable to move house and people with investment in property losing money. "Initially it was good," says a banker who lived through what Japan refers to as its "lost decade."

"People welcomed lower prices and a new array of goods that were suddenly available. But then as the excitement wore off and people realised what they were up against, they suddenly stopped spending. "The shops were full and no-one was buying," he recalls. "The lines of taxis waiting for fares went around the block. "We learned the hard way."

http://www.telegraph.co.uk/opinion/main.jh...1/19/do1911.xml