Flawed fight against deflation

Prices are gradually rising. The Abe administration says that this is a sign that Japan is starting to beat deflation. But it is difficult to feel positive about the current situation because price rises are not being accompanied by higher wages. Thus households are being forced to shoulder a greater financial burden.

In May, the nationwide consumer price index, excluding perishable foods, compared with a year before emerged from a negative zone, with the index coming back to the same level as in May 2012. After that, it increased, though only slightly, for two consecutive months from the levels of the same months of 2012 — 0.4 percent in June and 0.7 percent in July. The June figure represented the first rise in 14 months.

The Bank of Japan’s policy to achieve a 2 percent rate of inflation in two years, which reflects the Abe administration’s economic policy, caused the value of the yen to decline. This in turn increased the costs of imported crude oil and liquefied natural gas, leading in turn to higher electricity and city gas prices for consumers. Hokkaido, Tohoku and Shikoku Electric Power companies will again raise electricity rates this month. And gasoline generally costs between ¥160 and ¥170 per liter.

The cheap yen is also pushing up the prices of frozen food, cooking oil, bread, mayonnaise, wine, jam and so forth as the price of food items imported from China, Thailand and other Asian countries increase.

In issuing the government monthly economic report in August, Economic Revitalization Minister Akira Amari said that the recent price figures show Japan is making progress in beating deflation. But if food items and energy, whose prices have risen due to the cheap yen, are excluded, the consumer price index showed a 0.4, 0.2 and 0.1 percent decline, respectively, in May, June and July from a year earlier. It is premature to say that Japan is winning the battle against deflation.

In July, average household consumer spending stood at ¥286,098 or an increase of 0.1 percent from a year earlier — the first rise in three months. But basic monthly pay had fallen for 14 consecutive months through July. Clearly the recent price rises are not a result of strong demand backed by wage increases. Major exporting companies gave better summer bonuses. But non-manufacturing companies and small and medium-size companies did not perform well enough to increase their bonuses.

If the current trend continues, the real income of households will likely decrease, leading them to tighten their purses. Then consumer prices will begin to fall. The Abe administration needs to consider ways to increase wages. It must pay attention to the fact that Japan is the only developed country to suffer from deflation. Workers’ nominal wages peaked around 1997 and have been falling ever since due to restructuring and an increase in the number of irregular workers. This situation must be reversed.