For a place synonymous with deflation, Japan sure can be intolerant to savvy responses to it.
Take Tokyo’s not-so-stealthy effort to keep Uber, Airbnb and other sharing economy kingpins at bay. The innovative boom remaking America Inc. has run into a thicket of regulatory, legal and cultural restrictions in the third biggest economy. Ride sharing, for example, barely exists and bureaucratic barriers make home sharing more hassle than a profit opportunity.
True, Prime Minister Shinzo Abe is cracking the door open so Japan won’t miss out on the hottest developments in commerce — and to maximize its tourism boom. But Japan Inc.’s reluctance to embrace the new tells a bigger story about deflation’s positive influence.
Positive? Sure, falling consumer prices are, according to Milton Friedman, a “scourge” for debt holders, financial assets, corporate profits and business confidence. But give good deflation its due. For Japanese who haven’t had a decent wage hike in 25 years, it’s been akin to a stealth tax cut. It forced rigid industries to modernize, executives to boost competitiveness and produced corporate success stories like Fast Retailing’s Uniqlo brand.
The other good emanating from deflation: innovation. The “secular stagnation” worrying economists like Lawrence Summers is a key driver behind the sharing economy ethos and the bewildering number of new apps popping up on smartphones. Faced with declining wages and less job security than their parents’ generation, 20-somethings are raising living standards with technology. As this dynamic accelerates and broadens, it will change the business and financial realms and interactions between public and private sectors beyond economists’ wildest dreams.
It’s easy to see why Tokyo is losing sleep. “As with any fast-expanding sector,” McKinsey argues in a recent report, “governments, regulators and industry incumbents are taking greater interest, and the growth pains are becoming louder.” Abe would be wise to get hip to millennial generation mores, and fast. Virtually all of Japan Inc.’s targets for progress and internationalization center on the 2020 Olympics. It really should be focused on 2025, when the revenue from the sharing economy that its labyrinthine regulatory system is stifling is projected to surpass $335 billion globally.
Japan boasts sharing economy pioneers, including Anytimes, which allows for the outsourcing of odd jobs, and AsMama, a child-rearing aid. A bigger embrace of the frugal economy could upend Japan Inc. in fascinating ways. Along with unleashing disruptive forces on change-averse corporate chieftains, it would allow multiple people to tap the same capital — and to get more out of it with less labor, fewer inputs in environmentally stable ways.
Unfortunately, the full weight of government policy is on the old economy: producing a 2 percent inflation rate. As Bank of Japan Gov. Haruhiko Kuroda puts it, the plan is to “drastically convert” a deflationary mindset by driving prices upward. Then, companies might have the confidence to raise prices, increase wages and unleash a virtuous cycle of economic revival. It backfired, though. That mindset shifted to what happens if the cost of living jumps when we haven’t seen wages rise noticeably since 1990? Consumers simply froze.
The BOJ, in a sense, is fighting the wrong battle. Prices in Japan are falling for three very rational reasons: costs are still adjusting downward from their 1980s bubble-period surge; a rapidly aging and shrinking population is deflationary; and households just don’t believe their fortunes will be better five years from now.
The government, meanwhile, is supporting the wrong end of the economy. By weakening the yen, Abe’s team is helping exporting giants that mattered 30 years ago. They’ve done virtually nothing to facilitate the creation of a Japanese Silicon Valley. Nor are they championing Japan Inc.’s new heroes: those who understand that deflation isn’t a cyclical phenomenon but a secular one.
It irks Japan’s corporate graybeards no end that the sexiest industry in recent years wasn’t cars or electronics, but made-in-China underwear, T-shirts and jackets. Tadashi Yanai’s Uniqlo is the poster child of Japan’s contribution to the cheap-chic movement. Yanai also is a fascinating example of a CEO who didn’t wait for direction from Tokyo bureaucrats — or for Abe to make good on deregulation pledges.
Yanai invested aggressively overseas to tap growing markets and escape a shrinking population. Meetings at Uniqlo headquarters are held in English. It eschews Japan’s Inc.’s aversion to poaching talent from competitors, empowering women, hiring foreigners and the seniority-based promotion system that kills productivity. If you’re 28 and smart, Fast Retailing will let you lead a team of 48-year-olds. Yanai champions the concept of kaizen, or continuous improvement, forcing competitors to raise their games. Yes, an argument can be made that Uniqlo has over-expanded for now. But its success shows it’s better to accept and harness deflation than wait around for it to disappear.
What the BOJ missed is that Japan is suffering from what Kosuke Motani, author of “The Real Face of Deflation,” calls “non-monetary deflation.” In the 1980s bubble era, the cost of everything from power to food to telecommunications to transportation to service fees to education to child care skyrocketed. While stocks and real estate values declined, prices on a generalized level remained too high, rendering Japan uncompetitive in the age of China. The gradual, almost genteel ratcheting downward of costs is a rational, and still unfinished, response to Japan’s economic bubble.
Deflation, contrarians like Motani argue, is a symptom of Japan’s woes, not the cause. That’s why Kuroda’s talk of 2 percent generated psychological sticker shock, not optimism. The problem, he says, is that the belief quantitative easing can defeat it is “just like a religion” with few concrete facts on its side.
In fact, for all the hand-wringing about deflation, its persistence is more of a choice by lawmakers than some affliction heaped their way. Rather than legislate painful, destabilizing structural reforms, they seem happier to live with the status quo of modestly sliding prices.
Just as Japan’s households found ways around falling living standards, so are millennials around the globe — and in tantalizing ways that create new jobs and prosperity. Abenomics aims to fire three arrows: monetary expansion, fiscal pump priming and deregulation. Tokyo should introduce a fourth: tax incentives and publicly funded venture-capital programs to enable 20-something Japanese to raise living standards via innovation.
Who knows, rather than being a scourge, deflation could be the basis of Japan’s next technological wave.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com
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