http://www.theglobeandmail.com/report-on-business/in-deflation-era-japan-a-li…

In 1989, when Mitsuo Tate left Tokyo to work in England, Japan’s cost of living was the world’s highest.

But 20 years later, while inflation has driven up prices in Britain, the cost of everyday items in Japan seems frozen in time.

“A beer in a pub in London was 80 pence [about $1.40] per pint in 1989, now it’s almost £3 [about $5.20]. But in Japan prices stayed the same, or dropped,” Mr. Tate said. Today, bargains in Tokyo abound: jeans for ¥700 (about $8.40); beer for ¥98 (about $1.20); and this winter’s women’s fashion hit, mock mukluk boots, for ¥1,000 ($12). But like many in Japan, Mr. Tate, a freelance sound engineer, has mixed feelings about what a government report this month called a “mild deflationary phase.” Mr. Tate knows that the low prices mean that “the jobs are going to China, Vietnam, other countries, because we cannot make ¥700 jeans. Everything’s cheaper, but it doesn’t seem cheap because we have less money in our pockets.”

Japan is taking extreme measures to kick-start a long-sluggish economy that is wrestling with high unemployment, slack domestic demand and a sharply rising yen, which undermines the country’s exports. The Bank of Japan Tuesday said it would keep rates at a rock-bottom 0.1 per cent while pumping more than $100-billion (U.S.) into the banking system. The central bank cited “a critical challenge for Japan’s economy to overcome deflation and return to a sustainable growth path with price stability.” “The days of high growth driven by exports and big companies are over,” Finance Minister Hirohisa Fujii recently told reporters. “We want to focus on policies that will foster spending by consumers and domestic demand.”

But recent figures suggest a double whammy of both deflation and less consumer spending. Prices have been falling for eight months, and the Bank of Japan last month forecast they will keep sliding through fiscal 2011. Japan’s Business Federation says workers will get 15.9 per cent less in winter bonuses, the biggest drop in 50 years, which will likely inhibit holiday shopping. “The cause of sustained price falls is a lack of demand,” central bank governor Masaaki Shirakawa told reporters after the government report. “When demand itself is weak, prices won’t rise just through liquidity provision.”

As prices and wages fall, many Japanese are putting off purchases of appliances or cars, because they could be cheaper next year. Consumers in Tokyo, who tend to rent apartments rather than own homes, cheer as prices for food, clothing and housing decline. Many analysts see deflation as a necessary evil in a country where incomes have declined for two decades, and memories of soaring prices in the 1980s remain fresh. Some goods and services remain out of reach for many. Trains and planes between Japanese cities cost more than flights to Singapore; urban parking spots fetch between $200 and $600 a month, while $1,000 barely covers the rent for a suburban apartment smaller than a typical Canadian garage.

“I think people have been too negative about deflation,” said Andrew Smithers, a British investing expert and author of books about deflation in Japan. “In Japan, there are many people who think deflation is not really as bad for the economy as many are led to believe. The best way to get consumption up is deflation and negative interest rates.” Mr. Smithers and others say Japan still has a long way to go toward “normal” prices. In the early 1980s, at the rate of ¥300 to the U.S. dollar (compared with 86 this week), prices in Japan made sense relative to other countries. A spartan room in a seaside village minshuku , or bed-and-breakfast, costs about ¥3,000 (about $36) per person for a family of four. Workers could afford a ¥900 lunch special of pork on rice with misosoup. Thousands of mom-and-pop shops sprouted up to serve them, fostering a culture of full employment that attracted thousands of international workers, including Canadians.

But after the so-called Plaza Accord of 1985, the world’s major powers intervened in currency markets to weaken the greenback, slow Japan’s export juggernaut and open Japan to imports. The yen quickly doubled in value, and property values skyrocketed, to 50 times their 1950s levels in some cases. Cramped wooden houses were suddenly worth the equivalent of $1-million. Expecting Japanese to become wealthier, businesses jacked up their prices to levels above international norms. But when the bubble burst, and Japan’s stock market shrank in the 1990s, many landlords, farmers, and suppliers held their prices firm, stifling demand for years to come.

In 2006, as Japan’s exports to China, India and elsewhere expanded, corporations channelled record profits toward research rather than their workers, who in turn refrained from buying their employer’s products. Household spending continued to drop, because wages on average were still 10 per cent lower than 1997 levels. While the government in 2007 trumpeted Japan’s “longest postwar expansion,” vehicle sales fell to the lowest levels in 35 years. As then-economy minister Hiroko Ota noted in the summer of 2008, “consumption demand is likely to remain weak because workers’ wages are not picking up.”

While many urbanites spend more than half their income on rent, homeowners in the Tokyo suburbs of Saitama, Chiba, and Ibaraki have watched their property values fall in half over two decades, while figures in China and Thailand multiplied by 10-fold or more. Sagging home prices have scared away a generation of potential buyers. Like most of his friends, Mr. Tate, 44, rents an apartment with his wife and two-year old child, and has no plans to buy a home. “Now is the right time to buy, because the price has dropped, after years of being stupid. But the problem is, people don’t have money now. The bank probably wouldn’t lend us money, because I don’t work full-time. We [would] have to get a 35-year loan, but by that time, I’ll be 80.”

With people abandoning rural areas to seek work in cities, governments are giving away farm land in central Japan. Seaside plots in scenic Chiba are cheaper than land in Thailand and Cambodia. “Living in the countryside is really cheap, but [there’s] no jobs,” Mr. Tate notes. “That’s the problem.” Psychologically, this “life of minus,” as he calls it, is sapping the spirit of youth stuck in “permatemp” (permanently temporary) jobs, who expect to be poorer than their parents and grandparents. “We are not growing like China or other countries … The average youth who are working hard are worried,” he said. To save money, young people are drinking happo-shu , a cheap new beverage with less alcohol than regular beer. “ Happo-shu tastes good,” Mr. Tate said. “But it means everyone is getting poor.”