Deflation Slowing Japan*

April 19, 2002

Japan May Be Advancing

In Fight Against Deflation

By PHRED DVORAK

Staff Reporter of THE WALL STREET JOURNAL

TOKYO -- A sprinkling of hopeful economic data has Japan watchers saying the world's second-largest economy could be gaining ground in its war on deflation.

If true, that could be one of the most encouraging signs in a decade in which Japan has been ravaged by an unremitting slide in the prices first of stocks, then land, and finally goods and services.

The small easing in price declines noted so far has been largely driven by a nascent upturn in business conditions, as economic recovery overseas boosts demand for Japanese exports and cost-cutting manufacturers finally decide they are trim enough to produce more. But the big question is whether the slight domestic economic recovery that forecasters see ahead this year will be enough to start prices in Japan rising again.

"There has been a very serious deflationary problem in Japan, but there are the first inklings that that is beginning to stabilize," U.S. Federal Reserve chief Alan Greenspan told a Congressional committee Wednesday.

The signs of improvement are patchy and muted.

Japan's key consumer and wholesale-price indexes are still falling steadily compared with the year before. But on a month-to-month basis, domestic wholesale prices were flat in March after nosing up 0.1% in February for the first rise in six months. And core consumer prices in Tokyo -- seen as an early indication of the direction of prices in the rest of the country -- climbed 0.1% in March on a seasonally adjusted basis, the second straight monthly rise.

Stocks have risen about 4% since the beginning of the year. Prices for golf-club memberships -- considered by some a loose proxy for land prices, because members have a stake in the golf course -- have been ticking up slowly since mid-January, according to an index compiled by the Nikkei Sangyo newspaper. Those prices are down 94% from their peak in 1990.

And Japan's most notorious cost-busters have slowed their price-slashing pace, lessening the pressure on rivals. Earlier this year, McDonald's Co. (Japan), widely regarded as the most aggressive discounter in the low-cost food business, stopped offering half-price hamburgers. Skylark Co., which last year scrambled to push down prices at its chain of family restaurants, isn't planning future cuts "simply because we cannot make money if we do so," said spokesman Makoto Suzuki.

Economists warn it is too early to get excited.

"People are saying deflation is easing and not that inflation is back," said Richard Jerram, an economist at ING Barings in Tokyo. "It's a massive difference."

That's because as long as prices keep falling, the huge amounts of debt that still burden much of corporate Japan will get heavier relative to the value of their assets. For many companies, the burden is already so heavy that they have little chance of paying back debt, adding to the load of bad loans Japan's banks are already carrying -- tallied by the government at 37 trillion yen ($283.01 billion) as of Sept. 30. And without clearing away those weakened companies, Japan is unlikely to get the kind of growth needed to really give prices a boost, said Mr. Jerram.

"Deflation causes the bad loans and bad loans cause more deflation," he said.

Economists are full of suggestions on how to break out of that vicious cycle, with most favoring a combination of aggressive debt restructuring and radical monetary easing to weaken the value of the yen and boost prices. For now, though, the Japanese government seems unlikely to take either step. Without such action, analysts say Japan's bout of deflation could be prolonged indefinitely.

And with the cost of producing and buying many goods still higher in Japan than it is in other countries -- particularly in Asia -- there's still room for prices to go down.

"We expect prices to continue to fall in the future, though at a slower pace," said Kenichi Arai, a spokesman for supermarket operator Aeon Co. "That's because there is still huge price disparity between Japan and overseas, particularly in the prices of housing and leisure-related goods."

Miho Inada contributed to this article.

Write to Phred Dvorak at phred.dvorak@wsj.com1.

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