The Real Reason For Deflation in Japan

Ever since Toyota and Honda were forcing GM, Ford, and Chrysler to shape up the hard way, the US government has pushed Japan to open up its markets, particularly its automotive market, and the fact that it’s still pushing shows how little success it has had. Back in the 90s, the cited reason for the near non-existence of US-branded cars in Japan was that they weren’t of the quality Japanese consumers wanted. OK, but today?

“The US government urges Japan to address the full range of barriers in Japan’s automotive market,” pleaded the Office of the US Trade Representative in its just released 2012 National Trade Estimate Report on Foreign Trade Barriers. Indeed, the Japanese automotive market remains largely sealed off to US automakers through nontariff barriers such as lack of transparency, standards and certification issues, and impediments in building distribution and service networks.

It’s not just cars. The racket to protect Japan’s pork producers is almost silly—and very costly to the hapless Japanese consumer. Imported pork whose price exceeds the government-set reference price will get away with a 4.3% ad valorem tax. Any pork imported at a price below the reference price is slapped with an additional duty that brings its price up to the reference price. Hence, there are no lower-priced imports of pork.

And beef. The base tariff is 38.5%. But it jumps to 50% when import volume rises by more than 17% from prior year. Japan uses health concerns as fig leaf for blocking imports entirely. In December 2003, a cow in the US that had been imported from Canada was discovered to have Bovine Spongiform Encephalopathy (BSE or Mad Cow Disease). Japan immediately blocked all imports of beef from the US. December 2005, under intense US pressure, Japan reopened its market to US beef, with strict safeguards. When one single exporter violated one single rule a month later (it had shipped a forbidden vertebral column), Japan closed its market to all US beef for seven months.

The arm-wrestling continued. February 2011, Japan blocked beef imports from a packer in Nebraska that couldn’t prove, as the rules required, that the intestines in one shipment were from cattle no older than 20 months. It took till today, to get the ban lifted. Beef jerky, which has quite a following in Japan, and other processed beef products are still blocked. Meanwhile, Japan had 29 BSE cases in its own herds (compared to 3 in the US). And now some of its cows are radioactive.

Tariffs impact citrus, apples, wine, cookies, wheat, wood products, shoes, leather, shredded mozzarella…. In addition, nontariff restrictions and entanglements, such as legendary customs processing, keep imports out or make them more expensive. Yet, high-priced luxury goods jumped over the hurdles and turned Japan into the world’s largest market for them—until China came along. Cognac, dresses, handbags, Ferraris….

And then there is rice, the sacred crop. Of the 1.63 million farmers in Japan, 80 percent are part-timers who make 90% of their income from other sources. Farmed on small plots, rice is Japan’s most inefficient crop and absorbs most of the agricultural subsidies. It’s expensive in grocery stores. And now that fears of contamination are added to the price, imports have become very popular.

Alas, imported rice gets whacked with a tariff of … 778%! Ouch! Only 682,000 metric tons of rice may be imported tariff-free, most of which is acquired by the government for stock and released later for animal feed. Only about 100,000 tons can be imported tariff-free as food—1.25% of domestic production of 8 million tons. Hence, even imported rice is expensive.

The latest excuse for blocking imports: Takeshi Nakano, associate professor at Kyoto University and ex-finance-ministry official, one of the media poster boys of protectionism, said that cheaper imports would aggravate deflation.

Ah yes, there it is, the reason for deflation—though he used it in a twisted manner. In 1996, when I went there the first time [check out my book on that adventure, BIG LIKE: CASCADE INTO AN ODYSSEY], Japan was a shockingly expensive country, even in mundane things. Trade liberalization gradually opened up the market to imports and forced domestic producers to become more efficient and competitive. Eventually, this will even impact rice farming. And prices will ease further. In the mayhem of Japan’s unspeakable fiscal woes and tough economy, this is a bit of good news for the consumer.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  4 comments for “The Real Reason For Deflation in Japan

  1. Lee says:

    Deflation in Japan for the ordinary person is nothing more than a myth.

    In real life prices and costs have gone up while wages have remained the same or gone down.

    I'll just give three examples.

    First, concerns the national pension system. In Japan now everyone of employment age is required to be covered by some type of pension plan. If you are not working you fall under the national pension plan.

    Years ago the charge per month was much smaller and the number of people that had to pay it was much smaller in number as well.

    For example, as a self employed person I and my non-working wife were both covered by this system. I had to pay in for myself and the wife as well. The system at that time was quite regressive and hada minimum charge and a maximum charge. Once you hit the max charge under the plan it didn't matter if your income was two, three or ten times that: you still paid the max charge.

    At that time the amount was much, much smaller than today. If I remember correctly it was around the 3000 yen per month area or so. Now the charge is around 15,000 yen a month.

    So, yep real 'deflation' right there taken out of everyone's wages.

    Second, let's look at meals. Eating out in Japan, believe it or not, can be quite cheap. "One coin lunches (500 Yen) are quite common and you can get a decent meal for US$10. Here in Australia that same meal would set you back twice or three times that.

    Ah, haaaaaaaaaaaaa you say: cheaper lunches – deflation. Hold on there. Not everything is quite as it seems. One concerns quality. Years ago when you ate out the rice in the meals was top notch quality and you could tell that the rice was good. Last trip to Japan in late 2011 and the rice in the meals was piss poor quality – no where near the same quality as before. And yes, even I could tell. Second, the portion sizes were a lot smaller than before. These are classic signs of INFLATION and not deflation.

    The third concerns wages. Wages for many people have remained the same or in fact fallen over the years. Wages for part time workers have not changed in 16 years and in many cases are lower than before. Falling incomes with stable or increasing prices for everyday goods is not DEFLATION.

    Most if not all the arm chair economists have no idea about the real situation in japan for ordinary people. Ordinary people have been doing it tough based on stagnant or falling income and higher costs of living.


    Yeah, that neat nifty el cheap imported Chinese TV set may be cheaper than the year before, but that in reality means nothing.

  2. Lee says:

    I think I can give more examples of how costs for the ordinary person have gone up but I would have to just be general in nature.

    For example, the amount that the individual has to pay when visiting the doctor has increased quite a bit. I think that when I was in Japan the health plan I was under covered 90% of the costs and I had a 10% copay. Now that same health plan only covers 80 or 85% for the primary holder and less for the others covered under the plan. The cost of the plan has also gone up – a double whammy.

    This may not seem like a big deal, but with a large number of elderly people in Japan it does hit the bottom line.

    Others have commmented that real estate taxes in big cities have gone way up as have charges for water and related services.

    Other things that I noticed that had gone up were transport costs. Subway and bus fares were up. Taxi costs were up as well. Gasoline was way up as one would expect with the price of crude going up.

    Many moons ago used cars were quite cheap and once a car got to ten years old you couldn't give it away. We had to pay to have ours taken away. How times have changed. From reports from people in Japan the price of used cars is way up and that ten year old car isn't a throw away anymore.

    I have no idea why the market has changed that much – maybe someone with more info could explain that situation.

    Real estate prices for NEW condos in the big cities are about the same and unlike RE in many other places in the world they fall in price as they get older.The RE market in Japan is quite funny as the rules, regs, and taxation have made the market a real mess. Understand that and you'll understand one of the main reasons for the bubble and all the busted loans on property in Japan……….

    After years of heavy price competition in the mobile phone market, that has ended as well with costs there now much higher too.

    On the other hand it seemed that electricity prices hadn't changed much. Natural Gas though has gone though the roof!! Monthly service fees are still cheap in Japan.

    Solar panels are priced at ridiculous levels in Japan. If I remember correctly a 3000 watt system was around the 2 million yen level or about $US25,000……..this is before the miniscule rebates from the local and national governments.

    And remember these are the same systems one can buy in the USA for I think $5000 before any rebates and such….

    Milk prices were up a little as well along with newspaper prices.

    Of course there were 'bargains' as well. One could get cheap discounted ready made to ea tfood at the super markets right before closing time at 50 to 75% off the price……..

  3. Wolf Richter says:

    Lee – excellent info. With your permission, I might quote you in one of my next posts on the issue.

    Vanity World – I see that conundrum as well. Customer preference has always been cited as the reason. On the other hand, I hear from the US auto industry that there are real hindrances at customs and in building distribution channels for US automakers (lower-margin mass market cars) though it seems easier for higher-margin luxury cars. It's all just a matter of money, in the end. Just as Hermes scarves were available in Japan long before Chinese-made T-shirts were (though now they are).

  4. Wolf Richter says:

    Thanks Lee. Good to know. My in-laws also live in Japan, and I go there frequently enough to be astounded by some of the changes…. It's an amazing place. Love it. Just a shame that its system (Japan Inc.) is so screwed up. If you are on twitter, follow me on twitter, and we can communicate more easily.

Comments are closed.