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At Last, Someone Apologizes for Deflation

May 18, 2016

Much of the world is in the grip of deflation and negative interest rates, with all kinds of negative consequences. Yet no one takes responsibility. Who do we blame? How do we get them to change their ways?

I’m happy to report that someone is finally stepping up. The New York Times reported this morning that Akagi Nyugyo, a Japanese ice cream company, is airing a televised apology for raising its prices. Grim-faced executives and workers face the camera as a subtly humorous folk song plays and then bow deeply in contrition.

This probably seems very, very strange to American and European viewers. It’s also amusing, at least to me, but there’s a serious point here. Most of us grew up in a world where inflation is normal. We expect prices for most goods and services to go up a little bit each year. That perception is starting to change, but it is still the default setting for most people, even economists.

The Japanese have a very different perception after 25 years of deflation. They expect prices to fall, not rise, or at least to remain steady. Akagi Nyugyo hadn’t raised the price of its signature ice cream bars in decades. Higher lumber expenses (for the sticks) finally forced their hand. The company feels terrible and decided to it should apologize.

Will we see American companies doing this in a few years? Well, don’t hold your breath, but if we do it won’t be the weirdest economic development of the century. The strange new beat goes on.

I am in Abu Dhabi as you read this, having endured a long non-stop but reasonably comfortable flight here on Etihad Airways. I have one more speaking engagement in Raleigh, North Carolina, next Monday, and then it’s back to Dallas for my own Strategic Investment Conference. It will be great to see so many old friends and make some new ones, too.

Finally, I want to thank everyone for the very kind and thoughtful responses to last weekend’s Thoughts from the Frontline. “Life on the Edge” drew far more social media shares and positive comments than usual. I think we are all beginning to realize how far off course we’ve steered the economy. I expect many more bumps before we get back on track. Like all of you, I’m trying to figure out how to minimize the pain.

Your fastening his seat belt analyst,

John Mauldin, Editor
Outside the Box

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In Japan’s Slow Economy, Rare Price Rise Prompts Surplus of Remorse

Originally published in The New York Times
May 18, 2016

A teenager in Kawasaki, Japan, getting a Garigari-kun, a popular ice cream bar.
The price of the bar was recently raised for the first time in a quarter-century.
Credit Ko Sasaki for The New York Times

TOKYO — One of the most talked-about television commercials in Japan this year advertises an unusual product: contrition.

The ad shows a group of workers and executives from an ice cream company lined up in neat rows in front of their suburban Tokyo factory. As gentle folk music plays, they bow in apology.

The company’s transgression? Adding 10 yen, or about 9 cents, to the price of Garigari-kun, a hugely popular soda-flavor ice cream bar. About 500 million of the bright blue snacks are consumed every year, mostly by children.

Increasing prices are a big deal in Japan. The country’s sluggish economy means that the cost of most things has not risen in 20 years, and almost any increase makes headlines.

Consumer prices are a painful economic headache for Japan. The country’s officials have been trying to break this stubborn pattern of deflation by pumping money into the economy and bolstering public spending. Japan’s economy, which has been oscillating between growth and contraction for years, picked up speed in the first quarter, according to government data released on Wednesday.

But the price increases that do go through — like the cost of the Garigari-kun ice cream bar rising to ¥70, from ¥60 — do not reflect a more vibrant economy or a stronger consumer. They usually mean a company is facing higher costs cutting into its profit. The deflationary trends are still firmly in place. And wages are under more pressure than prices, so buying power for most Japanese has declined compared with a generation ago.

Deflationary Pressure

Japanese policy makers had some success in increasing the inflation rate in recent years, but the index of consumer prices again fell below zero in March.

 “Garigari-kun is meant to be something kids can easily buy with their allowance,” said Fumio Hagiwara, a marketing executive at Akagi Nyugyo, the maker of the ice cream bar. “Even grown-ups have less pocket money these days.”

Akagi last increased prices a quarter of a century ago, and it debated the recent rise for seven or eight years, Mr. Hagiwara said. The rising cost of raw materials finally forced Akagi’s hand, he said. Tighter logging restrictions in China, for instance, meant it had to use more expensive Russian lumber for ice cream sticks.

In stronger economic circumstances, Akagi’s price increase would not stand out. Companies in other places routinely pass on higher costs to consumers. But in Japan, businesses that face rising costs feel they have less ability to do so because wages are flat. Instead, they take a hit to their profits or cut back rather than alienate consumers.

“We don’t have any more income, but taxes are rising,” said Kazuko Ida, 65, who lives in Tokyo. As a result, she said, she is especially reluctant to spend more. “It’s one thing if luxury items are expensive, but if cheap things aren’t cheap anymore, it’s a real problem.”

Japanese policy makers have long identified deflation as enemy No. 1 for the economy. Prime Minister Shinzo Abe won power four years ago on a promise to stamp it out. The central bank has been flooding financial markets with cheap money, and it has gone so far as to cut its benchmark interest rate below zero, a policy that has been tried in only a few other developed countries.

But the results officials have been seeking — robust increases in borrowing and spending, and a sustained rise in prices — have been elusive. The Consumer Price Index is back below zero, after an upswing during Mr. Abe’s first two years in office. Wholesale prices tumbled 4.2 percent in April, their sharpest decline in more than six years.

A recent rise in the value of the yen, after several years of weakness under Mr. Abe, has made beating deflation harder. A weak yen means costlier imports, which helps drive overall inflation. But now imports on the whole are getting cheaper again.

The price of Garigari-kun ice cream bars was raised by 10 yen, or about 9 cents, to ¥70.
Credit Ko Sasaki for The New York Times

The economic report on Wednesday showed that Japan’s economy expanded 1.7 percent in annualized, price-adjusted terms in the quarter that ended in March. That was significantly faster than forecasts. Still, economists urged caution: Spending by households and businesses was down, and so were exports — all crucial pillars of growth.

Rather than rely on those, the economy benefited from higher government spending and a decline in imports. The extra day in February because of the leap year also helped, specialists said.

“Reasons for the upside surprise were not encouraging,” said Masamichi Adachi, chief Japan economist at JPMorgan Chase. He said the economy was likely to remain stagnant.

Since Mr. Abe’s conservative coalition was elected in December 2012, the economy has expanded in eight quarters and shrunk in five. Newspaper opinion surveys suggest that about half of voters are dissatisfied with his economic program, known as Abenomics. A disorganized political opposition has offered little in the way of alternatives, but an election for the upper house of Parliament in July is adding to pressure to turn things around.

Mr. Abe is looking at ways to restore momentum. The government is drafting a supplementary stimulus budget and is considering delaying an increase in the national sales tax planned for April 2017. The two percentage point tax increase, the second of two planned rises, has already been put off once. Supporters say it is needed to reduce Japan’s large budget deficit. But the first increase, in 2014, hurt consumers and was blamed for pushing the economy into recession.

In the ice cream business, Mr. Hagiwara said Akagi had calculated that Garigari-kun’s sales volume would drop by 7 percent as a result of raising prices. The sales hit, the company believed, would be more than counterbalanced by the higher price.

But it appears that for his company, at least, an apology is an effective way to deal with the pain. Mr. Hagiwara said sales jumped by about 10 percent in the first month or so after the price increase in March, though they have since begun to fall back.

“We figure it will take another year before we know how consumers really take to it,” he said.

Discuss This


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John Sloan

May 19, 2016, 6:16 p.m.

Agree with Art
According to David Fischer - in The Great Wave -The three best eras in western history - Equilibrium of Renaissance - Equilibrium of Enlightenment and Equilibrium of Victorian Era were all eras of deflation followed by steady prices - we would have a fine deflationary era now as he predicted but labor refuses to reduce wages along with other prices as was the case in the three mentioned eras. Plus governments now are the largest debtors so cannot stand to have deflation. Actually they require another massive inflation in hopes of paying off debt.

Art Eatman

May 18, 2016, 7:46 p.m.

If deflation reduces consumer costs, isn’t that a good thing?  Seems like it would be good for Joe Sixpack and middle-class working folks.  Folks like Joe drive the trucks that haul the food.  Repair the plumbing, cars and around-the-house needs of wealthy investors.  While I hope that investors keep increasing their wealth, I can’t help but hoping for the well-being of Ol’ Joe.

The FRB and government damned sure aren’t.