`Futon Money
Glassware and porcelain sales shot up more than 30 percent last month at the downtown Tokyo housewares store Kenji Wako manages. “People wanted to get a bargain before prices went up,'' he says.
Japan, a nation that has seen mostly falling prices for years, is experiencing something it isn't used to: a “buy now'' psychology that seems to be taking hold among consumers as record oil and food costs fuel inflation expectations.
A scourge that is threatening growth from Europe to China, inflation might be exactly what Japan needs. The prospect of higher prices may lift the economy by drawing out some of the 1,500 trillion yen ($14 trillion) Japanese households have squirreled away. Half sits in savings accounts paying almost no interest. Some is even stuffed under mattresses.
“Mr. and Mrs. Watanabe are slowly opening their purses. Why? One word: inflation,'' says Jesper Koll, director of Tantallon Research Japan, a Singapore-based hedge fund. “The futon money is coming out.''
A 12 percent increase in the cost of gasoline this year has raised consumer expectations for inflation overall, after prices were flat except for fresh foods in 2007. A Bank of Japan survey found that households anticipate prices will go up by more than 7 percent in the next 12 months. That outlook helps explain why their spending climbed last quarter twice as fast as in the previous three months.
Dipping Into Savings
“If you expect prices to rise, you might be willing to dip into your savings a bit,'' says Julian Jessop, chief international economist at Capital Economics Ltd. in London. “That pickup in spending supports wider economic growth.''
According to the Paris-based Organization for Economic Cooperation and Development, consumers will spend enough this year to help Japan avoid a recession. Early evidence: The first quarter's 0.8 percent increase in household expenditures accounted for half of the economy's expansion after inflation, the government reported last week.
Growth supported by domestic spending would help bring Japan closer to the goal former Bank of Japan Governor Toshihiko Fukui outlined in 2006: an economy no longer weighed down by deflation, in which interest rates could gradually increase.
It's a good time for Japan's economy, the world's second- largest, to pull more weight globally as growth falters in the U.S. Last year Japan accounted for just 4.5 percent of worldwide expansion, according to the International Monetary Fund. That compares with 14.1 percent for the U.S. economy, the world's largest, and 19.9 percent for China, ranked fourth.
Making Up for Exports
This year, the IMF forecasts, Japan's $4.7 trillion economy will expand 1.4 percent — almost triple the 0.5 percent pace projected for the U.S. — as consumer spending helps make up for a slowdown in demand for exports.
For the last two years, “domestic demand has been the big drag, the big disappointment,'' Koll says. “2008 is a good year to be optimistic.''
Not everyone shares that optimism. Stanford University economist John Taylor says inflation is no good, no matter what. “You could go back to a real spiral, and things could get worse for Japan,'' Taylor says. “It's hard to believe at this point, but you could get too much inflation.''
A study published last month by Tokyo-based Nippon Research Institute showed that about 44 percent of households plan to cut back on spending this year because of higher food and energy prices fast cash payday loan.
A More Careful Shopper
“I have become very careful about my shopping style,'' says Yukie Ushijima, 42, who lives near Tokyo with her husband, an architect, and their two children. “I used to go to supermarkets whenever I needed to buy things. Now, I go there once a week.''
Jessop argues that just because consumer confidence is weak doesn't mean people will definitely be spending less. “You need to look at what people do, not what they say,'' he says. Indeed, last quarter's spending surge came in the face of the worst consumer sentiment since Japan's last recession ended in 2002.
The explanation may lie with Japan's hoard of household savings. “The amount of money involved is almost unimaginably large,'' says Richard Jerram, chief Japan economist at Macquarie Group Ltd. in Tokyo. The Bank of Japan's 1,500 trillion-yen estimate of household wealth — including bank deposits, cash and investments — represents roughly three times the country's annual gross domestic product.
`Bad Inflation'
“The bad inflation in Japan is the trigger, the tipping point that unleashes the futon money,'' Koll says.
Japan's core consumer prices, excluding fresh food, rose about 1 percent during the first quarter. That's mild compared with rates of 7.7 percent in China and 25 percent in Vietnam; still, it's the fastest increase Japanese households have seen in 10 years.
As a result, “people expect prices to be higher in six to 12 months' time,'' Jessop says. “That gives them an incentive to spend now.''
Wako, who manages an outlet of Illums Japan Co., says his sales of Iittala Oyj porcelain and glassware jumped after the store advertised a planned June 1 price increase.
With higher shipping costs and the euro's rise against the yen forcing Illums to raise some prices by an average of 10 percent, “customers were asking us to set merchandise aside for them,'' Wako, 30, said in an interview.
Customer Inquiries
Last week Wako was fielding inquiries ahead of another increase scheduled for today, this one on chairs. “We've gotten a lot of calls about it, people asking when prices would go up and by how much,'' he says.
Japanese consumers have also seen prices rise for bread, mayonnaise and soy sauce this year. Kirin Holdings Co., Japan's biggest brewer, raised beer prices in February for the first time in 17 years.
Carlos Ghosn, chief executive officer of Nissan Motor Co., said higher steel costs will force the company to raise prices “at some point,'' the Mainichi Newspaper reported last month.
For the past decade, Japanese consumers had been accustomed to exactly the opposite situation, as prices fell. A hamburger at a McDonald's Corp. restaurant today costs 100 yen, down from 130 yen eight years ago and the same as in 1973.
The expectation that prices would keep falling led consumers to hold off more-substantial purchases. Lower demand brought still more price cuts.
`If you start to reverse that, you get an economic benefit,'' says Jerram. “Japan is one of the few countries where you can actually see a positive dimension from inflation.''
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