What is really happening with deflation in Japan?
What is really happening with deflation in Japan? Many people think that deflation in Japan has made the country uninvestable. Judging by the sentiment promulgated on the major news networks, world opinion on the Japanese economy and Japanese stocks could hardly be worse. Yet on the other hand, we also know that the moment of greatest sadness is the moment of greatest opportunity. Therefore, many investors are curious about the current state of deflation in Japan.
The end of deflation in Japan will be a historic moment for that country, since it has been stuck in that condition for about 15 years. Deflation has defined Japan’s economy, with an entire business model that now assumes prices will continue to fall year after year.
According to the Japanese Ministry of Statistics, overall prices in Japan fell by 1% between 2007 and 2012. Also, this year they have been rising every month. So there has been some price movement, with very little net difference.
However, for investors, it is more interesting to look at deflation not for the whole country, but for different categories, such as industry. According to the same Ministry, the total number of items purchased by households fell by 15.1% between 2000 and 2009 (disaggregated statistics for 2010 have not yet been published).
But this decrease in the total number masks several secondary currents that are interesting for investors. While non-discretionary items obviously held up better in price, discretionary prices fell considerably.
For example, alcoholic beverages and tobacco were 6% more expensive in 2009 than nine years before, while leisure and culture products were 57.3% cheaper.
Clearly, the effect of deflation has been uneven, with non-discretionary items bearing the brunt of price declines and some other categories experiencing inflation. An interesting part of the statistics is that while demand for alcohol increases in a normal depression, alcohol consumption in Japan has decreased over the last decade. Also, contrary to popular belief, healthcare prices have been relatively stable, rising just 4% during that period.
Furthermore, it is commonly believed that the decline in the child population will lead to a collapse in the demand for schools. While this is true to some extent, what is really happening is that schools are closing and merging, while parents are more likely to invest in their children and are spending more money per child, and this is leading to inflation in the education industry. and creating opportunities for investors.
Therefore, rather than treat the entire Japanese economy as a single deflationary spiral into oblivion, it is worth separating industries to see which are more resilient and checking valuations on a case-by-case basis. When other investors aren’t doing this, it’s an opportunity to get involved in bargain hunting.