"do good to them which hate you" - The Japanese Deflation

A Tokyo District near the Japanese Parliament Bldg.

The Japanese Deflation

The biggest question in the world economy is not why Greece went bankrupt but how Japan came to suffer 20-year long deflation.

Japan's GDP in 20 Years
http://philnews.seesaa.net/article/134476364.html

Some people think Japan's deflation is caused by the decrease in population of Japan.

An old problem
Will it take more than monetary policy to cure Japan’s deflationary ills?
Feb 10th 2011 | TOKYO | from the print edition

JAPAN, one of the great exporting nations, usually runs a trade deficit with, of all places, Switzerland. Why? Ask Rolex. Japan also buys more from France and Italy than it sells there. Why? Bordeaux, Brie, mascarpone and Armani, to name a few expensive vices. In Japan such delicacies are mostly immune to deflation, while prices of everyday goods like cars, electronic goods and clothes tumble. Why then do Japanese firms continue to churn out the latter, even though margins are low? And could this help explain Japan's persistent deflation problem? 

These questions preoccupy Kosuke Motani, author of “The Real Face of Deflation”. In this book’s first seven months in print, 500,000 copies have been sold, including one to Naoto Kan, the prime minister. Mr Motani argues that deflation in Japan is not so much a monetary problem as a structural one linked to bad business decisions and demography.
http://www.economist.com/node/18119075

Others deny that Japanesedeflation has been cuased through trade with China.

China in Transition
Is Japan's Deflation "Made in China"? 

In recent years, China's remarkable progress in industrialization has been regarded as a major cause of deflation in Japan, and Japanese financial authorities are calling for a stronger yuan to solve this problem. However, if we consider the fact that Japan's imports from China amount to only about 1.5 percent of gross domestic product and that there is very little competition between the two countries on the trade front, it is clear that any decline in prices in China has only a limited impact on the Japanese economy. In fact, the rate of inflation - or, to be more accurate, deflation - in China is about the same as in Japan, and if China is to be called the cause of deflation in Japan, the reverse also applies... 

As this shows, it must be said that both the therapy that attributes the cause of deflation in Japan to the rise of China and the prescription that a stronger yuan will solve the problem are wrong. So long as the real reason behind Japan's deflation is the delay in structural reforms and the protracted domestic economic slump that accompanies it, Japan's economy will not see a real recovery unless these problems are solved, no matter how strong the yuan becomes.
http://www.rieti.go.jp/en/china/03030701.html

Indeed, deflation in Japan has been a mystery for many parties concerned in the world, including economists and journalists.

Cheap imports compounding deflation shock
Asahi Shimbun
March 23, 2001 

Globalization may have its fans and its foes, but one thing about the trend cannot be denied: It is exacerbating Japan's deflation shock... 

After the bubble economy collapsed, asset values sank as land and stock prices plummeted. Companies and households alike tightened the reins on investment and consumption, further deflating assets. Inexpensive, high-quality foreign products flooded the market, adding to deflationary pressures.
http://www.asahi.com/english/asahi/0323/asahi032301.html 

Deflation is related not only to prices but also wages.  Some analyzes the Japanese deflation in this context.

No Japan-like Deflation in the US
Risaburo Nezu
Senior Executive Fellow, FUJITSU RESEARCH INSTITUTE

As deflation is a phenomenon unique to Japan, its cause should also be singularly Japanese. As the graph illustrates, this cause is the consistent downward trend in wages observed only in Japan. Workers lose their purchasing power when wages fall. Companies respond by slashing prices to maintain sales volume. Absent improved productivity, lower prices inevitably lead to wage cuts to reduce costs. In this way, deflation and declining wages fall into a downward spiral—such is the Japanese phenomenon.

Prices of goods are falling and the government finally admitted on March 16 that the nation is indeed experiencing deflation... 

Falling wages are rooted in company-based unions and an increase in non-regular workers 

Why have wages continued to fall in Japan? Among many reasons, the first and dominant view is that securing job opportunities is given priority in Japan, and a slight drop in wages is unavoidable to maintain employment. Behind this perspective is the problem that mid-career reemployment is difficult in Japan, and, even if successful, is disadvantageous in terms of wages. It is comparatively easier to switch jobs mid-career in the US, and American companies that cut wages risk losing their top talent. In Europe, the unionization rate is high with unions forming by functionality instead of by individual company, and a wage system is maintained uniformly in each country. It is therefore difficult for individual companies to slash wages based on their particular circumstances. 

The second view is that the employment of cheap non-regular workers(1) has dramatically increased. These workers already represent a third of the entire Japanese workforce. Non-regular workers are also common outside of Japan, but the comparatively low wages of non-regular workers, who see half of what regular workers earn, is uniquely Japanese. No such disparity exists in other developed countries, where the principle of “equal pay for equal work” is maintained more rigorously, and, as a result, there is no incentive to replace regular workers with non-regular workers to save money.
http://jp.fujitsu.com/group/fri/en/column/message/2010/2010-08-20.html

Yet, the key factor is downward pressure on Japanese wages from labor force in China, since 20,000 Japanese businesses are operating in China.

Comparison between Yearly Income in Japna and China (in US$)
Year      Japan             China
------------------------------------------------
2000    $54,946.59        $2,317.23
2001    $54,112.26        $2,669.47
2002    $53,397.12        $2,926.29
2003    $52,920.36        $3,330.07
2004    $52,324.41        $3,666.39
2005    $52,086.03        $4,030.80
2006    $51,847.65        $4,443.45
2007    $52,086.03        $5,215.56
2008    $51,251.70        $5,936.12
2009    $48,391.14        $6,430.07
http://www.china-b-japan.org/archives/460

(to be continued...)

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Luk 6:27 But I say unto you which hear, Love your enemies, do good to them which hate you,
Luk 6:28 Bless them that curse you, and pray for them which despitefully use you.