Worrying signs in Japan as prices fall
While the rest of the world battles to maintain a positive consumer price index figure, Japan today revealed that consumer prices, excluding fresh food, declined by 0.1% in April. This is compared to 12 months earlier and heralds a return to deflation in a country which was decimated back in the 1980s and 1990s by the fall in the stock market, the collapse of the property market and deflation. So what will happen next?
In a worrying development the governor of the Bank of Japan has this week suggested that prices will continue to fall until March 2010 as the prospect of a severe period of deflation looms large. The sapping of demand in the consumer market, the expected fall in the price of oil and a general lacklustre feel about Japanese economy do not bode well for the immediate future. While Japan has been in this situation before, consumers know only too well that excessive competition in a deflationary period will see today's prices beaten tomorrow as businesses fight for survival.
As we have covered on a number of occasions there are very few consumers who would buy non-essential items today when they know that tomorrow they will be cheaper. This may sound very simple but in effect this is the power of deflation and its ability to change the mindset of consumers and businesses alike.
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