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Monday, May 18, 2009
Will second wave of 'price destruction' finally spur change?
A major wave of what could perhaps be called the second round of "price destruction" is accelerating in Japan.
As corporate bankruptcies rise and companies pursue mergers and integrations, the recent closure of a department store that established a new business model during the Edo Period on the principle of "no overcharging and no sales on credit" proves that this model has become obsolete in today's rapidly changing world.
The first wave of price destruction struck in the 1990s after the cross-border movement of cheap labor and land ownership, facilitated by transfers of goods, money and technology that sped up after the end of the Cold War, boosted manufacturing outside the industrialized powers.
Japanese consumers have been drawn to cheap, private-brand goods produced overseas for large retailers, leaving many of the small stores that typically populate shopping streets near train stations to go out of business.
Today, there probably aren't many young people who have heard of COCOM or CHINCOM, the entities that were tasked with regulating exports of sensitive goods to communist-bloc nations.
What are the differences between the first wave and the current wave of price destruction?
First of all, protectionism is rising in many countries due to the global recession. But this has not reversed the trend of globalization, or the cross-border movement of goods, money, people and land — the key elements of production.
This is because economies around the world today are so interdependent that reversing globalization is impossible.
While several structural problems need to be addressed, including the excess consumption in the United States, which used to be called the "consumer of last resort," and the heavy dependence on external demand seen in countries like Japan and China, these factors mean that international competition can only increase in the coming years.
The second difference is that while overseas production by Japanese manufacturers played a key role in the first wave, Japan today is being inundated by goods mass-produced by foreign competitors who are doing the same thing in regions where they can make goods cheaply.
This has actually been great for Japan's consumers, who think nothing of making long lines in front of foreign department stores early in the morning to get the best bargains when the doors open.
But what's different this time is that consumers aren't simply looking only for low prices, they're being more selective and hunting for higher quality and more fashionable products.
The third and most important development in the new wave of price destruction is the fact that average wage levels have dropped over 5 percent since the turn of the century. To rebuild their effective purchasing power, consumers are looking even more strongly than before for cheaper goods.
The fall in the consumer price index has raised concerns that Japan is once again falling into the clutches of deflation. But declining prices will be a blessing for consumers. The new flat rate for expressway tolls boosted family travel during the Golden Week holidays, thereby proving lower prices benefit households.
It's important to discuss price fluctuations, but it is also important to realize that prices in Japan — particularly in farm products and certain kinds of real estate — remain fairly high by international standards.
The government led by the Liberal Democratic Party-New Komeito ruling coalition has compiled a huge extra budget to stimulate the economy out of recession, but consumers know that it will eventually come back to haunt them in the form of higher taxes.
Meanwhile, the economic and foreign policies of the opposition camp, which is facing its first realistic chance of taking power in decades, may be in flux following the resignation of Democratic Party of Japan President Ichiro Ozawa.
Decisions have been made to cut public servants' pay at both the national and municipal levels to match the decline in salaries affecting their private-sector counterparts.
Therefore, the tax-funded salaries of Diet members and local assemblymen should be similarly reduced so they can better understand the pain of the public and formulate policies that more effectively reflect consumer sentiment.
Teruhiko Mano is chairman of the Mano Economic Intelligence Forum.