Posts Tagged ‘Paul Krugman’

Deflation Watch: New Year’s scorecard

Sunday, January 12th, 2014

Bottomless: Bargain bulk sale on diapers at discount store

Bottomless: Bargain bulk sale on diapers at discount store

In a chat with Nobel Prize-winning economist and New York Times columnist Paul Krugman, the weekly magazine Aera asked him about the prospects of “Abenomics,” which Krugman has supported. He still supports it, but thinks that the consumption tax hike to 8 percent next April was a “bad decision” that may ruin all the good things that Abenomics could achieve. He recommends that Prime Minister Shinzo Abe either cancel the increase or postpone it.

It’s probably too late for that, which explains Abe’s recent desperate attempts to get Japan’s businesses to promise to boost salaries, none of which seem to be working. In a recent Kyodo News survey of 104 “key” companies, only 17 percent say they plan to increase pay in 2014, but none will carry out basic salary increases across the board, what’s known in Japanese business parlance as “base up.” The feeling is that they’ll increase wages for some workers, maybe through bigger bonuses, but such schemes don’t instill confidence in workers, and unless workers think they will be paid more in the future than they are now, they aren’t going to spend as freely, behavior that’s central to the success of Abenomics.

In the Kyodo survey 71 percent of businesses polled believe they will see growth in 2014, but if that growth isn’t translated into higher salaries, the game is off. Moreover, the good performance of the economy in 2013 was misleading. As web magazine Diamond Online points out, it was a minority of well-to-do Japanese who benefited from the stock market boom in the past year. Also, because people have anticipated the consumption tax hike next year, they rushed to buy houses. These two factors boost numbers, at least temporarily, but they don’t solve the underlying problem of deflation and lack of consumer sentiment in the population at large.

Much was made of the big profits enjoyed by large companies this year, but they represent a fairly small portion of the Japanese business community, only 0.3 percent of all registered companies. They made money through exports, meaning they benefited from the higher dollar. That’s all. Diamond says that 70 percent of the Japanese workforce is employed by small or medium-sized companies, who depend mainly on domestic consumption.

Diamond surveyed 200 workers about their winter bonuses. Seventy-eight said they received no bonus at all, while 98 said their bonus was less than ¥500,000. Only 38 replied that their bonus was larger than last year’s, while 40 said it was less. The remainder said there was no change. This contrasts greatly with the widely reported news that the average winter bonus of an employee of a large company was ¥806,000.

More significantly, when Diamond asked the people who did receive a bonus what they used it for, 61 percent said it went into their savings, while 24 percent said it would go for “necessary expenses” and 19 percent used it to help pay off loans. In other words, only 6 percent, at most, bought something with it.

The Mizuho Research Institute found that the average household, which earns ¥4 million-¥5 million a year, will spend ¥78,869 more in taxes in 2014 thanks to the consumption tax increase. The Cocomane website, which helps consumers save money with tips on reducing expenditures, did its own survey of 1,127 people, 80 percent of whom said they “economize” on a regular basis. Why are they always looking to save money? The number one reason is to “prepare” for future expenditures. The second most common reason was “loss of income,” and the third reason “not enough money saved.” As to the question “How do you save money?” the most frequent answer was the simplest: Just try not to spend it, followed by “not eating out” and “cutting back on utilities.”

But the most interesting responses were in relation to the consumption tax hike. Fifty-four percent of respondents said they have not made nor do they intend to make any “big purchases” before the increase goes into effect, and 62 percent of the people who are making big purchases say it has nothing to do with the increase. Essentially, most consumers either aren’t changing their already careful consumption habits in face of the tax increase, or they will try to spend less. Almost no one expects to spend more.

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