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Deflation in Everyday Life: A Japanese Family Reports

Japan's real estate bubble burst in 1989. The booming growth came to an abrupt end. Deflation was a word that people knew only from textbooks, but it became a bitter reality. Even for Hiroyuki Sugano from Tokyo.

It took Hiroyuki Sugano a while to notice that something was wrong. Now 54 years old, he had long worked for a company that produces mobile ordering systems for the food service industry. In the past, customers replaced the equipment every three years. Then the cycles became longer and longer: first five, then seven years. In the end, many restaurants kept their equipment as long as it continued to work. It became increasingly difficult for Sugano's company to stay in business. The workforce shrank from more than 4,000 employees to nearly half that.

One Lost Decade Became Two

In 1989, Japan's real estate bubble burst. The booming growth that had made the country the world's second largest economy came to an abrupt end. Deflation – a word that most people know only from textbooks, if at all – became the stark reality. Prices and wages stagnated or fell. Companies curtailed production; the economy shrank. Time and again, Japan slid into a recession. Despite a brief recovery in 2003/4, the "lost decade" of 1990 to 2000 lengthened into two "lost decades." For most people, the changes showed up in little ways. For example, Sugano recalls, his take-home pay shrank as allowances were dropped, one by one. On business trips, the hotels became cheaper and the food worse. His salary also decreased, by as much as 20 percent.

Abenomics: The "Historic Experiment"

When the Liberal Democratic Party returned to power at the end of 2012, Prime Minister Shinzo Abe vowed to make economic policy his top priority. "Abenomics," a combination of a relaxed monetary policy, stimulus packages and structural reforms, aimed to restore growth. The goal was for deflation to give way to an annual inflation rate of 2 percent. Haruhiko Kuroda, the new head of Japan's central bank, declared in April 2013 that this target would be reached within two years. To that end, he initiated a series of measures to pump cash into the Japanese economy, most recently in October 2014.

Economist Franz Waldenberger, director of the German Institute of Japanese Studies (DIJ) in Tokyo, calls this a "historic experiment." "Since the Great Depression of 1929/30, modern economies have only had the problem of curbing inflation through monetary policy," the professor says. "No monetary authority has yet attempted to reach an inflation target from below, as it were."

Young People Are Restricting Their Consumption

After the initial euphoria, it is becoming increasingly clear that the targeted inflation rate is still a long way off. Japan recently slipped into its fifth recession since 2000. Demand is not gathering momentum. One reason is that many young people, like Hiroyuki Sugano's oldest son, Kohei, 21, are worried about the future and curbing their consumer spending. According to Doerig, "No matter which party is in power, the economy is not going to change overnight." Kohei has never known his country's economic situation to be anything but strained. Having dropped out of school, he works in a DVD rental store. He doesn't know what else he could do or would want to do. The one thing he does know is that he needs to find some kind of permanent position as soon as he can.

Worried about His Children

Kohei knows from his father's situation how hard it is to find a job. At 50, Hiroyuki Sugano accepted a severance package from his faltering company and left. It took a whole year, however, for him to find a new position. Now he works in purchasing at a small import company. But the weak yen, an effect of Abenomics, makes importing goods more expensive. Sugano takes some comfort in the fact that so far sales have held stable.

A father of three, he considers stability important for planning purposes. Major expenses still lie ahead, especially for education. His youngest daughter Mami, 15, is still in middle school. Her sister Kumi, 19, has started college. And it's not clear what will happen with his son Kohei. Sugano worries about his children.

Despite all these uncertainties, the family always had some sort of income, even while Sugano was out of work. At least his wife Kazuko, 51, has a secure job. She works for a company that makes oxygen apparatus products – a business with a future in Japan's rapidly aging society, regardless of the economic situation.

The Economy Is Contracting, Society Is Aging

But Japanese society is not just aging; it is also shrinking. This is one reason that many companies have hesitated to expand their production capacity, says Waldenberger. Given this situation, he doubts that it makes any sense to stimulate further investments with a relaxed monetary policy. In his view, rather than relying on growth, the country should be pursuing greater productivity.

In the decades ahead, fewer and fewer people of working age will have to pay for more and more elderly citizens. Not all are as fit as Hiroyuki Sugano's mother, Kieko. At 81, she still works four hours a day in a small biscuit factory. Not because she really needs to; she just enjoys it, she says, and it allows her to go on little shopping trips with her friends. She has never thought about such things as inflation and deflation. "I always had work, and that was enough for me." She never worried about the future. In the seventies and eighties, nobody thought about it, says her son, Hiroyuki. Only when the economy faltered did people begin to ask themselves what the future might bring.

The Sugano family does own its small plot of land in northeast Tokyo, but they are still paying off the loan for the house itself, which they took out during the boom years. They find it very difficult to save money. For financial reasons, they go out less, and they rarely eat in restaurants any more. In the past, they never worried about paying the bills for water, electricity and gas. That has changed, Hiroyuki and Kazuko say.

Only Consumption Tax Has Risen

Like most of the population, the Sugano family is unaffected by the promises of the Abe administration. According to Abenomics, companies would see their profits rise and their employees would receive higher wages. This would have offset the rising prices under inflation. So far, however, only a few major firms have boosted salaries. But most Japanese people work in small and medium-sized companies, where salaries remain stagnant. Furthermore, in April 2014 the consumption tax rose from 5 percent to 8 percent. Since then, more and more Japanese consumers have had to think twice about spending their yen. The reason is that after years of deflation, businesses took this as an opportunity to raise prices – often by 8 percent in one go.

Others chose an indirect approach, as Kazuko learned while shopping for her three-generation household. She likes a particular brand of natto, fermented soybeans, for breakfast. "I was happy when I saw that the price had gone down. But then I noticed that the package simply contained less than it had before."