Japan may have finally broken the “stranglehold” of deflation that has weakened bank lending and the real estate market for 25 years.
Deflation damages economies because people become less willing to borrow and spend when they expect prices to fall.
Timothy Griffen, managing director of Lazard Japan Asset Management, has witnessed Japan’s deflationary woes since beginning his career in Japan in 1986.
Speaking at a recent lunch in Sydney, Mr Griffen said things have started to change for the better with the election of Prime Minister Shinzō Abe in 2012.
The goal of Mr Abe’s economic policy has been to use government spending and quantitative easing to create inflation.
The reality of two decades of deflation in Japan has shifted the psychology of consumers, Mr Griffen said.
“In Japan, real estate prices have fallen over 70 per cent since 1989,” he said.
“So the decision to buy a home is basically the same decision you’re making to buy a car [in Australia],” Mr Griffen said.
As a result, Japanese consumers tend to save enormous deposits before they make the decision to buy a house – suppressing any other sort of natural expenditures in the process, he said.
“This is the psychology that Japanese consumers have been operating under pretty much since the peak of the bubble in 1989,” Mr Griffen said.
“The single biggest success the Abe administration has had is to break the stranglehold that this deflationary mentality had on peoples’ behaviour,” he said.
Bank lending has been rising consistently since Mr Abe became the prime minister, Mr Griffen said.
Furthermore, every single region in Japan has announced a rise in real estate prices in recent weeks, he said.
Inflation is running at around one per cent, he added.
“The citizens in Japan are starting to behave in a more ‘normal’ fashion to these economic forces,” Mr Griffen said.
The same change in psychology is emerging among corporations, which have been spending the last two decades deferring purchases of plant and equipment supplies, he said.