The first thing Masayuki Iwasa saw that something was wrong was the chocolate biscuits. Back then, he was an avowed fan of the Bourbon Chocoliere product. He knew 16 biscuit bars filled with chocolate in a package. But at some point Iwasa discovered that there were only 14 bars left in a pack. At the same price. He accepted that. But then he found that the 14 bars had become shorter. Again at the same price and without notice. “That annoyed me, I wanted to share that with others.”
So Masayuki Iwasa, 45, a stock trader from Ushiku in the Japanese prefecture of Ibaraki, set up a website listing which products are getting smaller over time for the same price. That was two years ago. Iwasa has been maintaining his portal so meticulously since then that he has made a name for himself as a chronicler of so-called shrink flation, a different kind of Japanese inflation. “I counted a total of 400 products,” he says, “especially snacks , Sweets, ice cream. ” Result: There are also price increases – but manufacturers mostly compensate for increased costs by saving on the amount of ingredients. “60 to 70 percent of these products have become smaller.”
Shrink flation. The term sounds like a slapstick movie from Hollywood, but the phenomenon should be taken seriously. Perhaps even as a harbinger of a major Japanese economic crisis?
Economists have long puzzled why the world’s third largest economy, with its ultra-loose monetary policy and record debt, seems so sluggish, but at the same time so invulnerable. Since 2012 it has been moving with the flow of the so-called Abenomics policy, which the right-wing conservative Prime Minister Shinzō Abe introduced after his re-election in 2012. The concept turned out to be a relaxed fundraising program for the domestic economy, which Abe’s government implemented in close collaboration with the Japanese central bank. Since then, the central bank has consistently bought government bonds from commercial banks and other financial institutions, thus supporting loans at extremely low interest rates and indirectly keeping the state liquid. Japan lives on credit with its own people. It prints the money it needs and goes into debt without thinking about tomorrow. Fairytale.
After the health crisis, many families received a grant of 770 euros per child
With this monetary policy, Japan has set a trend. The USA and Europe followed suit and achieved convincing successes in times of the booming global economy. Japan also had better records. But Nippon’s economy still didn’t seem very dynamic: scant growth, steady salaries, an inflation rate that fell far short of the target of two percent.
And now? Powerful corona aid packages and pandemic-related delivery bottlenecks have caused prices to rise to record levels in America and Europe. Japan’s industry is also feeling the bottlenecks. Meanwhile, the Japanese government is spending enormous sums of money to generate new momentum after the health crisis, including 100,000 yen (770 euros) in cash for every child in families with an annual income of less than 9.6 million yen (approx. 74,000 euros). But inflation is hardly rising in the island nation. Instead, products are shrinking. What’s going on there?
“Interesting”, says Frank Rövekamp when he hears about the observations of the shrinkflation chronicler Iwasa. The economist Rövekamp heads the East Asia Institute of the University of Economics and Society in Ludwigshafen. He is a professor of Japanese economics and politics, and even if shrink flation is primarily a retail phenomenon for the time being – for Frank Rövekamp it fits into the picture. Well-dosed inflation stimulates consumption, it is said, because everyone wants to anticipate the next price hike. But in Japan, most of all think of the uncertainty that comes with it.
It has now been over 30 years since Japan’s real estate boom collapsed like a balloon that was not tied up after it was inflated. Japan’s bubble economy had previously produced fantastic values. “The Imperial Palace was worth as much as California. 40 percent of the world’s stock market capitalization was concentrated on the stock exchanges in Japan,” says Frank Rövekamp. But the market overheated, land prices plummeted, stock prices plummeted. End of the gold rush mood. Deflation.
When Japan’s central bank buys government bonds, it is basically government funding in disguise
Since then, Japan has been waiting in vain for the next boom. One has got used to the fact that salaries, prices and pensions do not rise. Even more: After the loss experiences of the 1990s, one does not accept the slightest risk. “At that time we learned that investing can be dangerous,” explains Masayuki Iwasa. Even he, as a stock trader, describes himself as cautious. Many others hardly give their money out of their hands anymore. You keep as much of it as possible in your checking account. Or at home in cash. Demographic change intensifies the trend, and the pandemic even more. “Without investment, the money becomes less, which is also a risk,” says Iwasa, “but the fear of the future is probably a bit greater.”
This tendency towards reserves is also evident in the banking sector. When Japan’s central bank buys government bonds, it is basically government funding in disguise. The commercial banks, which practically act as intermediaries in government bonds between the state and the central bank, get a lot of fresh money as a result. They could put this into circulation, issue loans, invest in the growth of the Japanese economy. But something else is happening. “We are observing that the monetary base, i.e. the amount that the commercial banks hold at the central bank, is growing incredibly,” says Rövekamp. The commercial banks are therefore reluctant to invest the fresh money. One can say: what Japan’s central bank takes from the nation’s stockings ends up back there in the end. “A strange situation,” says Rövekamp.
But it makes the country feel that Japan’s prosperity is secure. And the central bank is vigilant about this feeling. “It could force the commercial banks to sell the money to the people, for example through higher penalty interest rates,” says Rövekamp. But it doesn’t. Why? “She is afraid that too much money will come into the Japanese market too quickly.” That is why it is so important that prices remain stable. Even if the products are getting smaller.
This Japanese cycle still works. The only question is how much longer. “Not forever,” says Frank Rövekamp. “If at some point people seriously lose confidence in the yen and have doubts that their savings will keep their value, that would be catastrophic.” Inflation would overshoot. The central bank would have to counteract this with higher interest rates and the sale of its government bonds. A huge national debt crisis would loom.
Frank Rövekamp sees Japan as a long way off for the time being. And Masayuki Iwasa cannot imagine that his compatriots could ever lose faith in their yen in their bank account or in the drawer at home. “The Japanese don’t use the money,” he says, “we save.” The pessimism is too great. Prime Minister Fumio Kishida wants higher salaries, even a new capitalism. Iwasa also thinks that people need signs of renewed confidence so that life will be better for everyone. But can Japan pay for it? In any case, Masayuki Iwasa himself continues to watch his money very consistently. He hasn’t bought them since his favorite chocolate biscuits shrunk.