Economy Japan – reversal of deflation policy

Economy Japan – reversal of deflation policy

Persistent deflation in the Japanese economy has had the longstanding effect of deterring small enterprise. However, now that the country is gradually slipping away from this economic constraint, everyone from business start-ups to investors are starting to make bolder decisions.

There is evidence of this optimistic approach in many areas, particularly on the high street. Take the example of hair salons. One particular entrepreneur had been toiling at an upscale shop in Tokyo's exclusive Ginza shopping disctrict for several years. Then he noticed a significant change amongst customer attitudes. Where clients had previously only ever popped into the salon every three months or so, now they were attending on a much more regular basis, sometimes every other four weeks. This was a clear indication that the economy was improving in a big way.

Similar indicators are appearing all over Japan's commercial sector. In fact, all over the country there has been a steady rise in the number of people starting up enterprises. Japan Finance Corporation, which is a government-affiliated body dedicated to financing ventures, is likely to offer more than 20,000 new business loans this year alone. This is the highest lending figure in more than eight years.

In the previously deflationary Japanese economy, aggressive price-cutting has been an effective tactic that big companies have used. This is fine when there is ample capital to spare, but that situation will change if prices increase. According to one official of Japan Finance Corporation, Atsushi Morimoto, "even entrepreneurs with limited funds can compete against big firms by offering quality products and services".

An end to Japan's lengthy period of deflation was signaled when the consumer price index rose for five successive months through October. As well as serving as an incentive for would-be entrepreneurs, the price upturn is inspiring companies to make bolder investments as opposed to pursuing more conservative financial policies.

A classic example of this new-found optimism in the Japanese market is the case of Hiday Hidaka. The Chinese restaurant chain, operating in the Tokyo area, has long been keeping aside ¥4.5 billion, as financial security. But during a shareholder meeting, when a young shareholder pointed out the company's capital efficiency was low, the decision was made by senior management to put that nest egg to more positive use. The company opened up 35 new shops and have not looked back since.