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Figure 3. The collapse of the asset price bubble

Figure 3. The collapse of the asset price bubble

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OECD Economic Surveys: Japan



28



Figure 4. Household saving rates

Per cent of household disposable income

Per cent



Per cent



18



18



16



16



14



14



12



12



10



10



8



8



Japan

OECD average1



6

4



6



1990



1991



1992



1993



1994



1995



1996



1997



1998



1999



2000



2001



2002



2



4



1. A simple average of the 29 countries for which data are available.

2. OECD projection.

Source: OECD.



corporate sector. Subsequently, compensation stabilised in nominal terms in the

first half of 2003, thanks to overtime and bonus payments, while employment levelled off. With prices, as measured by the private consumption deflator, falling at a

1½ per cent annual rate, stable labour income in nominal terms provided enough

real income gains to support a 1 per cent rise in private consumption.6 However,

these trends imply that the persistent fall in the saving rate (Figure 4), which has

sustained private consumption and the Japanese economy, was reversed with the

end of falling labour income in the first half of 2003.

Unemployment and deflation

The unemployment rate, generally a lagging indicator of economic conditions, has remained stable (on a seasonally-adjusted basis) around the record

high of 5½ per cent. This reflects the fact that as employment stabilised, the

labour force participation rate also stopped falling. However, taking account of the

rising number of discouraged workers suggests a less favourable picture. Indeed, if

the labour force participation rate had remained at its 2000 level, the unemployment

rate in the first half of 2003 would have been nearly 1 percentage point higher.7

One positive labour market indicator has been a rise in the job offer-to-applicant

ratio from 0.5 to 0.6 during the course of 2002. However, the unemployment rate

has failed to decline, suggesting that the mismatch problem in the labour market

has become more serious.



© OECD 2004



Macroeconomic developments and key economic challenges



29



Figure 5. Trend of deflation

Percentage change from previous year

Per cent



Per cent



5



5



4



GDP gap, s.a.



4



Consumer price index

Core consumer price index



3



3



2



2



1



1



0



0



-1



-1



-2



-2



-3



-3



-4



1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003



-4



Source: Bank of Japan and OECD.



Despite the cyclical upturn, deflation has remained persistent. Although

the headline consumer price index fell only ¼ per cent (year-on-year) in the first

semester of 2003, this reflects rising prices for oil and fresh food (Figure 5). The

core measure, which excludes these two components, fell by twice as much over

the same period. In addition, a hike in out-of-pocket medical care costs in April

also had a significant impact on the consumer price index.8 Excluding such costs

from the core measure, the underlying deflation rate was 0.6 per cent (year-onyear) in the second quarter – close to its average rate since 2000.9 The private

consumption deflator also reported a steady decline in the price level, though at a

faster rate of around 1½ per cent through mid-2003. The broadest measure, the



© OECD 2004



OECD Economic Surveys: Japan



30



Figure 6. Decomposition of deflation

Quarter-to-quarter percentage change at annual rates

Per cent



Per cent



4



4



Cyclical demand shock

Global productivity shock

Comparative advantage shock

Total deviation of CPI

from its mean1



3



3



2



2



1



1



0



0



-1



-1



-2



-2



-3



1990



1991



1992 1993



1994 1995



1996



1997 1998



1999 2000



2001



2002



-3



1. The deviation of the consumer price index from its mean of 1.09 per cent over the 1985 to 2002 period. Thus, the

sum of the bars in each quarter differs from the actual inflation rate by 1.09 percentage points.

Source: Kamada and Hirakata (2002), updated by the authors.



GDP deflator, showed a larger decline of around 3 per cent, reflecting sharp falls in

the price of investment goods.10

It is difficult to identify precisely the causes of deflation, which results

from a number of interrelated factors on the demand and supply sides. In the

short term, the path of price changes is thought to be determined by demand

pressure (as measured by the output gap), supply shocks and expectations. A

recent analysis found that the pattern of stagnant growth and falling prices has

been caused by both demand and supply-side shocks since 1998 (Figure 6). On

the demand side, weak demand pressure has resulted from the on-going fall of

asset prices and a number of negative external developments, such as the



© OECD 2004



Macroeconomic developments and key economic challenges



31



Figure 7. Supply-side influences on inflation

A. Imports of consumer goods in volume terms 1

Index 2000 = 100



Index 2000 = 100



110



110



100



100



90



90



80



80



70



70



60



60



50



1993



1994



1995



1996



1997



1998



1999



2000



2001



2002



2003



50



B. Effect of rising import penetration on the CPI

Per cent change, year-on-year



Per cent



Per cent



3



3



2



2



1



1

Other goods



0



0



-1



-1



-2



-2

Imported goods and their substitutes 2



-3

-4



1993



1994



1995



1996



1997



1998



1999



-3

2000



2001



2002



2003



-4



1. Seasonally adjusted. The figure for the second quarter of 2003 is based on April data.

2. Excludes petroleum, agricultural and aquatic products. The data for 1993 to 2001 is based on 1995 weights for the

CPI, while that beginning in 2001 is based on 2000 weights.

Source: Bank of Japan.



1997 Asian crisis. Demand factors are estimated to account for roughly one-third of

the variations in the consumer price index since 1998, suggesting that supply-side

factors play an important role. Such a role would be consistent with the fact that

the Japanese economy has recorded small increases in output while prices have

been declining.

On the supply side, two factors, in particular, appear to have been significant.

– Imports of consumer goods have risen nearly 40 per cent in volume

terms since 1998, reflecting Japan’s increasing openness and integration

in the world economy (Figure 7). The prices of these imports and their

domestic substitutes have declined at a substantially faster pace than

other goods (Panel B).



© OECD 2004



OECD Economic Surveys: Japan



32



Figure 7. Supply-side influences on inflation (cont.)

C: Effects of deregulation on the CPI



Cumulative changes from 1995 to 2002 in per cent 1



Fixed telephone charges

(1.8)

Rice (1.0)



Regular gasoline (1.4)

Electricity charges (2.9)



All items excluding

fresh food (95.5)



-16



-14



-12



-10



-8



-6



-4



-2



0



2



D. Percentage of items in the CPI whose prices are falling

Per cent



Per cent



80



80



70



70



Decrease of 1% or less

Decrease of 1 to 2%

Decrease of 2% or more



60



60



50



50



40



40



30



30



20



20



10



10



0



1998



1999



2000



2001



2002



0



1. Based on the 2000 weights for the CPI, which are indicated in parentheses.

Source: Bank of Japan.



– Deregulation has led to falling prices for a number of goods and services. For example, prices of fixed telephone services, rice, gasoline and

electricity have dropped substantially since 1995 (Panel C).

While imported goods and deregulated items have led price declines,

deflation has become broadly entrenched over time. The proportion of goods experiencing price declines has risen from 40 per cent in 1998 to 60 per cent in 2002

(Panel D). Moreover, the extent of the decline exceeded 2 per cent for more than a

quarter of products that year. While deflation has negative implications for growth

(see below), gradual price declines of the magnitude recorded during the past

decade are not the underlying cause of Japan’s economic stagnation but rather a

symptom of weak demand, as well as the supply-side factors discussed above.



© OECD 2004



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Figure 3. The collapse of the asset price bubble

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