Monetary Policy in Japan has a new problem: Amazon

Japan's economy is expanding but inflation is weak, due to price competition from e-commerce firms

Japan thought it was on track to beat deflation. Then came the Amazon effect.
 
The country’s retailers have been cutting prices in response to the rise of online rivals like Amazon.com Inc., disrupting what had seemed like perfect conditions for Japan to get the stable dose of inflation it has long been looking for.
 
In part as a result, Japan’s central bank is likely to lower its price forecast for the current financial year at its policy meeting on Thursday, said people familiar with its thinking. That reflects continued resistance to price rises, despite Japan’s longest economic expansion in 11 years and its tightest labor market in decades. The Bank of Japan is also likely to raise its view on the economy while keeping its policy settings on hold, the people said.
 
Japan isn’t alone in its surprise at the slow response of prices to improved economic strength. Policy makers, economists and central bankers in the U.S. and Europe are also scratching their heads about why prices around the world can move so little while economic growth gathers momentum—a factor that usually drives inflation.
 
While BOJ officials continue to refer to a number of factors that are holding back price gains, e-commerce is now among them, people familiar with their thinking said.
 
Aeon Co. , one of Japan’s largest retailers, said e-commerce has made competition more severe, especially when consumers remain budget-minded. Aeon, which operates Wal-Mart -like superstores that sell food and general merchandise, cut prices on milk, shampoo and more than 250 other products in April and is planning to do so again in August.
 
Aeon President Motoya Okada said in April that consumer trends, including the low prices offered by internet retailers, left Japan unable to return to inflation after nearly 20 years in which prices have often been in decline.
 
“The end of deflation was a great illusion,” Mr. Okada said.
 
E-commerce in Japan still accounts for less than 6% of retail sales, but its influence on price-setting may be much larger because e-commerce sales keep growing 8% to 10% a year, while overall retail sales are roughly flat. E-commerce makes up about 8.5% of U.S. retail sales.
 
Japan was the third-largest global market for Amazon.com Inc. in 2016 after the U.S. and Germany, accounting for sales of nearly $11 billion, while some local websites offering cut-rate fashion such as Zozotown are also growing fast.
 
“Price competition between e-commerce companies like Amazon and brick-and-mortar shops has become fierce in the U.S. and is beginning to turn that way in Japan,” said Izuru Kato, president of Totan Research Co. “It isn’t so simple that the BOJ can spur inflation by just easing monetary policy.”
 
Amazon representatives didn’t respond to requests for comment.
 
While consumers may welcome a better deal on shampoo, the BOJ and other central banks have long been concerned that broad overall price declines can hurt an economy by fostering a negative cycle of low corporate investment, low wage growth and general lack of vitality. The BOJ has targeted inflation of 2%, and it has pumped the equivalent of hundreds of billions of dollars into the economy each year through purchasing government bonds and other assets.
 
In the past, the central bank blamed sliding oil prices for its failure to hit the target. Recently, oil prices have stabilized, and Japan’s price index edged into positive territory this year. Still, the core inflation rate in May—covering all prices except for fresh food—was just 0.4%.
 
BOJ officials looking for explanations cite the difficulty of changing the common view among Japanese consumers that prices don’t go up. One person close to the central bank’s policy makers said Amazon was helping entrench that view further.
 
The BOJ predicted in April that core consumer prices would increase 1.4% in the year ending March 2018, but it is likely to reduce that estimate, said people familiar with its thinking. Some of those people said recent data suggest it will be hard for inflation to reach the 2% target by March 2019 as the BOJ has projected.
 
Another theory gaining ground at the BOJ is that Japanese companies are investing in automation to improve productivity and offset the higher costs of labor and raw materials. This could help them avoid pushing up the prices they charge customers.
 
Analysts have long said Japan’s heavily staffed service industries have plenty of room for more efficiencies. However, data so far don’t show major productivity gains in Japan.

Source: The Wall Street Journal