Japan's deflated generation

Those turning 20 this year in Japan have known only an economy of falling prices. What damage have two decades of deflation, anaemic wage growth and lower job security done to their ambitions?
By Leo Lewis, Published The Sunday Times, 17 Jan 2016

With the magnificent Meiji shrine behind them, kimono brocades catching the sun and their coming-of-age ceremony about to begin in the Shibuya district of Tokyo, seven Japanese friends hold an urgent meeting, mobile phones in hand. Thumbs move in a blur as staff urge them to hurry inside.

Rival thrift sites flicker across screens. One of the group shouts in triumph: If they get to the restaurant by 3pm with the right coupons, they will save 1,220 yen (S$15) collectively on the after-party bill.

They agree and dash into the hall.

Everyone can relax now, one of them explains, because money has been saved.

This generation of 20-year-olds celebrating their coming of age across the country is the first to have lived their entire lives with the economy in a broad state of deflation. They think small. They trust only with caution. They see the future as a string of cash-draining emergencies.

"Our parents had the 1980s bubble, we have deflation. They went a bit crazy. We are coldly practical," says Tokyo student Ayako Imaeda.

"Both generations have had their way of thinking changed deeply by the economy."

Whatever the social narrative of the ceremony, it has been undermined by two decades of anaemic wage increases, lower job security and lacklustre consumption, says Tokyo University professor Hiroshi Ishida. Economic factors have stripped away the incentives for young Japanese people to leave home, buy cars, marry, have children, take risks and generally grow up, he says.

To an extent, the same is true in other parts of the developed world.

In Japan, however, the phenomenon is especially bad news for the growth reforms, known as Abenomics, and for the Japanese leadership's dream of priming the nation for an era of entrepreneurship, innovation and investment.

LIFELONG PHENOMENON

Coming-of-age day, a public holiday, is held on the second Monday of each January and prompts national reflection and demographic anxiety. The seijin shiki is a celebration for Japanese youth who, over the past 12 months, have turned 20 - the age at which they gain the right to vote, smoke and drink.

Thanks to falling birth rates, there are fewer of them each year and an ever-greater population of retirees for them to support.

This year's celebrants, born in 1995 and 1996, are the first to have spent their entire journey to adulthood in an economy of mostly falling consumer prices.

Their lives have been so infused by the phenomenon that several say deflation - one of the main obstacles to growth through the 2000s - has evolved into a source of low-level apprehension that limits ambition.

Engineer Takuya Okuyama, who joined Hitachi in 2013, says: "It has been the norm for as far back as I can remember.

"Even if there was a negative impact from deflation, I would not be able to recognise it because I have nothing to compare it against."

That does not mean the deflation generation sees an end in sight.

But the young are not convinced, even with last November's figures showing a 0.3 per cent year-on-year rise in overall prices, the Bank of Japan (BOJ) continuing to target 2 per cent inflation and Prime Minister Shinzo Abe declaring that Japan is "no longer in a deflationary period".

Prices in Japan began falling at the time that this year's 20-year-olds were born, and the fruitless attempts to drag Japan from deflation has seeped into their psyche, say academics.

The phenomenon has not just eroded faith in the enriching powers of the economy, but left this generation sharply aware that its leaders are neither all-knowing nor all-powerful.

Another attendee at the ceremony, Yusuke Hamada, says: "My parents believed that the government would make their lives good and they did get richer. The lesson we have learnt is that we need to save as much as we can and take as little risk as possible."

The critical difficulty faced by Mr Abe and the BOJ, according to academics, is that they are engaged in a form of psychological warfare with the public on inflation.

They need to persuade people that prices and wages are indeed rising to give that assertion any kind of sustainability.

Unfortunately, says Tokyo student Nozomi Hasegawa, the deflation generation is a tough audience.

"My age group has only ever lived with bad economic news," she says.

"We've seen different Japanese governments fail to revitalise the economy, fail to stop deflation and fail to improve the prospects for working women."

Deflation's clearest crime has been to squeeze company profits.

As well as suppressing wages, it is blamed, at least in part, for the steady disintegration of the job-for-life corporate culture.

Falling prices gave civil servants and those with stable jobs in large corporations a sense of rising wealth, but for everyone else - 99 per cent of Japanese companies are small and medium-sized - it has produced a sense of insecurity.

Japan now has a generation of newly enfranchised adults that become stressed over a price difference of five yen between two doughnuts at rival stores, keep count of their micro-savings in notebooks, but struggle to explain what they want to do with the money.

Author Takuro Morinaga, who has prospered by writing best-selling guides to frugal living, says: "Deflation has made Japan unable to think. The generation turning 20 does not dream big but looks for small moments of happiness in their current situation.

"They don't save for something big, but as insurance."

YEN-PINCHING

The deflation generation will soon enter Japan's job market, doing so with only a modest expectation of wage increases despite the tightening labour environment.

Among nearly two dozen students and workers interviewed by the Financial Times, none found the idea of zero interest rates unusual. Few imagine having wealthier lives than their parents, and barely any foresee owning shares.

Only one said they would consider starting their own company.

A fashion school student attending the coming-of-age ceremony in Shibuya says: "I often surprise myself. I am more conservative than my mother. I am more conservative than my grandmother. She lived in a time of war."

There are striking consistencies in attitudes.

All the interviewees, most either working full-time or part-time and earning about 1,000 yen per hour, were asked to choose between two train routes to the same destination. One journey costs 200 yen, and the other costs 170 yen but takes an extra 15 minutes.

All but one of the 20-year-olds took the cheaper option.

Ms Imaeda says: "I guess we've got our values of time and money mixed up, but this question isn't a theory. My friends and I have this discussion all the time.

"Sometimes it is over a 10 yen difference in price. Probably we feel we are saving to buy things - for me, it's nice clothes or a bag - but the importance of that 30 yen is the saving itself."

Japan Women's University labour economics expert Machiko Osawa says the impulse of Ms Imaeda and others to pursue micro-savings is the culmination of years of psychological pummelling.

One of the long-term effects of deflation and economic stagnation, she says, has been the growth of non-regular employment and the tumbling expectations of any kind of security. Savings are part of the defence mechanism.

Yokohama student Teru Kohara says: "Deflation lives in our minds and has become normal.

"There are many effects - a lot of them we don't even realise and a lot that we cannot decide whether they are good or bad.

"(But) I am sure that if you gave me 100,000 yen now, I would save 99 per cent of it."

Professor Osawa says that as a consequence, young people are not taking enough risks.

"Our generation learnt the lesson that if you take a risk, you can always get back to a position of safety," she says.

"It is not so easy for Japan's 20-year-olds. There is no real market for mid-career recruitment, so you know that if you quit your job, the second one is not going to be as good as the first.

"In society, the young generation should be risk-taking and innovative. In Japan, they are just afraid."

Ms Imaeda and others echo that criticism of corporate Japan and what they call its inflexibility.

Deflation, she says, has also heightened her awareness of opportunities sliding away from the country's economy.

She adds: "I think things will improve until the Olympics in 2020, but if we as a nation haven't taken every chance we can between now and then, there will not be any chances afterwards."

SAFETY FIRST

For students Eiju Obata and Akira Niki, neither of whom plans to move out of their parents' homes, safety is the priority rather than wealth.

Japan's economy has left them with an ambition no greater than preserving the quality of life they have. "Our parents did have a much easier time," says Mr Obata.

"My mother got a job at Mitsubishi after graduating from art school. That would be impossible now. People made more money at that time. They consumed more, they bought more things."

According to Prof Osawa, the persistence of falling prices means there has rarely been a time during these students' formative years when they have not been exposed to negative economic news.

Several of the Shibuya coming-of-age graduates say that the euphoria surrounding Abenomics has been more prolonged than other phases of recovery.

But none was able to name a specific monetary, fiscal or structural reform of the past three years that had directly benefited them.

"It's no wonder my students are so price sensitive," says Prof Osawa. "They have had a constant flow of horrible information about their economy.

"They are being told about people going bankrupt or retiring with no money. They see a welfare system built around lifetime employment which has not adapted to the change."

She adds: "They are told, from a young age, not to be extravagant and, when they grow up, not to try to keep up with the Joneses."

Despite the misgivings, Mr Abe and the BOJ appear to have given themselves an opening in which to convince the deflation generation to put faith in rising prices and a return to an economic normality they have never known.

The 20-year olds interviewed may not have liked the idea of starting a business, but Japan is riding a wave of new businesses.

Between 2010 and 2014, according to figures from Tokyo Shoko Research, the annual number of newly established businesses jumped from 99,780 to 119,552.

Prof Ishida suggests that some young people may be shedding their fears of being disadvantaged by the economy. For eight years, he has tracked a panel of 4,800 people aged between 20 and 40.

The number of those saying they had "no hope" in society has floated above 50 per cent since 2008.

In 2013 - the first full year of Abenomics - that dipped to 41 per cent.

However, the anxiety remains.

Ms Hasegawa, the student from Tokyo, says: "The government wants us to believe in an economic growth situation that we have only ever read about in books or heard about from our parents.

"Even if it comes true, I'm not going to stop saving."

FINANCIAL TIMES

They think small. They trust only with caution.
Posted by Financial Times on Thursday, January 14, 2016