Low Prices Spark Fears of Japanese-Style Recession

      November 10, 2015 12:49

      Prices have gone down as the economy wallows in the doldrums, spawning fears of a Japanese-style long-term recession.

      "Prices of consumer durables don't go down because consumers don't buy them at all during a protracted recession, but essential goods and services like food and beverages tend to get cheaper," said Prof. Sung Tae-yoon of Yonsei University.

      "Dirt-cheap prices seem to lessen the burden on consumers for the moment, but if they spread to all goods and services the result is a deepening recession, shrinking investment and employment, and eventually giving a heavier burden on consumers," he added.

      The consumer price index has been at virtually zero percent for 11 months running, the longest period since 1965. The prices of fruit and vegetables went up briefly, but mostly things are getting cheaper.

      Ultra-cheap chain Paik's Coffee has opened more than 200 outlets this year, selling a cup of American coffee for a mere W1,500 (US$1=W1,161).

      Prices of premium hamburgers have plummeted from more than W10,000 to W3,000-W4,000, and some restaurants are selling passable steaks for W7,000.

      Mired in a trap of low growth that has hovered at 2 to 3 percent since 2011, the real wage increase rate has stagnated at 1 percent. That has put a squeeze on middle and low-income families alongside a steep rise in housing costs.

      The same phenomenon was seen in Japan in the 1990s, at the start of the country's "lost decade." 

      In the early 1990s, Japanese consumer goods makers reluctantly cut prices when consumption stagnated. Soon companies reduced investment, setting in train a vicious cycle of low growth and low spending.

      Prof. Kim So-young of Seoul National University said, "Unless sales go up despite lower prices, it could have a bad effect on investment and employment."

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