$2,000 for a Watermelon? That’s a Bargain as Deflation Returns in Japan - WSJ

TOKYO—A prized Densuke watermelon grown in northern Japan sold at auction on Monday for about $2,000. That’s a lot for a piece of fruit, but down more than 70% from last year’s season-opening auction.

It was another sign that Japan, the first modern advanced economy to tackle deflation more than two decades ago, is facing the return of its stubborn foe.

“There was quite a big impact from the coronavirus. Tourism hasn’t recovered yet, so demand for gifts and souvenirs is expected to decline,” said Tomofumi Suematsu, who works at the market that held the melon auction.

On Tuesday, the Bank of Japan said overall prices are likely to go down for now, adding that the nation’s economy “has been in an extremely severe situation due to the impact of the novel coronavirus.” Consumer prices excluding volatile fresh food prices fell in April from a year earlier, the first year-over-year drop in more than three years.

Deflation, an overall decline in prices, used to be just a Japanese disease, but it is spreading world-wide. Consumer inflation in China fell to a 14-month low in May, and producer prices fell at their fastest pace in more than four years. U.S. inflation is slowing too, prompting a reconsideration of extreme measures that might be needed in the event of deflation.

While consumers welcome discounts at the store, deflation is generally considered bad for an economy because it can reduce corporate investment and growth—and ultimately bring down wages. In the worst case, all those declines can feed on each other.

“Japan is already entering deflation,” said Takeshi Niinami, chief executive at Japanese drink maker Suntory Holdings Ltd., in an interview Tuesday.

Industrywide shipments of regular beer—which typically sells for about $2 a can at retail stores—fell 40% in May, while shipments of a beer-like low-malt product rose 14%, according to industry figures supplied by Suntory. The low-malt brew costs only about $1.30 a can.

It is the kind of mind-set that took root in Japan starting in the late 1990s. Escaping deflation was the core of Prime Minister Shinzo Abe’s pro-growth Abenomics strategy when he took office in December 2012, and he has relied on Bank of Japan Gov. Haruhiko Kuroda’s aggressive monetary easing.

Since the virus hit, the government and central bank have worked hand-in-hand on measures that would normally spark quick price rises. The government is paying nearly $1,000 in cash to every person and handing out tens of thousands of dollars to businesses.

Parliament has approved spending in the hundreds of billions of dollars, all financed by new government debt—which the central bank says it will buy in unlimited quantities if necessary.

The nation has mostly shrugged and reverted to its frugal ways. Businesses are responding with the reflex learned over a quarter-century: cut prices.

Suit maker Aoki Holdings Inc. has seen sales plummet because office workers have been staying home. It is selling its latest suit designs at half price.

“Consumers will start to get used to buying at low prices once they experience it,” said Mizuho Securities economist Toru Suehiro. “They would think, ‘I should probably wait until a sale because the shop had one before.’”

The Bank of Japan’s policy board has said it expects core consumer prices to fall by 0.4% to 0.8% in the year ending March 2021 and rise slightly the following year but remain below the bank’s 2% target.

Mr. Kuroda, the Bank of Japan governor, said Tuesday he believes prices would start to rise again once the impact of infections eases. Japan has had far fewer infections than the U.S. and Europe and a coronavirus state of emergency was lifted in late May. The government is urging people to adopt a “new lifestyle” to protect themselves.

“I don’t necessarily think the new lifestyle would lead to price declines,” Mr. Kuroda said.

However, economists said deflationary pressures could increase later in the year as Japanese companies, which have generally protected the jobs of full-time workers, trim bonuses to reflect lower profits.

Mr. Niinami, the Suntory CEO, said the government needs to hand out even more money to encourage spending.

“We have to keep prices resilient by guaranteeing financially troubled households that their lives will be stable,” he said.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com