Amazon blamed for Japan's deflation problem

Jul 22, 2017 | News On Japan

Jul 22, 2017 (investopedia.com) - Over the years, numerous reasons have been provided for Japan's prolonged deflation problem. These have ranged from automation to mindset problems. Amazon.com, Inc. is the latest culprit to be assigned the blame.

According to a recent report in The Wall Street Journal, low prices due to intense competition between retailers â€“ online and offline â€“ are responsible for the Japanese economy's deflation problems. E-commerce has less than a 6% share of Japan's overall retail sales. At growth rates of between 8% and 9%, e-commerce's future prospects in the heavily digital country are considered bright. For example, according to some estimates, e-commerce sales will reach $134.1 billion by 2019. This has led traditional physical retailers to undercut e-commerce rivals in a bid to slow their growth. (See also: Why Is Deflation Bad for the Economy?)

The WSJ piece quotes the president of Aeon Co., Ltd. (AONNY), one of Japan's largest retailers, as saying that the end of deflation is a "great illusion." The retailer has made repeated price cuts to better compete with online retailers like Amazon, which offer deep discounts because they have streamlined operations. In turn, this has limited the Bank of Japan's ability to trigger inflation in the economy through monetary and fiscal policies.

Amazon entered Japan in 2000. In 2016, Japan was the third largest market for the Seattle-based company and contributed 8% to its overall revenue. The e-commerce behemoth's effect on the overall economy is also a point of concern in the United States, where critics charge the company with depressing wages and making products cheaper. (See also: Deflation and Debt: Is the United States the New Japan?)

To be sure, the Amazon effect might have only a minor impact on Japan's deflation. Automation, in the form of robots in manufacturing, may have a much stronger case for causing deflation there. According to the International Federation of Robotics, Japan is the world's third largest market for robots, and sales in the country are expected to grow by an average of 5% every year until 2019. While they have a much higher initial expense, robots are more productive compared with humans and lower overall costs associated with manufacturing products. These savings can then be passed on to customers.

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