Japan's Consumers Happy to Be Back

Retail Resurges as Long Spell of Deflation Ends

TOKYO -- If happiness is a $150 pair of designer sneakers, Nishiki Tada bought himself a bundle of joy last week.

Flush with a new raise, the 27-year-old carpenter joined the mobs of shoppers in Tokyo's Omotesando neighborhood, the hip epicenter of Japan's retail renaissance. Inside urban clothier A Bathing Ape, where multicolored sneakers revolve on conveyor belts like so many pieces of tempting sushi, Tada dropped nearly $300 in 15 minutes on a long-coveted pair of tennis shoes and other pricey accessories. "I love shopping," Tada said. "And now my life is great because I have money to spend!"

He had his shopping companion and boss, Kazuhiro Takeshima, to thank for that. With Tokyo real estate prices rising in 2005 for first time in 15 years, Takeshima's home-construction business has rebounded too, allowing him to reward his staff with raises.

"There is a sense that we're back in business, that things are good in Japan again," said Takeshima, 35. "It makes us all feel a little more confident about opening our wallets to spend."

That chain reaction of spending -- from houses to cars to sneakers -- heralds what economists call the long-awaited return of Japanese consumers. Their comeback, analysts say, is the strongest sign yet that Japan is overcoming a protracted cycle of economic downturns by finally licking its most daunting financial plague: deflation.

Unlike most nations, where prices rise with inflation each year, Japan has been locked in seven years of price declines, or deflation, as gloomy consumers and skeptical businesses put off purchasing, expecting that prices would continue to fall. The drag on the economy forced some companies to cut payrolls, creating what many feared would be a cycle of constantly falling prices.

That is changing during a strong economic recovery that has lifted Japan's consumer price index for four straight months. That the world's second-largest economy is getting out its checkbook again is good news for the global economy.

Before Japan's economic bubble burst in 1991 as real estate and stock prices crashed, Japan was criticized in many corners for trade protectionism and corporate hurdles that made it difficult for foreign companies to tap the lucrative Japanese market.

Although barriers still exist, overseas retailers such as Starbucks and Gap have proliferated, globalizing the insular Japanese retail market. Last year, the value of imports was projected to have reached 13.8 percent of gross domestic product, the largest in more than a decade. While higher oil prices were a factor, so was strong demand for European wines, Chinese textiles and American leather goods.

"With Japanese consumers spending again, we could be looking at the start of the longest period of economic expansion in Japan since World War II," said Takahide Kiuchi, senior economist at Nomura Securities. "This is something that is going to be felt around the world."

Japan is entering its fourth year of robust economic growth and has an unemployment rate of 4.1 percent, the lowest since 1998. Unlike previous, short-lived recoveries fueled by government spending, the upward trend now is based largely on slimmed-down companies posting record profit and returning to a cycle of hiring. Major banks have cleaned up their bad loans. This month, the Tokyo Stock Exchange's Nikkei index soared near a seven-year high. The Bank of Japan last month scrapped its ultra-loose monetary policy, which had had kept its key interest rate near zero percent for the past five years.

Analysts expect Prime Minister Junichiro Koizumi's government to declare the death of deflation this summer.

Government officials and economists caution that any slowdown in Japan's two largest export markets -- China and the United States -- could yet have a dampening effect here. But for now, the Japanese are embracing a sense of economic optimism not seen in years.

Takuya Wakizawa, 30, a Tokyo television programmer, recently took the plunge into homeownership. "I started seeing mortgage rates going up, and I realized I couldn't wait any longer," said Wakizawa, who locked in a 35-year fixed mortgage for a two-bedroom Tokyo apartment at 2.62 percent last summer. Rates for similar loans have since risen above 2.8 percent.

"My generation never used to think that prices would get higher. We became used to things getting cheaper and cheaper," said Wakizawa, who additionally splurged on two rooms of American-made Ethan Allen furniture and a domestic flat-screen TV. "But prices are going up and it makes you feel like you can't afford not to buy now."

The price recovery -- like Japan's economic comeback overall -- has been lopsided. Land prices in greater Tokyo, where nearly 20 percent of the national population lives, are recovering after years of declines. But rural areas and traditional manufacturing centers such as Osaka -- once home to many factories that moved to China for its cheaper labor -- continue to lag behind.

Blue-collar workers still, in many cases, hold jobs with lower salaries than they had 15 years ago. But leading companies that spent much of the 1990s trimming full-time positions are aggressively recruiting white-collar workers again. Camera and copier giant Canon Inc. hired 688 new university graduates this year, the largest number in company's 69-year history. Next year, Canon expects to hire 710 more.

"I was anxious throughout most of my college years. Everyone told me how hard it would be find a good a job," said Natsuko Kobayashi, 24, a mechanical engineering major who started with Canon this month. "But I got three firm job offers and most of my friends landed the jobs they wanted. It's given us new confidence about the future."

Nowhere is that more evident than in Tokyo's glittering retail districts, with their electronics mega-stores and outsize flagship boutiques. Although Japan's famous taste for luxury goods barely waned even during the recession years, nowadays many consumers are finding ways to buy them for less. At Costco warehouse stores in Japan, for example, shoppers can buy Coach handbags, Rolex watches and cases of Dom Perignon in addition to 12-packs of toilet paper and toothpaste.

Years of recession also made some people grudgingly more cost conscious, opening the door for the likes of Fast Retailing Co.'s Uniqlo brand -- a sort of Japanese version of the Gap. Taking the market by storm with $25 jeans and $15 sweatshirts, the company has grown from 100 stores in 1993 to 709 last year.

Rather than cutting prices, retailers in Tokyo's hot Omotesando district are winning customers back by building bigger and better stores. Last month, Polo Ralph Lauren Corp. opened its largest outlet outside the United States there. Omotesando Hills -- an industrial-style, six-story mall where shoppers are soothed by forest sounds as they browse Harry Winston jewels and Jimmy Choo shoes -- opened in February.

"You definitely see two distinct groups in Japan now," said Roy Larke, editor of Japan Consuming, publisher of an online retailing report. "There are the ones who are now more aware of value and the others, the Japanese who have prospered during the recovery and are willing now more than ever to pay any price for what they want."

Special correspondent Akiko Yamamoto contributed to this report.