Wed, Oct 09, 2002 page10

• Deflationary environment developing

  • By Joyce Huang / STAFF REPORTER
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  While discount stores offering everything from books to daily necessities have mushroomed recently, pundits warn the trend may indicate future deflation if consumers continue to cut spending.

  A 48-year-old male shopper surnamed Wang said yesterday that he had cut his monthly spending on daily necessities to a minimum by frequenting bargain retailers such as the Daiso Shop (大創百貨), which offers most of its products for only NT$50.

  "Low prices are the major reason that I shop here. I save about 50 percent over past spending on these items," Wang said.

  Currently unemployed, Wang certainly has reasons to reduce his spending -- but for others, bargains seem to be just as tempting.

  Shopping at Sai Yu Kan (彩遊館) -- "the everything is NT$39 store," a 20-year-old student, surnamed Wu, said she was not only attracted by the store's low-priced items, but also the novel products they carry and "not-to-bad quality."

  A 30-something housewife, surnamed Lin, said products at thrift shops can actually be trendy.

  Using the strategy of low prices to boost sales seems to work at Sai Yu Kan's 12 outlets since its sales growth increased by 25 percent to 30 percent per month after its start-up last October, according to spokeswoman Hitomi Yeh (葉麗真).

  The trend may soon lead to a deflationary environment.

  "As far as consumers are concerned, the gains are positive," said Schive Chi (薛琦), president of the Taiwan Academy of Banking and Finance (台灣金融研訓院).

  But economists said that, from the macroeconomic point of view, deflation may actually be worse than inflation, and also harder to deal with.

  During a recent online interview, Colin Asher, a London-based economist at the Japanese investment bank Nomura Securities (野村證券), was quoted as saying that "deflation is dangerous because it creates downward economic momentum."

  "In deflation, [there's] a declining spiral. Businesses make less profit so they cut back [on] employment. People feel less like spending money. Businesses then don't make any profits and everything works itself into a declining spiral," Asher said.

  And the main problem with deflation is that there are not many remedies available to combat it, economists said, adding it's not as easily detected as inflation.

  Economists loosely define deflation as a "persistent decrease in the level of consumer prices."

  It's the opposite of a textbook example of inflation -- which is a sustained rise in prices.

  According to the definition, Schive said Taiwan experienced signs of deflation four years ago when the real-estate bubble burst after the 1997 Asian financial crisis.

  He said Taiwan still suffers from deflation to a degree -- a view shared by Chu Hau-min (朱浩民), a professor in National Chengchi University's department of money and banking.

  "Taiwan is currently going through the initial stage of deflation," Chu said.

  He cited the declining consumer price index (CPI). The CPI fell 0.74 percent from a year ago and 0.04 percent from August according to the Directorate General of Budget, Accounting and Statistics.

  "But whether Japan-style deflation contagion will spread across Taiwan remains to be seen," Chu said.

  Both Schive and Chu agreed that there's little the government can do to tackle the problem since even relaxing monetary policies won't help fight the contagion.

  While governmental spending could be expanded to prop up employment and investments, the government, facing financial difficulties, has little room to spend lavishly, Chu and Schive both said.
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