Global economies are now facing an age of deflation
1. It is widely said that global economies are now facing an age of deflation. What are the common deflationary forces in global economies? Has the US experienced deflation in recent times?
2. Ina Food has been successful for 55 years of continuous revenue and profit growth. Nevertheless, the Japanese economy has been stagnant do to inflation. If Japan can overcome deflation, Ina could do much better. How can Japan overcome deflation?
3. Put your quant hat on! In the main text, it is claimed, “If the gross margin of a product was 30%, it could be increased as much as 17% through simply raising the price 5% if the cost is not changed.” Explain this mathematically.
4. Tsukakoshi believes that as long as a company is confident in its products’ competitiveness, there are always methods to raise prices and increase profits smoothly. Is this a viable general business model in a deflationary environment?
5. The case authors consider Ina Food’s successful price increase in a period of deflation to be a “contrarian” strategy. What is a “contrarian” strategy? What in the case supports Ina Food’s contrarian strategy?
6. Tsukakoshi decided to raise prices during a period of deflation. What if he had lowered them as so many companies were doing in this environment? What would have happened?
Sample Solution
Global economies are now facing an age of deflation
In mainstream economics, deflation may be caused by a combination of the supply and demand for money, specifically the supply of money going down and the supply of goods going up. There has been several deflationary periods in U.S. history, including between 1817 and 1860. The most recent example of deflation occurred in the 21st century, between 2007 and 2008, during the period in the U.S history referred to by economists as the Great Recession. The U.S is not now experiencing deflation. Japan suffered nearly two decades of deflation until 2013 when Prime Minister Shinzo Abe stimulus policies helped revive parts of the economy out of the doldrums. Deflation can be overcome by lowering bank reserve limits, open market operations [O.M.O], lowering the target interest rate, quantitative easing, and increase in government spending.
