Abenomics One Year Later
One year later and due mainly to the fact the Japanese stock market has risen an astounding 70% year-over-year, talking-heads, politicians, and central bankers proclaim Abe's trip into the monetary policy black hole as a success (it would seem on that basis that the head of Venezuela's "central bank" deserves a Nobel prize). Abe has managed to devalue his nation's currency by 25.5% against the USD in that time and the price of Japanese government bonds (despite some early teething trouble with the government's repressive activity) is practically unchanged up 0.75% on the year. But away from the 'market', Job creation remains stifled, inflation is rising (but thanks to import prices) and wages languish down 0.9% as the trade balance is collapsing.
Tonight provided another example of Abenomics failure to spur real growth... Jobs-to-Applicants ratio rose at the slowest pace since Abe started and missed expectations by the most in a year...
One thing is for sure - dueling QEs between Japan and the USA make for highly correlated FX and equity market co-movements...
Still believe its all about the fundamentals... and not just a marginally levered carry trade's flows?
A year later, some progress has been made, but crucial issues have been ducked and much greater challenges lie ahead.
The new administration under Mr Abe immediately fired the first and easiest of his three “arrows” (see David Pilling), a dramatic expansion in the BoJ balance sheet that will be maintained until inflation reaches 2 per cent. The second arrow, a temporary fiscal support programme, has also been implemented.
The third arrow, structural reform, has not even been removed from its quiver. And by far the most difficult task of all, now being termed the fourth arrow, stretches far into the future. That arrow is the tax increase needed to attain long term fiscal sustainability.
...the rise in the Nikkei has had positive wealth effects on consumption, so the central bank can claim some of the credit for the recovery.
More important for the long term strategy, inflation has broken into positive territory after many years below zero. Unfortunately, much of this change has been due to the rise in import prices, which will be a one-off boost unless wages rise in response, which they are not yet doing. Core inflation is barely at zero.
Without significant structural reforms, the markets may focus their attention back onto the sustainability of fiscal policy, which is very far from being fully addressed. In fact, when combined with the ageing of the population, this is by a long distance the most intractable problem which Japan faces.
The great unknown for Mr Abe and his successors is whether this fiscal tightening can be accomplished without tipping the economy back into recession. If not, the future may eventually hold further monetisation of the debt, with an even bigger devaluation and much higher inflation. Mr Abe cannot continue to rely on only one of his three arrows if he wants Japan to avoid that fate.
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