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It’s now really starting to look like Prime Minister Shinzo Abe of Japan has lost his magical touch. Even though he was widely praised for the ‘Abenomics’ principle which was built on the three pillars of fiscal policy, monetary policy and economic growth and actually secured his re-election (he was already prime minister in 2005) into office on this strategy, it looks like his theoretical model is no longer working. Even though the Nikkel index enjoyed a huge run since the elections in December 2012 until the end of 2013, the index has continuously moved in a certain trading range over the past 18 months.
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As you can see, the Nikkei index was trading at around 9,000 points in November 2012 when Shinzo Abe unveiled his economic program but immediately shot up to 16,000 points just seven months later. That’s an incredibly impressive 78% run in less than a year and without a doubt the Nikkei index was one of the best performing indices in 2013. Of course, when the stock markets in in some kind of jubilant atmosphere it’s always a difficult task to live up to the extremely high expectations.
So let’s have a look at some data to see if Abenomics really worked. One of Japan’s main issues was its unemployment rate which was 4.2% at the time Abe was voted back into the office. This is low by European and American standards, and to get it down to 4.2% after peaking at 5.5% in 2009 was already a huge achievement. But, Abe proved he could do even better, and indeed, the unemployment rate went down from 4.2% to 3.6%.
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This achievement gets even more impressive if you know that people have to work longer. The retirement age has increased to 61 (and will reach 65 by 2025), which means that there will be less available spots on the labor market available for new entrants. One would think this would have a negative impact on the youth unemployment rate as well, but no, the next chart clearly shows the youth unemployment rate was also decreasing until it recently shot back up.
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So how exactly did Abe stimulate the Japanese economy? First of all, in the beginning of this year the corporate tax rate was reduced once again, from 38.01% to 35.64%. This reduces the tax bill for the companies but the effect on the unemployment rate was relatively minimal. A second part of Abe’s plan was to increase the money supply and if we look at the M2 Money supply rate, there’s indeed a clear shift. Since November 2012 the M2 Money supply increased from 820 trillion Yen to 876 trillion Yen in July of this year, and that’s a 6.8% increase in just 20 months.
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However, even though Abe did everything right in the first 18 months of his second tenure in office but then he decided to raise the sales tax again, from 5% to 8%. This was a bold move as the previous time Japan increased the sales tax from 3 to 5% (back in 1997) the crisis worsened and the recession became extremely severe. Back in the nineties the government was hoping this sales tax increase would also increase the government revenues, but they couldn’t have been further from the truth. This 2% sales tax increase had a much worse effect on the consumer confidence than expected and the government revenues actually decreased by 4.5 trillion yen.
So in light of those events, it was a really bold move by Abe to increase the sales tax even further to 8% earlier this year. And unfortunately the reaction of the consumers was the same. Japan’s GDP has contracted by more than 7% in the quarter wherein the sales tax was increased. Even though there were plans to increase the tax even further to 10%, these plans now seem to have been shelved as it would very likely be disastrous for the Japanese economy.
What's the main takeaway of this situation? In just six months time, the purchasing power of the Japanese Yen versus the Dollar decreased by 6% as the bad macro-economic numbers were released. However, the next chart shows you that if the average Japanese citizen would have bought gold, its purchasing power would have remained stable. This once again emphasizes that gold still is one of the most important assets to protect your wealth and purchasing power.
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Even though Abe’s master-plan initially seemed to work, the Japanese recovery basedon the Abenomics has stalled and it now even looks like the country will miss its inflation target even though the central bank has pledged to double (!) the monetary base to 270 trillion yen. This will be necessary as with the current falling oil pice, the deflation risk is increasing as it will become cheaper to produce goods. According to several analysts the risk of a stagnating economy is now a very realistic scenario, and it looks like Wonderboy Abe’s plans are running out of steam and the temporary revival of the Japanese economy has come to a screeching halt.
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