Tuesday, February 25, 2014

Jury Is Out on Abenomics (excerpt)

So far, Abenomics has succeeded in stopping deflation and actually boosting price inflation. However, the jury is still out on whether it is ending Japan’s economic stagnation. It still could backfire if wages aren’t raised by at least as much as the increase in consumer prices. What we know so far is that December’s CPI inflation rate was 1.6% y/y, the highest since October 2008. The core rate (excluding food and energy), which had been negative from January 2009 through August 2013, was up but by only 0.7% during December.

Unfortunately, much of the “improvement” in the headline rate has been in food and fuel prices as a weaker yen increased the domestic prices of imported commodities. Japan’s trade deficit widened dramatically last year through January as overall import costs soared, while exports weren’t boosted by the weaker yen as much as expected.

Even after adjusting for inflation, Japan’s imports increased during each of last year’s four quarters, while exports actually turned weaker during the second half of the year. That weakness contributed to the fourth quarter’s disappointing 1.0% (saar) gain in real GDP.

Much will depend on the spring wage negotiations, a tradition since the 1950s, during which big manufacturers set wage trends for the rest of corporate Japan. The 2/19 WSJ reported that employers may be willing to hike wages and bonuses to stimulate the economy, as requested by the government. I don’t expect that the gains will do much more than offset price increases over the past year.

Today's Morning Briefing: Stagnation? (1) The man who coined “stagflation.” (2) Plenty of “stag-disinflation.” (3) IMF sees better growth with lower inflation. (4) Professors Summers and Gordon share a bleak view. (5) Draghi on deflation alert. (6) Eurozone’s recovery is anemic. (7) Survey data showing better upturn than hard data. (8) Abenomics has boosted prices, but jury is out on wages and real economy. (9) Stagflation emerging in some EMs. (10) Are revenues, margins, and earnings starting to stagnate too? (11) Staying realistically optimistic. (More for subscribers.)

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