This morning has seen some disturbing news from the Far East. This came as rather a contradiction to the promises of the G20 conference which had only just ended in Brisbane.
The combined growth strategies of G20 member nations presented at the Brisbane Leaders’ Summit will equate to 2.1 per cent new growth and inject an additional $2 trillion into the world economy and create millions of jobs.
The Brisbane Action Plan contains close to 1,000 measures, including more than 800 new ones, which the IMF and OECD estimate will boost the collective GDP of G20 nations by 2.1 per cent by 2018.
I suspect that many of those promises will be forgotten on the flights home.
The news flow took a darker turn as the latest economic growth figures for Japan were released. From the Financial Times.
July-September data defies consensus, contracts again: July-September real GDP shrank by 1.6% qoq (quarter on quarter) annualized, defying market consensus for growth (+2.1%), as GDP (Gross Domestic Product) remained negative following the April-June print (-7.3% qoq annualized, revised downward from -7.1%).
Just to be clear that was a 0.4% fall as we usually measure GDP in the UK and it followed on from a quarter where the economy had shrunk by 1.9%. So we see that the Japanese economy has in fact not only returned to recession but has in fact faced a sharp one. This in itself poses more than a few questions for the official policy of Abenomics in Japan of which more later although of course regular readers will be aware that I have challenged it from its inception. If we go back to the 30th of October 2012 here were my thoughts.
I always felt that rather than conclude that the policy is a disappointment they would instead conclude that what had happened was that it had not been applied with enough size and vigour……….So in spite of the grand declaration of a “Measures Aimed at Overcoming Deflation” by the Japanese government and the Bank of Japan I expect there to be a QE10,11,12….. as time goes by.
This caught the “experts” somewhat by surprise as the Financial Times highlights.
#Japan GDP forecasts in full: Credit Suisse: +3.4pc Morgan Stanley: +2.8 Bank of America: +2.5 Barclays: +2.2 JPMorgan: +2 Banque Nationale Paris: +1.6
As you can see up is indeed the new down one more time!
Perhaps they have spent too much time reading Paul Krugman in the New York Times who has been a cheerleader for Abenomics since its inception. He added this in April 2013.
I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness.
Also Paul Krugman was kind enough in that article to confirm that for him you can never “Pump It Up” enough.
The hope now is that things have changed enough at the Bank of Japan that this time it can, as I put it all those years ago, “credibly promise to be irresponsible”.
What about QE 11?
Some nuance is needed here as whilst events have progressed as I argued and Mr.Krugman has seen the Bank of Japan “credibly promise to be (even more) irresponsible” as QE 11 was announced by the Bank of Japan on the 31st of October the latest move came after the quarter in discussion here.
The problem that is fiscal policy
If you think that Japan has a problem with monetary policy wait until we get to fiscal policy! Not only does Japan have a very high level of gross government debt (245% of GDP) but it is also running a relatively large annual fiscal deficit (7% of GDP in 2014 according to the Cabinet Office). As you can see real problems are posed here by the size of the numbers. For example 24% of all Japanese government expenditure is projected to go on debt costs this year and that is in spite of what are extraordinarily low government bond yields. Or if you prefer debt costs are 43% of all government revenue. Japan’s official debt measure excludes some of what is counted elsewhere but even so it is some 17.5 times the expected central government revenue this year (Cabinet Office figures).
If we look further ahead in time then there are clear challenges for fiscal policy from Japan’s population which is both ageing and shrinking. Of all the countries in the world Japan is suffering from the most severe case of this with regular falls in its population combined with a low birth-rate and a rising life expectancy. Please do not misunderstand me in most respects the latter is welcome. But in the world of what is sometimes called the dismal science it poses plenty of challenges right now.
Even with the fiscal consolidation measures planned Japan expects to run a fiscal deficit of around 5% per annum in the future as the forecasts go to 2023. Of course we are left wondering if the phrase “Too infinity and beyond!” applies?
Actually those forecasts assume measures which now are much less likely to take place such as the second phase of the planned consumption tax rises.
Speaking of the consumption tax increase
This has become something of an elephant in the room as I have been involved in a debate this morning as to whether this was part of Abenomics at all. I agree with this from the Japan Times from the 13th of June 2013.
The Abe administration appears inclined to raise the consumption tax from April 2014.
Whilst the bill was in existence pre the Shinzo Abe government it is a bit much to argue that a “revolutionary” economic policy could not have changed course on this if it wanted! Also I note that like the Bank of Japan the Japan Times was very concerned about the historical precedents from past consumption tax rises.
The Finance Ministry had expected that the tax hike would increase total tax revenues, thus contributing to the government’s financial reconstruction. What happened was the opposite. Although consumption tax revenues went up, total tax revenues fell because the tax raise broke the back of the economic recovery.
It would appear from the evidence so far that history can indeed repeat itself. Back on the 17th of December 2012 I pointed out that Abenomics arrow number two or fiscal expansionism would have to face up to the issue of what to do about the consumption tax.
If the LDP spends more and delays or ends the planned rise in the sales tax rate then the national debt will rise even faster.
I suppose those at the more fanatical end of Abenomics support with argue that Shinzo Abe “bottled it”.
There is much to consider here but let me start with the forecasting community. They have had yet another bad day as estimates of growth of the order of 0.5% turned into a -0.4% reading. Actually that is pretty much the history of Abenomics which has received an extremely favourable press with some news organisations willing to misrepresent wage patterns. The reality is as I put it on the 20th of October that Japan is stuck between a rock and a hard place.
Of course the story is not yet over (although if an election is called and Shinzo Abe loses it presumably would be…). My main measure involves looking at wage growth. As of the latest figures released earlier this month real wages were falling at an annual rate of 2.9% in Japan. Exactly how will the economy improve with this being the state of play?Also as higher inflation is official policy and as the numbers indicate the often promised wages fairy has not turned up in Japan how will the promised higher inflation help with this? Perhaps in an example of another definition from my financial lexicon for these times help is now defined as a hindrance.
In musical terms Japan is singing along with Coldplay.
Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,
Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,