As the western world prepares for the Christmas season not every nation joins in. Whilst some will no doubt join in with celebrations in the land of the rising sun I note that Christmas Day brings a flurry of economic data including the main target for the official policy of Abenomics which is the consumer inflation rate. We have seen falls in the annual rate of inflation in the November data of around 0.3% to 0.4% as we await to see the exact impact of the fall in the oil price on Japan. Meanwhile Prime Minister Shinzo Abe has just been re-elected and so will have political confidence boosted but of course the real issue is the state of play of the Japanese economy as it looks forwards to 2015.
What is the latest data?
Today’s releases concentrated on the retail sector as this from the Financial Times highlights.
Supermarket sales fell 0.7 per cent year-on-year in November, the eighth consecutive month of decline.
This reinforced the impression given by department store sales on Friday. From the Yomiuri Shimbun.
Department store sales in November fell 1 percent from a year earlier to ¥558.1 billion, down for the eighth consecutive month since April’s consumption tax rate hike from 5 percent to 8 percent, industry data showed on Friday.
Actually sales edged marginally higher in the major cities but fell more substantially outside them. This is not of course in tune with the messages being provided by the official communiques which sing along to Happy by Pharrell.
It might seem crazy what I’m about to say
Sunshine she’s here, you can take a break
I’m a hot air balloon that could go to space
With the air, like I don’t care baby by the way.
Or more formally here is today’s view from the Bank of Japan.
Japan’s economy has continued to recover moderately as a trend, and effects such as those of the decline in demand following the front-loaded increase prior to the
consumption tax hike have been waning on the whole.
Still in a sign that Japan has not entirely lost the ability to innovate it has copied a western phenomenon and found a by now familiar scapegoat.
Sales of winter clothes were slow due to relatively high temperatures, the Japan Department Stores Association said.
Something interesting seems to be happening in the world of alcohol or liquor too.
Beer coupons worth a total of ¥67.9 billion have yet to be used by households, a liquor industry survey revealed Saturday……These figures translate into the total sum of ¥41.7 billion for bottled beer coupons and ¥26.2 billion for canned beer coupons.
What about wages?
The weak numbers for department and supermarket store sales are not a surprise if one remembers how weak wage growth has been in Japan as 2014 has progressed. Very briefly it looked as though the promises of Abenomics in this area may be coming to some sort of fruition. But the 2.4% annual wage growth of July was followed by 0.9%, 0.7% and 0.2% in October. That sort of trend makes one wonder if wage growth might head into negative territory.
In western terms to inflation generated by the fall in the value of the Yen has been surprisingly low as another feature of Japanese economic life comes into play. But it has been enough for Japanese real wages to fall steadily since July 2013. Indeed the situation here has been worse this year than it was in 2013 and each of the 3 months up to and including October saw annual rates of fall of around 3%.
At the end of last week a private-sector survey trumpeted that wage growth was the highest for 3 years but I note that it looked at larger companies (employees of 100+) which are doing better under Abenomics and was of the princely sum of £28 per month.
Accordingly we see that the inflation created by a combination of a lower Yen and the Consumption Tax rise has weakened the domestic economy via its impact on real wages. There are plenty of inflationoholics in the media who present it as a type of economic cure which is contradicted by the Japanese experience so far.
The fiscal deficit
The second arrow of Abenomics did not fly straight and has instead copied a boomerang and flown back at him. The failure to provide the economic growth promised means that the issue remains a hot one. This is in spite of the fact the corporate Japan has profited from Abenomics, – you might want to think of the third arrow of no “pork barrel” policies at this point – and paid its taxes. From the Yomiuiri Shimbun.
If tax revenue grows to ¥51.7 trillion, as currently expected, the amount would be the highest since fiscal 1997, when the consumption tax was raised from 3 percent to 5 percent.
I am not sure that reminding readers of 1997 is a good portent! But Shinzo Abe feels the need to spend even more than that.
As tax revenue is increasing, the government is expected to set its economic stimulus package at ¥3 trillion. The package will be adopted on Dec. 27.
One of the features of the stimulus package gave me a wry smile, rather than us Turning Japanese are they Turning British?
The government plans to extend income tax breaks for housing loan borrowers by 18 months to the end of June 2019, informed sources said Friday.
Indeed the attitude to dealing with the fiscal deficit is along the lines of Saint Augustine.
Lord, make me chaste – but not yet!
The National Debt and Bond Market
The national debt continues to rise with Japan spending around 43% of its tax revenue on financing its national debt (fiscal year 2014). The amount of debt rises and rises but the worldwide trend to lower bond yields means that each unit of debt is increasingly cheap to finance. Today the ten-year government bond yield in Japan fell to 0.335%. So far an increase in indebtedness has been accompanied by lower and not higher bond yields as we wonder whatever happened to the bond vigilantes?
If you think about it what could be more dangerous if you factor in a spendthrift political class? So Japan is in an illusion where increasing risks are accompanied by lower costs for now anyway.
Default is an awkward issue as the Japanese own just under 92% of their own bond market so they would be defaulting on themselves with only a small marginal gain.
The Yen and the Nikkei 225
At first the re-election of the government of Shinzo Abe saw a strengthening Yen and a weakening equity market or exactly the reverse of his proposed medicine. However in recent days there has been something of a Santa Rally to 17,635 for the Nikkei 225 index and a fall in the Yen towards 120 to the US Dollar. But the credit crunch era has taught us that financial markets often decouple from real economies and so this factor has been the dog that has not barked.
Japan is a country which is ever more following the policy prescriptions of Paul Krugman of the New York Times. Monetary policy is very expansionary with the Bank of Japan aiming to increase the monetary base by 80 trillion Yen a year. Fiscal policy is also very expansionary with planned expenditures of 95.8 trillion Yen comparing with an expected tax revenue of 51.7 trillion Yen. The currency has fallen by 15% over the past year against the US Dollar. So the economy should be growing fast, but instead the malaise has carried on.
If there is to be a rescue cavalry charge it will be the falling price of oil and indeed other commodities. As I pointed out on the first of this month Japan is one of the biggest gainers from this.
Japan is the world’s largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer.
But as we note the falling value of the Yen Abenomics has fired an arrow into its own foot as the falling Yen has insulated Japan from some of the beneficial effects of falling oil and commodity prices. Let me remind you of the words of the band Japan.
Oh ho ho
Life can be cruel
Life in Tokyo
Oh ho ho
Life can be cruel
Life in Tokyo
All of this is before we analyse the drip-drip-drip effect of both an ageing and a declining population.