The outlook for the economy of Japan continues to disappoint Abenomics fans

There is much to consider in the land of the rising sun, Nihon. Firstly there is the stirring performance of its team in the Rugby World Cup which has been in marked contrast to that of England for example. By contrast the economic experiment called Abenomics after the Prime Minister Shinzo Abe continue to have more troubles than successes. Its original three arrows have started to look like duds as we peruse the economic environment as summarised by the Japan Times over the weekend.

The central bank will unveil the revisions in its biannual outlook report on economic activity and prices due Oct. 30, the Nikkei said. BOJ policymakers will cut the growth forecast to around 1 percent from 1.7 percent for the year ending March 2016, it reported. It also said the estimate for the following year would be cut from 1.5 percent.

This is a catching up with reality after the poor performance in the second quarter of this year that I reported back on the 17th of August.

This morning Japan’s Cabinet Office informed us that GDP had fallen by 0.4% in the second quarter of 2015 which is often reported as an annualised fall of 1.6%. (Later it was revised to 0.3% and 1.2% respectively)

Even worse was the fact that the exports fell as opposed to the hopes of a rise under the policy of driving the Yen lower. Although we need some perspective here as the Yen fell to over 125 versus the US Dollar as opposed to more like 120 now. These days even the amounts quoted below apparently do not drive your currency lower. From the Bank of Japan.

The monetary base had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth had been at around 35 percent.

The Background

Regular readers will be aware that I had pointed out that there were several reasons for this to be a good year for Japan and for its economy to push forwards like its rugby scrum. The main one has been the fall in the oil price for an economy described like this.

A fall in the oil price is likely to be extremely welcome for an economy which imports more than 90% of the energy it uses. The US Energy Information Agency describes it thus.
Japan is the world’s largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer.

I did a back of the envelope calculation which suggested that the gain to Japan was of the order of US $225 million per day.

To this we can add the expansionary monetary policy of the Bank of Japan with the sort of numbers shown above. I hesitate to say full steam ahead as we may be on the verge of what Agent Smith from the The Matrix series of films would described as “More! More!”. An awkward element has been the way that a lower oil price gives a boost to the Japanese economy because of course it provides exactly the opposite effect to the higher inflation of Abenomics.If you believe both then may I suggest you sing along to the recently departed Errol Graham.

Everyone’s a winner, baby, that’s the truth (yes, the truth)

What about wages?

This to my mind is pretty much the crux of the matter. The supporters of Abenomics thought so too as we have been subject to a barrage of rhetoric on the subject along the lines of that they were just about to turn higher. Let us see how the Nikkei Asian Review reports today’s numbers.

Real wages, adjusted for inflation, rose just 0.2 percent year-on-year, slowing from a revised 0.5 percent gain in July, as nominal wages are slow to keep up with price increases of food and daily necessities, undermining the purchasing power of households.

So it is not convinced by the pattern and it does not appear to be convinced by the inflation numbers either! However we have a problem as we note the barrage of rhetoric we have received in the past. The last 2 months of real wage growth in Japan are indeed welcome but rather than any improvement in trend they in fact reflect the fall in inflation that has been seen.

If we look at wage growth as defined by Total Cash earnings it rose by 1.9% in July 2014 and 0.9% in July 2015 and if we move to August last year was 0.6% and this year was 0.5%. Ouch! Wage growth has in fact slowed on this basis. In essence the improvement has been falling inflation as the impact of the Consumption Tax rise fell out of the numbers and a lower oil price impacted. Ooops! So exactly the opposite of Abenomics which was supposed to provide gains from higher prices and inflation.

One can debate the mixture of real and nominal wage growth but let me put it another way. One area of relative success for Japan is its low unemployment rate of 3.4% so a thriving economy would push wages higher. Now let is consider real wage growth in the UK and US for example.

UK Office for National Statistics: Comparing the three months to July 2015 with the same period in 2014, real AWE (total pay) grew by 2.8 per cent.

US Department of Labo(u)r Statistics: Hourly earnings have risen by 2.2 percent over the year. (So real wages rose 2%).

There is an order of magnitude difference between the Anglo-Saxons and the Japanese here. Odd that as the Japanese numbers have apparently been about to surge for 2 years now. The Governor of the Bank of Japan seems to think that they already have.

the positive feedback loop between the increases in employment and wages and the rise in inflation.

Indeed he actually offered a critique of current wage rises although of course he did not put it like that.

Now firms are enjoying record profits and the labor market is in a full-employment condition.

Shouldn’t wages be surging?

At the same time, it is also true that the pace of increase in fixed investment and wages is lackluster in light of record profits.

What is the current outlook?

The Markit business survey series for September was concluded today so what do we learn from it?

The weaker increases in both the manufacturing and service sector was reflected in the Nikkei Composite Output Index which posted the lowest reading since April (51.2), down from 52.9 in August.

So Japan had a relatively good August but this faded in September. Still welcome in comparison to suggestions via weak official industrial output figures that Japan has returned to recession again.

Three New Arrows

If things we going so well we would not have seen this from Prime Minister Shinzo Abe back on the 24th of September. From The Japan Times.

Prime Minister Shinzo Abe said Thursday he has set out three new goals for “Abenomics” and will target a 20 percent increase in (nominal) gross domestic product to ¥600 trillion.

He also added three new arrows to his quiver.

The three new economic policy goals include: promotion of economic growth, child-rearing assistance to push up the low birth rate and social security measures to increase nursing facilities for the elderly.


Prime Minister Abe has kindly reminded us of the demographic issues that Japan faces and let me add in a national debt which is 246% of annual economic output or GDP (Gross Domestic Product). In here we see that difference between the collective experience which can be described as Japan Inc (Incorporated) and the individual. His promise is one which helps Japan collectively with its debts if we ignore the lack of timescale provided but as it is for nominal GDP the individual Japanese will fear higher inflation and perhaps lower real wages.

Moving with the Japan Inc theme it is not that Japanese companies cannot afford higher wages. From Governor Kuroda.

Japanese firms have been making record profits, exceeding the peak registered before the global financial crisis.

That coincides with some of the data from the latest Tankan survey.But if you take the view that Abenomics is an example of Japan Inc moving things to suit itself then the current situation is just fine and real wage growth will continue to disappoint. Thus the individual experience will continue to disappoint. Of course Japan is far from alone being on such a course.

Meanwhile along the lines of its performance in the rugby there is much to admire about Japan. Its long life expectancy and the way which its treats its older population for example. In many ways it truly is different to us and certainly thinks so itself! So there will be plenty more opportunities to sing along with Graham Parker and the Rumour.

Discovering Japan
Discovering Japan
Discovering Japan


12 thoughts on “The outlook for the economy of Japan continues to disappoint Abenomics fans

  1. Hi Shaun.
    Remember we discussed the socialising of child-care and how it gave a boost to Britain’s gdp?

    “The three new economic policy goals include: promotion of economic growth, child-rearing assistance to push up the low birth rate and social security measures to increase nursing facilities for the elderly.”

    Next we’ll be “encouraged” to employ cooks to feed us.

    • Hi therrawbuzzin

      You are entirely right here. There is enormous pressure to move things which are not counted in GDP to within it. Sometimes nothing changes at all and sometimes it is worse (some parents would prefer to have more contact with their children) yet GDP goes up. You also remind me of this today from UK Chancellor Osborne.

      “George OsborneVerified account ‏@George_Osborne Oct 4
      Grandparents shouldn’t have to choose between helping with new grandchild and staying in work. So we’ll introduce grandparental leave”

      Will we be counting their help next?

      • This is, to a large extent, what I meant by gaming NDP in the comments section of one of your previous excellent articles.
        GDP goes up, but no wealth is created, & we all get poorer, or certainly no richer.

  2. Hi Shaun

    Japan is a rapidly aging society and, what is more, a culturally exclusive one.

    This means two things: a lower propensity to consume, which will impact aggregate demand, and an inability to relieve the effect of demographics by immigration.

    These are structural factors which no amount of QE or other monetary tinkering is going to fix. I think I’d go down the robotics route full bore to reduce the need for labour as there won’t be any in a few years time, but Japan may well be bankrupt before then due to Abenomics.

    • Hi Bob J

      I agree completely. There are hopeful things such as the advancement of robotics which may provide a 2001 A Space Odyssey “something wonderful” moment. I fail to see how Abenomics helps any of that and by bailing out Japan Inc. it is in fact likely to make it worse.

  3. hello Shaun,

    so who in Japan is pointing out that not much if anything has changed ?

    who’s pointing out we the west , are following in the same foot steps ?

    mores the point how much money have I lost with Lloyds and if I buy £1000 of shares will I get any back ?

    Wheres the OBR when it comes to share sales of assets purchased with my money ? (tax)

    Will the shares be imputed into GDP , thus giving it a boost ?


    PS: they are insane aren’t they ? or just bipolar ?

    • Hi Forbin

      With the concepts of face and respect in Japan i would imagine not many are. As to Lloyds Bank I think we (as UK taxpayers) are just about making a profit here and it is RBS where there have been losses. According to Fundweb the break-even is 73.6 pence as opposed to the current 77.3p but of course it could go wrong between now and the sale.

      If you believe the hype why are we as taxpayers selling? From the BBC.

      “Analysts also expect the bank to raise its dividend. At the moment it is paying only 0.97% a year to investors, but that is expected to rise significantly.
      “The dividend you get on the shares you hold will prove quite attractive to those private individuals who are looking for regular income,” said Sue Noffke, the head of equities at Schroders.
      “That dividend yield could be between 4% and 5% next year, and the year after,” she told the BBC.”

      Easy money,what could go wrong?

  4. Japan punished Kyushu electric power company whilst subsidising the incompetent TEPCO. Likewise, the Japanese seem to prefer having individually govt debt rather than paying it in tax to balance the system – there seems to be collective denial about the sustainability of 246% debt to GDP. In short the politics of economic policy are FUBAR and the voters are not holding their politicians to account.

    PS. Have been reading that Bernanke thinks more banksters should be jailed, better late than never, I’ve often said that we need more banksters prosecuted.

    • Hi ExpatInBG

      Agreed, but it is a shame that Bernanke did not push for jailings whilst he was in charge of the US Fed. as it would have sent out a strong message and would have helped. As to Japan it is a good point that in essence they prefer to buy JGBs (Japanese Government Bonds) rather than pay taxes.

      The experience of the last 2 Consumption Tax rises is rather unlikely to change sentiment on that front.

  5. Hi Shaun,I’ve been reading there’s been a lot of offshoring by Japanese industry following the beginning of the Great Depression (because that’s what it is) and the 2011 tsunami, so this might go some way to explaining the weak GDP figures, whilst Japanese companies are enjoying record profits as an investor friend keeps pointing out to me via his portfolio which has done very well in spite of the yen devaluation (I refused to touch Japan on grounds Abenomics was unsustainable).

    The real problem is the Japanese corporates reluctance to share their wealth with their workers which could have it’s roots in their culture of paying older workers less and Japanese demographics are OLD.

    A conundrum nonetheless – anaemic GDP, Government debt that makes Greece look well managed and a corporate sector awash with profits! The solution is obvious…..

    • Hi Noo 2

      The situation is a fact that there has been plenty of offshoring from Japan as the Nikkei Asian Review pointed out in February.

      “In 2013, Japanese companies’ direct investment in ASEAN member countries came to $23.61 billion, a 10-year high, according to the International Monetary Fund.”

      Some of it was originally driven by a higher Yen but as you know I wonder how quickly companies respond to a lower Yen and so noted this bit.

      “The weaker yen has apparently not deterred Japanese companies from moving their production bases closer to growing consumer markets.”

      This poses quite a few questions. How quickly does big business respond to changes in currency trend? Or do they fear a higher Yen again? Perhaps they are thinking along the same lines as you – corporate taxation could help here- and are departing the scene.

      Whatever the answer none seem to help Japan’s economy much.

  6. “The three new economic policy goals include: promotion of economic growth, child-rearing assistance to push up the low birth rate and social security measures to increase nursing facilities for the elderly.”

    It never ceases to baffle me that governments around the world are not subjected to much more ridicule for endlessly promising things they cannot and do not deliver. Regarding “promoting economic growth”, exactly what is left that Japanese governments & their central bank have not been trying in abundance these last 20 years. What secret, magical solutions have been held back or only just discovered which when unleashed will now make their sclerotic economy grow?

    Also any policies regarding “child rearing assistance” will have little effect on the Japanese birth rate. They seem to be ignoring the rather amazing apartheid which has developed between the genders in Japan over the last 25 years. Surveys have shown that about half of all thirty year olds in Japan have never been on a date and about a third of young people aged 16-24 do not even have any interest in sex (with another human). Until technology can figure out a way for humanoid robots or anime characters in computer games to conceive their birth rate is unlikely to improve.

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