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By HaleStewart November 22, 2013 9:13 am
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"Abenomics" Is Working So Far

Japan has been in a deflationary rut for the last 15-20 years.  This presents an incredibly difficult policy dilemma for the central bank and other economic policy makers as deflationary expectations (the belief that prices will be lower tomorrow) are now firmly ingrained in the Japanese economic psyche.  This greatly slows economic activity as consumers will delay purchases to a future date when prices are lower.  To exit this damaging cycle, the country needs to create inflation, which is a central tenant to "Abenomics."  To further this goal, the bank has pledged to double the monetary base in a short period of time, with the obvious intent of not only increasing inflation but creating inflationary expectations within the economy.  Let's take a look at several statistics to see if Abenomics is working as advertised. 

Above is a chart of Japanese exports on a month to month basis.  Notice that at the beginning of the year exports haw a large increase, largely as a result of the yen's sharp devaluation caused by the new policy.  However, exports have been at fairly consistent levels after that initial stimulus.  This is more the result of slowing international economies.

 

 

For the last four months, the annual rate of inflation has been increasing. 

And inflation appears to be slowly seeping into core prices, as we see in the above chart. 

While we only have positive inflation data for the last four months, the trend is promising.

Retail sales have increased, although they are still printing at a somewhat concerning pace.  Put in another way, the consumer is responding, but we'd like to see a sharper, more pronounced increase.

Industrial production has picked up a bit over the last few months, with a big year over year increase in the latest reading.

What many commentators fail to recognize is how incredibly difficult it will be to pull an economy that has been experiencing a pro-longed deflationary period out of the fire.  A concerted effort lasting several years (at least) is needed.  So far, we've seen a good first effort, but we will probably need to see more to push Japan out of its malaise.

 

 

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