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By HaleStewart April 24, 2016 7:42 am
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International Economic Week in Review: Abenommics is Failing, Edition

     When I was in college in the late 1980s, the US was terrified Japan would come to dominate us.  Japanese invested heavily in US real estate, at one point purchasing the NY landmark Rockefeller Center.  Books like Japan, Inc. became bestsellers and calls for increased protectionism rose in an attempt to stave off the then feared US downfall.

     25 year later, the tables have clearly turned.  Japan is in the middle of its second lost decade.  And the latest attempt to jumpstart growth – dubbed “Abenomics” – is getting nowhere.  The key short-coming is the failure of two key Bank of Japan described virtuous cycles to emerge.  The first is increasing corporate profits leading to increased investment and the second is low unemployment leading to increased consumer purchases.    

     Let’s start with the business side of the equation.

Corporate profits (top chart) bottomed during the Great Recession.  They rose afterwards, moving sideways until late 2012, when they started a slight but clear upward trend.  However, this has not translated into stronger capital investment (second chart) because the system still has plenty of capacity utilization (bottom chart) to access before adding additional capacity. 

     Turning to the consumer, we see the following:

Japanese unemployment (top chart) is enviably low at just over 3%.  But retail sales are weak.  The Y/Y pace (second chart) declined after an ill-advised tax increase pulled sales forward in 2014.  And the M/M pace (bottom chart) contracted in 7 of the last 12 months.  There are two reason for slow growth in consumer spending.  The first is deflation: there is little incentive to purchase an item today when a consumer can purchase the same good at a later time for the same price.  Second, as the population ages, purchasing declines.  And the Japanese population is clearly skewing older.

     Most concerning is the lack of any meaningful policy response.  The Legislature – which was supposed to enact meaningful legislative reform as part of “Abenomics” – has failed to do anything.  This is where the real failure of “Abenomics” has occurred.  Had the country actually made key changes such as broadening immigration policy or opening up the job market to women, then we could speak with far more confidence about the potential for Japanese success.  But that hasn’t happened.  And given how late we are in the game, it’s highly doubtful we’ll see any progress on these types of issues.  That leaves the BOJ as the only Japanese actor willing to try anything new.  And that’s just not enough.


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