Home > XE Currency Blog > Prime Minister Abe Has His Work Cut Out For Him

AD

XE Currency Blog

Topics6755 Posts6800
By HaleStewart December 15, 2014 8:17 am
  • XE Contributor
HaleStewart's picture
HaleStewart Posts: 792
Prime Minister Abe Has His Work Cut Out For Him

          Prime Minitster Abe – who was re-elected in a snap election over the last few days – has been in power a few years.  He first came to power on the back of “Abenomics” – a three part economic revival plan that contained the "three arrows" of currency devaluation, structural reform and fiscal stimulus.  This plan, however, ran into an economic roadblock in the spring when Japan raised the national sales tax, leading to two quarters of negative growth and a technical recession.  Abe called the most recent election to gain additional political capital to spend on the revival of his program.  While only time will tell if the plan is successful, the Japanese economy is currently experiencing serious problems.

          The most obvious sign of this is the weak GDP growth:

          The annualized pace of growth has been negative for the last two quarters.  While many people thought there would be a contraction in the second quarter, the severity took most by surprise.  And the third quarter contraction also surprised many people, as most were predicting a second quarter rebound.

          One of the biggest problems has been sluggish retail sales growth.  Before the sales tax increase in the spring, consumers were increasing their spending at a fairly decent clip.  After the tax hike, however, we see a far slower pace of increase.  And the rate of household spending (a far broader spending category) has been sharply lower.  The reason for this is consumer confidence has been dropping since the summer of 2013.

          And this slower spending is translating into lower industrial production growth, as shown above in the continue decline in the year over year rate of industrial production since the first of the year.

          Perhaps the biggest area of concern is the now slowing pace of inflation.  Japan has face near two decades of price deflation.  One of Abenomics three arrows is a doubling of the monetary base to increase inflation.  And this originally occurred, as shown by the sharp jump in inflation.  However, the pace of inflationary increases has slowed.

          Abe was right to call the election in order to increase his political capital.  His program clearly needs a new shot in the arm.  Now, he has to spend that capital in hopes it will revive the Japanese economy.Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

           

Paste link in email or IM