One for the mantelpiece, Mr Abe:
(Click through the pic for the Economist article)
As Cardiff wrote earlier in the week, Abenomics appears to have passed its early tests as we head towards the release of Abe’s third policy arrow aimed at structural reform and growth strategies. We got real gross domestic product increasing by 0.9 per cent in the three months to March, or 3.5 per cent in annualised terms. As the FT noted, it was the second consecutive quarter of growth, after a rise in October-December that the government revised upward to 1 per cent. And we got machine orders jumping impressively on Friday morning.
Abe himself is basking in mass approval. From the Economist again:
Mr Abe is electrifying a nation that had lost faith in its political class. Since he was elected, the stockmarket has risen by 55%. Consumer spending pushed up growth in the first quarter to an annualised 3.5%. Mr Abe has an approval rating of over 70% (compared with around 30% at the end of his first term). His Liberal Democratic Party is poised to triumph in elections for the upper house of the Diet in July. With a majority in both chambers he should be able to pass legislation freely.
But, to balance the glows above we just have to inject some caution while we wait for some more solid data points. First a rather chunky but worthy excerpt from Stephen Lewis at Monument Securities (our emphasis):
The 0.9% quarterly advance in real GDP has been widely hailed as representing a break with more than twenty years of economic malaise. There is no denying the pick-up in activity, as recorded in the data, is welcome following three quarters in which Japan’s economy had apparently struggled to grow at all. Japanese GDP figures tend to be more erratic than those of the other major advanced economies, however. This reflects, in large part, the methods Japan’s official statisticians employ when estimating the data. We should note that the year-on-year rate of increase in Japan’s GDP actually declined in the latest quarter from 0.5% to 0.2%, some way short of a growth miracle. This is because the rise in real GDP in 2012Q1, at 1.3%, was even stronger than in the latest reported quarter, and that has now fallen out of the annual comparison. But nobody in 2012Q1 was talking of a decisive break with Japan’s economic past. Nor were they in 2011Q3, when GDP recorded a 2.7% quarterly surge (or 11.3% annualised). On those previous occasions, observers readily accepted that Japan’s GDP series is volatile. Sharp swings from quarter to quarter are the rule rather than the exception. That is why it used to be widely recognised that GDP was a poor short-term indicator of changes in Japanese economic conditions. A better guide, perhaps, is METI’s all-industry activity index, which is published, with a lag, on a monthly basis. Full sets of figures for this series have been released for January and February, while the March number may be estimated from already published figures for industrial production and so-called ‘tertiary activity’ (that is, services). These calculations suggest that growth in activity between 2012Q4 and 2013Q1 was around 0.1%, in other words, negligible.
The latest GDP data reflect a positive contribution from net international trade volumes that might, on a hasty interpretation, be seen as resulting from the yen’s recent depreciation. In fact, the figures may reflect no more than a reversion to trend after two quarters in which the net trade balance had subtracted significantly from GDP. Consumer spending advanced solidly, as it had done, for the most part, over several quarters past. That was despite, or perhaps because of, falling consumer prices. The disappointing aspect of the report was the continuing slide in private non-residential capital investment. This component of demand shrank by 0.7% on the quarter, to stand 5.7% below its level in the corresponding quarter of 2012. It is too soon for Abenomics to have influenced the spending plans of Japanese businesses, though. We should not judge its impact on corporate expenditure much before the final quarter of this year.
Indeed, as we argued on 30 April, it is much too early to be looking for the effects of Abenomics on activity in any part of Japan’s economy. Confidence indicators have picked up, in the business and household sectors, since Mr Abe took office but there would normally be a delay between this shift in sentiment and an actual rise in spending, if the shift occurred at all. Possibly the impact of the ultra-expansive policies will show up in prices before activity levels. After all, the yen has already depreciated sharply and this is raising the prices of imported goods and services. The latest GDP data show a jump in the import price deflator of 6.9% from the previous quarter. These price increases seem likely to filter through to the consumer level, if survey results showing a fairly high level of confidence in the Bank of Japan (BoJ)’s ability to reintroduce inflation into Japan’s economy are any guide to the business environment in which Japanese companies believe they will be operating in future. Japan’s export price deflator also rose in the first quarter of this year, though not as sharply as the import price deflator. It stood 4.3% above its 2012Q4 level. It seems Japanese companies are taking advantage of the weaker yen to raise their yen prices, or to leave prices quoted in foreign currency terms unchanged, and thereby fatten their profit margins. To the extent they have followed this strategy, the competitive threat from Abenomics to other countries’ exporters will have been muted. It should be noted that the terms of trade were swinging against Japan in Q1. The standard view is that an adverse movement in a country’s terms of trade eventually crimps its ability to sustain economic growth. If this holds good in Japan’s case, Abenomics will eventually run into headwinds if the terms of trade continue to deteriorate.
And a quick reference to Abe’s first go at power from Koo’s Holy Grail of Marcoeconomics:
The Abe administration, which took office at the end of September 2006, announced early on that its economic policy would be based on the slogan “no fiscal reform without growth.” Not only was this motto eminently suited to Japan’s current economic situation, but it suggested that the new administration had learned from the Koizumi administration’s mistake, whose slogan was “no economic growth without structural reform”…
In less than a year, however, Abe and all of his ministers (except Foreign Minister Taro Aso) had fallen prey to economic orthodoxy, and were indicating that fiscal reform had become the administration’s first priority.
We’re in a different decade with different policies and it does seem that this Abe-iteration is less for turning, but forgetting that policy carry-through is not a guarantee would be silly. Particularly in Japan. It’s maybe for that reason the JGB market (not yet something to get in a fuss about) is worth watching.
Related links:
The Smith/Klein/Kalecki Theory of Austerity – Krugman
FT Alphaville’s Abenomics file