After a flying start and some impressive gains in the early going, Abenomics, the Japanese government's embrace of bold monetary and fiscal policies to revive the country's flagging economic fortunes and eradicate crippling deflation, will soon be running into serious headwinds. And when that happens, economists who view the Keynesian-style intervention as a model for other struggling economies will have to look elsewhere for inspiration.
The latest economic data show further modest improvements, much of which can attributed to a single source – a dramatically weaker currency. Slashing the value of the yen by a stunning 25 per cent (on a trade-weighted basis) has done wonders for Japanese equities and the bottom lines of the export powerhouses. It also accounts for a hefty chunk of the consumer inflation so eagerly pursued by the central bank, as the price of oil and other imported goods has gone up. Economists estimate that at least 50 per cent of the rise in consumer inflation – and possibly as much as 80 per cent – can be traced to the weaker currency.
Consumer prices rose 1.3 per cent in January, the eighth positive monthly number in a row. But even with the lower yen it was seeking, the Bank of Japan acknowledges that its inflation target of 2 per cent is still nowhere in sight.
Factory output also increased and retail sales picked up after a weak December. Base wages edged up in January for the first time in nearly two years. But a gain of 0.1 per cent is nothing to get excited about, particularly when the overall level slid 0.2 per cent, once bonuses and overtime payments were included. For the full year, the national wage tab is expected to expand by less than 1 per cent.
What's more, household incomes are still headed in the wrong direction, making it less likely that consumer demand can avoid a sharp plunge in response to a stiff sales-tax hike April 1 of 3 percentage points to 8 per cent.
Abenomics may not be derailed by the coming tax grab. But the heavy reliance on a devalued yen as the biggest weapon in the government's arsenal is bound to become increasingly problematic. Depreciation is rarely a path to sustainable growth, particularly in an economy so dependent on imported energy and in a region where bitter trade rivals like South Korea aren't likely to remain idle if they lose market share to a resurgent Japan Inc. Sooner rather than later, even the inflation benefit will fade.
Economists of a Keynesian bent cheered when Japanese Prime Minister Shinzo Abe stuck to the big-easing, big-spending platform that propelled him to power in December, 2012. (His third plank, major structural reform to boost domestic competitiveness, is still largely missing in action). Previous such efforts had been far too timid and short-lived and nothing else seemed to be working. So why not go all-in?
The early successes prompted economy watchers to cite Abenomics as the ideal illustration of why a combination of aggressive fiscal stimulus and vast amounts of monetary easing was the right remedy for the Great Recession. Here, at last, was the proper antidote to austerity. Too bad the patient seems to be drifting further away from a full recovery with each passing month.