Abenomics

The Japanese 1st quarter GDP numbers have created quite a stir amongst those of us who get excited about such things. According to the data, the Japanese economy grew by an anuualised 3.5% in the first three months of the year, suggesting that the eponmyous reflationary policies of the new Prime Minister are working. Unfortunately, as with most new economic policies, it is far too early to tell. The best that can be said is that Japan's new policies are doing somewhat better than the austerity policies of the Eurozone whose economy contracted by 0.2% in the same quarter. Japan's economy intrigues. Its problem is that it is not growing in nominal (or money) terms and indeed nominal GDP is 9% lower now than it was in 1997, whereas its real level (or volume) has risen by 9%. In other words, prices have fallen by more than 15% in the last 15 years (.91/1.09 -1). This, compounded by a falling population, means that it is impossible to service one's debts, and although the non-financial corporate sector has deleveraged, much of this has been transferred to the government sector whose net liabilities has risen from 34% to 144% of GDP over the period. In volume terms, what has sustained the economy has been consumption, both private and public, and to a lesser extent net exports. Investment on the other hand has fallen by over 20% and the ratio of investment to GDP has fallen from 30% to 20%, somewhat closer to the OECD average. At 30% in the early 90s, this ratio was clearly excessive and in some ways its decline is to be welcome although it has added to the deflationary pressures in Japan. In value terms, the fall in investment spending matches the fall in GDP. It is also clear that whilst the export volume growth has been strong, its value has not, meaning that companies have had to cut prices substantially to sell goods abroad. The other statistic of note about Japan has been the transformation in its trade accounts. It is now running a trade deficit of almost 2% of GDP compared to a surplus of 2% eight years ago and its current account is only just in surplus as a result of a surplus in foreign income. Japan has always been viewed as being an excess saver but this is no longer true as ageing consumers run down their savings and the government spends considerably more than its income to keep the economy afloat. The government has announced an inflation target of 2% and that it will double the monetary base as a way of achieving that target. The yen has fallen from under 80Y to the dollar to over a 100Y to the dollar. Some have called this the beginning of a "cureency war" and others are predicting a rapid growth in exports at the expense of other depressed economies. What is more likely is that companies will increase export prices in response to the rising cost of imports, most notably commodities, and leave export volumes as they are. What we are really looking for is a sustained rise in consumption in both nominal and real terms and these 1st quarter figures give cause for hope in this regard. Unfortunately what is missing from the figures is any evidence of an end to deflation and here one is going to have to wait for some time for proof that Abenomics has worked.

PMI data for April

There was not much in the data to get excited about, and it is possible that global economic activity actually fell in April. The recovery remains weak, despite a rise in activity around the turn of the year. The reason for the weakness has to be the ongoing saga in Europe, where activity has been contracting for twelve months. It is little wonder that the enthusiasm for austerity is not quite as great as it was, and demonstrates just how misplaced this enthusiasm has always been. Elsewhere, activity is still increasing but not as rapidly as a few months ago, and it is quite clear that stimulus policies will remain in place for some considerable time.