Tuesday, December 24, 2013

The unintended consequences of Abenomics

As discussed earlier (see post), Japan continues to struggle in its endeavor to generate demand-driven inflation. To a large extent price increases have been the result of costlier imports due to weaker yen, particularly items related to food and energy. Outside of those sectors, prices remain soft.

The danger of Japan's current policy (Abenomics) is that the outcome could turn out to be the exact opposite of what was originally intended. With wages stagnant, these import-driven price increases are hitting the Japanese consumer quite hard. As a result, spending on domestically produced goods and services could end up falling, constraining domestic prices instead of increasing them.
Scotiabank: - Key here is that the Japanese CPI inflation figures continue to showcase evidence of a relative price shock driven by imported food and energy price spikes significantly related to yen depreciation. Most CPI components not related to food and energy either continue to fall or remain soft as shown in the accompanying chart. The big gainers are prices for fresh food, utilities due to soaring electricity prices in the wake of the Tōhoku disaster coupled with rising imported energy costs, and the energy impact on rising transportation prices. CPI ex-food-and-energy remains largely flat. We maintain the year-long view that Abenomics would impose a relative price shock that would force wage- and credit-constrained consumers to spend more upon what they have to (food and energy) by restraining spending elsewhere in the economy in disinflationary fashion on the second- and third-round effects. That’s a very different inflation dynamic than would be the effects of a generalized increase in economy-wide prices in that it counsels future effects that will be bearish for the outlook for Japanese consumers. At the same time, the other main supposed benefit of Abenomics is an improvement in the trade account by stimulating export growth through yen depreciation, yet this is only evident via a price effect as export volumes remain weak [see post]. 

One sad consequence of Abenomics is the impact on Japan's elderly, whose ranks are swelling rapidly (see post). Isolation combined with rising prices on food and electricity makes survival for many older Japanese citizens a struggle. According to the National Police Agency survey, shoplifting incidents accounted for close to 10 percent of all crimes. And the number of shoplifting offenses is only growing among people 65 and older - with 68 percent of those cases representing food items. The latest 18.6 trillion yen stimulus package from the government is supposed to (among other things) provide additional help for the elderly, but it remains unclear how sustainable such efforts will ultimately be.

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