Japan's prime minister Abe Shinzo has shaken up the world economic circles with Abenomics, his bold mix of scatter shot fiscal boost, extremely loose (some would say slutty) monetary policy and a bundle of gift-wrapped regulatory changes benefiting supportive company presidents and reticent gestures in the direction of structural reform. Yesterday's government release on GDP in the first quarter of 2013 hints that Abenomics seems to be doing very quickly to the Japanese economy what the Friends of Abe have spent years trying to do to Japanese diplomacy: namely, run it into a ditch.
As the chart indicates, even a modest year like 2012 when Japanese businesses were under the thumb of a socialistic DPJ-led government -- frozen as it was to near immobility by divided control of the houses of the Diet -- the economy still grew at a robust annualized 5.3% rate in the Mar-Jan quarter. However, under the pressure of the Abe government's avowed attack on the value of the national currency, its adding to the national debt at an accelerated rate and the simultaneous destabilization of the bond markets and destruction of the purchasing power of Japan's burgeoning population of retirees, economic confidence has shrivelled. Real growth in Jan-Mar 2013 crashed to a mere 3.5%. In nominal terms, which are the meaningful figures in deflationary economies such as Japan’s, GDP shrank year-on-year at an annualized -4.0% pace...
The above is a parody.
However it is no more absurd than many of the prematurely laudatory, rose-colored glasses-wearing articles appearing yesterday in response to the government release of GDP estimates for the Jan-Mar quarter.
Later - Via Bloomberg: Goldman Sachs researchers have tried to find inflation expectations above and beyond those created by the mandated rise in the consumption tax from 5% to 8% next year.
The GS assessment of the net effect of Abenomics on expectations: none. (Link)
Later still - Right now it is impossible to disambiguate:
1) economic behavior driven by a sense of hope for a future of rising incomes, asset prices and employment
2) economic behavior driven by coldly calculated front loading of purchases to avoid paying the extra 3% tax
3） economic behavior driven by a panicked fear of rising interest rates and import prices,
4) economic behavior taking advantage of inventory clearance and special promotions in anticipation of companies trying to raise prices via the introduction of new products and services.
Under scenario 1, the economy keeps chugging through 2014 with a small, sharp dip after the tax rise. In scenario 2, economic growth is strong until the imposition of the tax, after which it falls off a cliff. Under scenarios 3 and 4, economic growth declines through this year, then falls of the cliff with the tax rise.
I know that the wealth effect of rising asset prices will provide a kick to certain sectors of the economy -- but the effects of wealth effect driven demand do not seem likely to have major impacts on domestic wages and employment.
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