Why inflation scare tactics in Japan drive consumption recovery


Nov. 20 2020, Updated 3:26 p.m. ET

Private consumption growth in Japan

The below graph reflects the trend in private consumption growth in Japan. As noted in Part 1, Japan’s real gross domestic product (real GDP) today is approximately where it was in 2005. The lack of overall economic real GDP growth has reflected in stagnated wage growth, as well as a corresponding lack in consumption growth, as depicted below. Once again, this prompts the question, what can “Abenomics” do to spur real GDP growth, wages, and private consumption?

“Abenomics”: Larger budget deficits and aggressive monetary policy  

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As we’ve seen, Japan’s new Prime Minister, Shinzo Abe, in conjunction with Bank of Japan Governor Haruhiko Kuroda, will attempt to end the post-1990 deflationary spiral, which has gripped the Japanese economy. These policies, known as “Abenomics,” will attempt to encourage private investment through a more aggressive mix of monetary and fiscal policy. “Abenomics” aims to end deflation by targeting a 2% inflation rate, as well as to increase fiscal spending by 2% of GDP. This level of government spending is expected to raise the 2013 deficit to a whopping 11.5% of GDP in 2013—higher than the U.S. budget deficit after the 2008 crisis, as well as present-day Greece’s deficit (with approximately 10.0% budget deficits). Plus, “Abenomics” involves the Bank of Japan purchasing $75 billion per month of bonds per month—nearly as much as the $85 billion per month purchased by the U.S. Federal Reserve Bank (Fed). When this large-scale bond buying program was announced last April, the yield on the Japanese 10-Year bond fell from 0.80% to 0.43%.

So far, both the massive bond buying operations and government deficits haven’t translated into higher interest rates in Japan. In fact, rates fell, leading to even lower real interest rates in Japan, which should further encourage consumption over savings. In the short run, lower interest rates should support the economy and possibly the valuations of Japanese equities. In the long run, investors are concerned that interest rates could eventually rise, as inflation slowly replaces deflation, which could have a negative impact on the price of Japanese equities and restrict future economic growth prospects. Also, many investors have become concerned about Japan’s ability to service or repay its ballooning debt levels, which stood at 211% of GDP by 2012. While Abenomics skeptics, such as Kyle Bass of Hayman Capital, predict that Abenomics policies will lead to drastically higher interest rates and collapsing equity prices, such doomsday predictions have yet to materialize.

Expect consumption data to lag

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As we move toward the last quarter of 2013, we’ve seen modest improvements in both disposable personal income and private consumption growth rates, moving from -2.0% and 0.0%, respectively, during the 2011 lows, to +1.0% during the 2013 highs. Given that the Japanese yen has weakened nearly 33% against the U.S. dollar since “Abenomics” started, and that the Japanese Nikkei equity index is up 53% over the past year, you might expect to see more robust consumption growth data.

You may reasonably expect a lag between “Abenomics” and consumption data. Though the weakening yen has significantly enhanced the profit margins of Japanese exporting companies over the past year, it may take a while before we see growth in both nominal and inflation-adjusted wages in Japan. As unemployment in Japan has fallen from 4.3% to 3.9% in Japan over the past year, you might expect to see some signs of wage growth going forward. We’ll examine why “Abenomics” means significant improvements in consumption and wage growth, and not simply inflation, in the upcoming parts of this series.


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These developments have significant implications for the future trends in Japanese equity markets in relation to its regional export competitors of China and Korea. As 2013 progresses, investors could see a continued outperformance of Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics”. Plus, as Japan pursues unprecedented monetary expansion, and the U.S. Fed ponders monetary tightening, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), State Street Global Advisors Dow Jones Index SPDR (DIA), and Blackrock iShares S&P 500 Index (IVV).

For further analysis of how China is being affected by Japan and “Abenomics,” please see China’s exports: Is the Golden Age of Cheap Labor Coming to an End? For further analysis of how United States–related consumption trends could impact Japan’s “Abenomics”-led recovery, please see U.S. consumer spending: Sustaining the unsustainable? For further analysis of how exports in Japan are being affected by “Abenomics,” please see Japanese exports: Are we seeing an “Abenomics”-led recovery in Japan?”


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