Abenomics (Abeconomics); recognising success

by George Hatjoullis

The shocking FT  headline this morning is (http://on.ft.com/1i1HZax)

Japanese companies cast doubt on BoJ inflation target

Reading on one discovers that corporations expect inflation of between 1.2 and 1.7% to be achieved over the next 5 years and not the 2% targeted in 2 years. The BoJ must therefore intensify its easing. This entirely misses the point of Abenomics and if I were Abe I would declare victory of sorts now. The target was to break structurally entrenched deflation expectations and not to hit a particular rate of inflation in a specific time period. The target of 2% in two years was a tool of this policy and not the policy. The fact that corporate expectations are of price rises is a form of success. The fact that the debate is about how fast prices will rise and not whether they will rise must give Abe and Kuroda much satisfaction.

The article continues to question the possibility of further Yen weakness. The real issue is for the Yen not to strengthen from current levels. This is easily achieved using the Swiss example. The authorities merely declare a cap on the Yen and accept the monetary consequences. As these consequences can only be faster growth of the money stock I hardly think it is a major obstacle at this juncture.

Finally, the article raises the question of the consumption tax and speculates that all this just exhibits nervousness about the consumption tax increase from 5 to 8% with a planned further increase to 10% in October 2015. They judiciously avoid mentioning plans to lower the corporate tax rate, which is among the highest in the developed world. The last time the consumption tax was raised it coincided with a downturn in the economy. At a recent speech at the LSE (covered in detail in a previous blog), the BoJ Governor explained why the BoJ believe this was as much a result attending conditions as the consumption tax rise. The BoJ do not expect a similar result from the rise in the consumption tax this time.

The Gestaltz blog has followed the Abe experiment since inception. The view has been that it might not succeed without monetary financing or debt cancellation. The fact that the debate is now about how fast inflation will rise suggests the blog may have been too cautious. Of course, persuading corporations that deflation is over is only part of the exercise. It is also important to persuade consumers of this. More specifically, it is important to persuade individuals that holding primarily cash and deposits and other near money assets is no longer advisable and that they should consider other asset classes. This is still not evident so it is too soon to declare the war against deflation over. But the corporate battle may have been won.