August CPI accelerates. More pressure on real wages.
On the 27th of September, the Ministry of Internal Affairs and Communications published the Consumer Price Index figures for August. The headline figure was 0.9% YoY, and CPI excluding Fresh Food was 0.8% YoY.
These are obviously a set of much watched figures, since many (the Japanese government included) use them as a sort of barometer for the extent to which Abenomics is working. The idea is that rising inflation will push consumers to spend more, because goods will be more expensive in six months or a year. It should be obvious to most people that even if this logic is valid, it is unlikely to have any meaningful effect if inflation goes from -0.5% to 0.5%. One could imagine it working if inflation moved from 1% to 8%, but the very small absolute changes that are currently materializing in Japan are unlikely to cause the fundamental shift in consumption behavior that the government is hoping for.
We here at NipponMarketBlog have argued several times that the idea that higher inflation by itself is a success criterion for Abenomics is misguided (see here and here), primarily because the success or failure of Abenomics rests on the nascent recovery becoming self-sustained, and this in turn requires a sustained increase in corporate investment and private consumption. But of course, if prices are rising faster than wages, leading to a reduction in real wages, consumer will likely be less inclined to part with their hard-earned cash. Unfortunately, it seems that Japanese companies are less than likely to raise wages for their employees just because Shinzo Abe would like them to, and a recent survey of companies demonstrates this trend very clearly. We have commented on the survey here.
Equally, in an environment where inflation is accelerating thus leading to a smaller real return on savings, consumers will be especially wary of increasing their expenditure. The assumption that the so-called ‘wealth effect’ arising from a rising stock market thus enriching the average consumer, is also misguided, especially in Japan where equity ownership on an individual basis is very low. Not even in the US where stock ownership for individuals is much more wide spread is this effect meaningful, simply because the vast majority of wealth increase falls to only the top 5% of the population.
Even if one was prepared to accept the premise that (at least for now) inflation is positive for the economy, it is becoming increasingly clear that the vast majority of the ‘improvement’ in inflation is happening for the wrong reasons. Lets look at the details of the CPI figures for August.
Headline inflation is clearly rising, but excluding Food (which is rising very slowly) and Energy(which is rising uncomfortably fast), the overall inflation rate is actually still negative to the tune of -0.1%. In other words, the inflation rate is rising slowly, not because the economy is improving (although that is certainly the case to some extent), but almost exclusively because energy prices have shot up, which in turn is a result of the significantly weaker Yen caused by the BoJ’s massive quantitative easing program. This rise in input costs artificially boosts inflation (and causes the illusion that Abenomics is already working), but it is putting pressure on corporate profits and making everyday life more expensive for Japanese consumers.
The following charts illustrates the extent to which energy prices are rising.
This is very worrying indeed for the Japanese government, and frankly for the Japanese people who have entrusted the management of the country’s public finances with politicians who have consistently added to the financial mismanagement of those finances over many decades now. Abenomics was designed to push Japan out of deflation and spark a self-sustained recovery, all with the single purpose of boosting the economy and thereby tax revenues, and consequently preventing the eventual collapse of public finances and resultant default, caused by decades of ever increasing government debt. We have written extensively on this in the past (see this piece).
Without a sustained change in the spending patterns of consumers (and companies), Abenomics will simply not be successful in turning the economy around, and rising inflation in the absence of rising wages will ultimately result in Abenomics ending up as failure. Apparently, Shinzo Abe last week began meetings with business and trade union leaders to attempt to persuade them to increases wages. NipponMarketBlog can not help seeing this as an almost desperate effort, and we strongly suspect that with soaring energy prices, it will take more than Shinzo Abe asking nicely for them to be persuaded to raise salaries.
On a slightly more philosophical note, NipponMarketBlog observes that human beings have a tendency to believe that for any given problem, there is always an achievable solution. This is a very powerful trait, and probably one that is partly responsible for our species’ evolutionary success in dominating this planet. However, it is sometimes a fact that there simply is not a solution to the problem at hand, the word “solution” being applied here as a way to avoid the negative consequences of the problem in question. Sometimes it simply is not possible to just “fix” a problem.
A few months ago NipponMarketBlog published a piece (see this link) in which we likened the Japanese economy to an aircraft in the middle of a take-off, and pointed out that in terms of application of fiscal and monetary policy, the Japanese government is past the point of no return. They are committed to Abenomics, and there is no way back from this point. Taking that analogy further, imagine if you will that the aircraft eventually manages to take off, but then by some freak accident one of the wings falls off. This is a problem for which there simply is no solution. However much you try to come up with some novel way to make the aircraft fly, it simply can not do so without both wings attached. It will crash, and the only thing you can do at that point is try to deal with that outcome.
NipponMarketBlog strongly suspects that the problem that is Japanese public finances simply is not fixable. Abenomics is a brave attempt to do something – anything – about the problem before it is too late, but it seems to us that the problems are too deep and have persisted for too long for them to simply be ‘fixable’. This of course does not mean that Japan will sink into the Pacific and cease to exits. It just means that Japan will eventually have to suffer the consequences of it’s past fiscal profligacy. This will become a serious burden on future generations, and inevitably lead to significant changes to the fabric and structure of Japanese society.
However, as we have argued before, once this has happened Japan has a great opportunity to relaunch itself as a much healthier, leaner and more competitive economy (see this piece).