Downturn Abe?

The start of 2015 has all been about Europe viz. the ECB, Swiss National Bank and the Greek election and their repercussions.  Even the oil price has been relegated to the shadows of European headlines.  Japan, which spent much of 2014 at the forefront of investors’ minds has been pushed towards the back of investors’ consciousness.  So how is the third arrow of Prime Minister Abe’s policy to deliver economic reform working out?  Has the huge monetary expansion undertaken by the Bank of Japan under Governor Kuroda had an impact? Is growth picking up in the world’s third largest economy or facing a downturn in activity?
Well, Japan is a major beneficiary of a lower oil price although a weaker Yen has diluted some of the dollar price fall, oil is still down 30% in yen terms over the past six months.  While that might damage the drive towards a 2% inflation target, the offset is that Japanese consumers’ disposable incomes have reaped a nice boost.  Indeed, add to that the December wage report which showed wages were up 1.6% over the past year aided by winter bonuses – a good sign ahead of the spring wage negotiation.  Of course future inflation reports will be clouded by the dropping off of last April’s VAT hike but real wages are increasing amid labour market tightening.
Importantly economic activity is picking up as illustrated by Japan’s Purchasing Managers Indices, good indicators of future growth, which are above the key 50 mark.
So as other parts of the world, notably Europe, feel the impact of Japan exporting its deflation via a weaker Yen, Japan, as one’s headmaster would no doubt have put it, is doing ok but could always try harder.

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