Japanese deflation and Abenomics By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 31, 2015 | Posted by bobbysrinivasan << back to blog

Japan has just announced that the fourth quarter of FY 2014 – 15 GDP has expanded by 1.5 percent. This comes after two quarters of sharp contraction and put together the Japanese economy has achieved a near zero growth for the financial year. This is sad news for Japan as it has been battling deflation for the last 20 years.

Did Abenomics fail? Prime Minister Shinto Abe introduced the scheme to banish deflation in December 2012. Mr. Kuroda their Central Bank Governor had promised 2 percent inflation in April 2013. What they have now is the Core inflation of 0.2 percent including the energy. Given the way the oil prices are moving south, it is unlikely that Japan will ever achieve a 2 percent inflation rate. What went wrong with Japan with their macro-economic policy? In 2014, the Japanese government introduced a 3 percent consumption tax. This made their consumers jittery and they reduced consumption.

Now with the oil prices going lower and lower. Japan will enjoy a big advantage since the Tsunami 4 years ago it has closed its biggest nuclear power station and so currently it is 100 percent dependent on the imported oil. Given the oil prices will remain favorable to them, it is possible that their economy could recover from the deep deflation through increased consumer demand. Already the tell-tale signs are there. Abe’s government is planning to accept wage rises of 2 percent, the steepest rise in 15 years. The labour market is tightest it has been in years. The industrial output has been rising steadily above the trend rate for more than 2 years. Since abenomics started nearly 1 million women have joined the workforce. There are tentative signs that companies are starting to put contract workers in better paid full time jobs.

Of-course Japan’s budget debt is in far excess of 250 percent of GDP regardless of the booming tax revenues. However this may not stand in the way of economic recovery. The ageing problem and declining population are all challenges for the government to grapple with, but regardless of this, there is a huge pent up demand for consumption in the economy. Finally the world will be happy to see a successful Japan growing steadily and contributing to the global growth.

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