The raft of monthly economic data published by the Japanese government on Aug 30 could easily be read as an affirmation of Abenomics. Japanese prime minister Shinzo Abe’s three-pillar strategy of short-term fiscal and monetary stimulus combined with a long-term growth strategy aims to kick the country out of 15 years of deflation. In July, the monetary boot seemed to land firmly on the backside of a becalmed economy: prices were up, unemployment down, factory output expanded, and workers’ incomes rose. More encouraging yet for the prime minister, inflation rose by its most in five years and unemployment fell to its lowest since 2008.
Those two data points encompass a more nuanced view of the Japanese economy’s progress. Inflation is being driven by higher energy bills and by imports made more expensive by a weaker yen far more than by an increase in broad-based demand. Yet the unemployment numbers, along with rising incomes, bode well for consumption spending, which has been a main driver of the recovery. Japan’s economy grew an annualized 2.6% between April and June, less than expected but still its third straight quarter of expansion.
In short, the recovery is on track, but has a ways to go and could still veer off course. The gamble is the short-term gains from hyper-easy money will last long enough for long-term growth to get a solid footing.
When the Bank of Japan meets next week for its September policy review there is little doubt that it will maintain the stimulus it launched in April to keep fueling the recovery until a broad demand-driven recovery takes firm hold. What to watch for will be how nuanced a view the central bank takes in its assessment of the economy, which in turn will inform the government’s decision (due in early October) on whether to go ahead next year as planned with the first of two rises in sales tax needed to cut deficits.