Things Are Improving In Japan

 |  Includes: EWJ
by: Scott Sumner

Nothing dramatic, but Tyler Cowen linked to a Financial Times article that has some positive data:

"We are still seeing input costs rising from energy and a weakening yen," said Takuji Aida, chief economist at Société Générale in Tokyo. "But pass-through momentum is getting stronger," he said, noting in particular a 0.8 per cent rise in the cost of clothes and footwear.

Wages are beginning to pick up, too, he said, judging by a 1 per cent rise in the sum of all workers' salaries and bonuses in the April-June quarter. "Deflationary pressure is easing," he said.

CPI in Tokyo in July, considered a leading indicator for the rest of the country, rose to 0.5 per cent from 0.4 per cent in June, she noted.

Other data released on Friday morning were positive. The jobless rate dropped to 3.8 per cent, from 3.9 per cent in June, while industrial production rose by 1.6 per cent on a yearly basis and 3.2 per cent on the previous month.

A few comments:

1. Although the goal is 2% inflation, you really want to focus on NGDP growth, which is a better indicator of demand-side growth. NGDP and RGDP both rose briskly in the first half of 2013, especially by Japanese standards (trend NGDP is negative for Japan, so 3% NGDP growth is like 5% or 6% in the U.S.)

2. From the very beginning of Abenomics I've claimed that the markets show the policy is likely to boost inflation, but will fall short of the 2% goal without more stimulus than markets currently expect. I still believe that. Just as I still believe U.S. growth in 2013 will be about 2%, and I still believe low interest rates are the new normal, and I still believe the China boom is not over. I stand by my predictions.

3. Unemployment was 4.2% when Abenomics was announced in November 2012, and 4.3% when Abe took office this January. Japanese unemployment rates are not comparable to Western data, but the 3.8% rate is low by recent Japanese standards (post 1998), and total employment is higher than a year ago despite a workforce that is shrinking. BTW, Japan has one of the most stable Phillips curves of any country in the world, and it even looks like Japan!

4. The 3% sales tax increase planned for 2014 is likely to slow growth. But I'm reluctantly supporting it because their fiscal situation is so bad. Let's hope the BOJ offsets the (negative) effects on NGDP, excluding taxes. Fortunately Japanese tax rates (share of GDP) are low, so doomsday fiscal forecasts for Japan will probably be proved wrong. They have lots of room to raise revenue if needed.

5. Tyler focuses on distributional effects but I think that's a mistake. The old people elected Abe because they understood it's not a zero sum game and they didn't want Japan to commit suicide (even if inflation eroded their savings.) As RGDP rises, even groups that might appear to be worse off (savers, workers), will often gain over time.

P.S. As usual Marcus Nunes got there before me. Marcus (and several commenters) also sent me a very thoughtful paper on Japanese policy by Kikuo Iwata, the Deputy Governor of the BOJ.