Saturday, August 31, 2013

Two key issues with Abenomics that many economists ignore

On its surface "Abenomics", which is focused on pulling Japan out of its prolonged deflationary environment, seems to be working. The CPI spiked to the highest level since 2009.

Source: Statistics Bureau

But there are two key problems with the way this policy is progressing thus far.

1. Price increases have been driven by weaker yen rather than pricing power improvements of domestic producers. Japan is generating the "wrong" kind of inflation - here are a couple of reasons for this recent spike in CPI.

Source: Statistics Bureau

2. This externally driven inflation is creating negative real wage growth domestically. The concept seems to fall on deaf ears in the economics community - we've received numerous emails from seemingly educated economists who don't see anything wrong with the current trajectory of Abenomics. Japan cannot pursue this policy without some badly needed labor reforms.

Japan's corporate practice of lower (on average) wages for workers who are older than 50 (see chart) combined with rapidly aging population (increasing numbers of employees older than 50) takes wage growth in the wrong direction. The combination of declining or stagnant nominal wages and rising prices is creating serious hardships for the nation's citizens. Here is a passage from the WSJ that zeroes in on the problem with Abenomics.
WSJ: - ... for the average person in the world's third largest economy, the recent budding signs of rising prices have brought more pain than gain amid sluggish income growth.

"I pay more when I go grocery shopping. I also pay more for gasoline," said Noriko Kobayashi, who works at an advertising agency. "As my monthly salary and bonuses haven't increased, the rise in consumer prices hurts me," the 39-year-old said. "I haven't felt any benefits from Abenomics."

Ms. Kobayashi's woes are shared by millions of others across the country who have seen their purchasing power shrink, and demonstrate that in the absence of solid wage growth, inflation isn't a cure-all for the economy.
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