‘Abenomics’ Falters Amid Worsening Deflationary Spiral in Japan

Dealing another blow to prime minister Shinzo Abe’s attempts to fight deflation and revive the world’s third-biggest economy, the consumer prices in Japan dropped for the fifth month in a row in July.

The July figures marks the biggest annual fall in consumer prices for more than three years as they showed  a 0.5% drop in July – worse than a 0.4% fall in June.

At this moment Japan is looking out for sings from the Federal Reserve chair, Janet Yellen, about America preparing to increase interest rates amid more upbeat assessments for the US economy. The data certainly enhances the importance of this lookout.

In April 2013, the Bank of Japan (BoJ) began its massive monetary easing programme in an attempt to reach Abe’s so far elusive 2% inflation target and the latest monthly decline in Japan’s consumer prices was the biggest fall since March 2013.

Japanese exporters, whose overseas profits have been ravaged by the currency’s recent rise against the greenback and other major currencies, would let a sigh of relief by any indication from the Fed that it is preparing to raise rates could push the yen down.

Expectations that Yellen will signal a readiness to raise rates gradually in the near future when she addresses a meeting of the world’s central banks in Jackson Hole, Wyoming, have been raised by comments by some Fed policymakers, including its vice chair, Stanley Fischer.

Yellen will strike a more cautious note, saying only that rate hikes are possible, is what some analysts believe.

“The anticipation is a bit too much. She is one of the more pragmatic and balanced speakers. I think she will leave the door open for a rate hike sometime this year, but I don’t see the Fed actually moving until December,” said Jennifer Vail, head of fixed income research at US Bank Wealth Management in Portland, Oregon.

Criticisms that Abe’s three-pronged approach to recovery – monetary easing, fiscal stimulus and structural reform – known as Abenomics, has failed to lift the economy’s fortunes, despite a promising start, would be reinforced by the unwillingness among Japanese consumers and businesses to spend the country out of stagnation.

Data on consumer spending due out next week are expected to add to the disquiet over the economy as Japan’s exports suffered their biggest monthly fall for seven years in July.

Awas prompted to unveil a 28 trillion yen spending programme to spur growth by the turmoil unleashed in international financial markets by Britain’s voted to leave the European Union in June.

In times of global economic uncertainty yen is seen as a safe haven for investors and the Brexit vote sparked a surge by the yen. However profits earned overseas by Japanese exporters is eaten into by a strong yen.

After recently deciding to leave its 80 trillion yen ($796 bn) annual bond-buying programme – a pillar of Abenomics – unchanged, the BoJ is expected to come under pressure to introduce more stimulus measures in light of Friday’s figures.

(Adapted from The Guardian)

Categories: Economy & Finance

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