It’s one of the most dangerous assumptions in recent years. That politicians and central bankers know what they are doing as they fiddle with global economies. Case in point – Japan.
Prime Minister Abe arrived with a bang and said he was the man to lift Japan out of its twenty year long economic coma. He bought a turbocharged carlos fandango money printing machine and turned the volume up to eleven. He announced that deflation would be history and the central bank would manage inflation up to his target of two per cent a year.
So, two and a bit years on, how’s he doing? Well, his ego must be flattered that the world has coined a new term for his profligacy, Abenomics. It begs the question why we haven’t had Obamanomics or Cameronomics. But he’s the one who’ll go down in history with his name attached to artificial financial stimulus. And he certainly got off to a promising start, reflected in a boom for the Japanese stock market in 2013 and of course a weakening of the yen by more than twenty per cent against other currencies that helped make Japanese exports cheaper.
But recently the wheels have rather come off. After reaching a six year high of one point five per cent in April, inflation fell to one point four per cent in May and again to one point three per cent in June. There’s even been a warning from Bank of Japan governor Harhiko Kuroda that inflation could fall back to just one per cent over the summer. His deputy tells us that we should focus on the upward trend in inflation rather than these minor blips, but how good is his crystal ball? Remember uncle Graham’s first rule of finance – Never Believe A Banker!
SO what has been happening? Well, the very weakening of the currency that encouraged exports also made imported fuel and minerals more expensive. That temporarily contributed to inflation but those effects are now diminishing. And there are some new price measures that show things aren’t as rosy as Abe and his Bank Governor would have us believe. Some clever people at Hitotsubashi University have devised a price index based on bar codes from four thousand everyday items that people actually buy in the shops.
This is a bit radical, because it uses a technique alien to politicians and central bankers called The Truth. Its a weekly index rather than monthly, so much more real time. And it tracks things we actually buy like sandwiches at lunchtime or toiletries in the pharmacy. And it’s not good news for Mr Abe. Across a much wider basket of goods than is used for the official figures, real inflation at convenience stores has been just nought point four per cent in the last twelve months. And in grocery stores, prices have actually come down. The dreaded deflation.
So how has the father of Abenomics responded? With Womenonics! Yes, Japan has a dire track record of women returning to the workplace after having children. Just over a third are tempted back, placing Japan behind global powerhouses like Tajikstan and Cameroon in the gender equality league table. With an ageing and a shrinking population, Japan needs to double this figure in the next decade if it’s to continue growing. But there are tax disincentives for both parents to work and childcare is so hard to find that some women pretend to divorce their husbands so they can jump the queue as a single mother.
Abe has promised to create four hundred thousand new day care places though it’s not clear where all the teachers will come from. And Japanese men may have to change their ways – at the moment they spend fifty nine minutes a day on housework, the lowest in the developed world. If their wives are to return to the workplace, domestic chores will need to be more evenly shared.
You have to admire Abe for being thinking big and doing something to buck the trend of the last twenty years. But, as my new friend Harry Dent would say, you can’t buck a multi decade demographic cliff. A smaller population following a larger one is always going to have a deflationary impact.
If you’re relying on politicians and central bankers to overcome the basic laws of economics, be very careful out there.
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