Japan Says Konnichiwa To Stagflation

More than twenty years after its infamous real estate and equity bubble burst, Japan has been plagued by economic malaise, an ailment most main stream economists have attributed to something they call a deflationary death spiral. As one lost decade turned into two, and now well into number three, Japan’s Prime Minister Shinzo Abe has vowed to remedy this deflationary flu with an enormous dose of inflation.

In Japan, they affectionately refer to this elixir as Abenomics. In English, this remedy roughly translates to an enormous injection of public spending, more than a spoonful of currency destruction, chased down with a large dose of a consumption tax.

And, if deflation had actually been what had ailed the Japanese economy – it would appear that after more than two decades, they finally found their cure. The price of food is soaring at the fastest pace in 23 years and core consumer prices jumped 3.2 percent YOY in April.

Unfortunately, those Japanese who were only sick of the stagnant economy, are starting to wonder if “Dr. Abe” misdiagnosed the original disease. With an economy in perpetual stagnation, slightly falling to stable prices was the one salve.  

As anyone who lived through the 1970’s can avow, low growth can’t be assuaged by raising prices. And with wages excluding overtime and bonus payments falling in Japan for a 23rd straight month in April, Japan’s economy is falling victim to a new kind of outbreak–stagflation. Stagflation is an inflationary period accompanied by rising unemployment and lack of economic growth.  

In fact, a favorite stagflation diagnostic indicator, termed the misery index, which adds the jobless rate (3.6 percent) to overall inflation (3.4 percent), climbed in April to 7–a 33-year high. Rising prices helped push Japan’s misery index to the highest level in decades, while wages adjusted for inflation fell the most in more than four years. If inflation continues at this clip, it won’t be long before Abe is forced to forego his Abenomic tonic in favor of a bottle of a Japanese version of WIN (Whip Inflation Now) buttons.