Moments ago the Nikkei strategically leaked a report that the Japanese cabinet office, quite expectedly, will downgrade its economic assessment in its April report. “Expected” because as we reported, discretionary spending following the sales tax hike, has gotten crushed. Also not unexpected, the USDJPY took the news in stride and posted a modest bounce in the face of today’s relentless selling of the pair. Why? Because to algos and many asset managers desperate for even more training wheels from central banks (now that everyone has forgotten how to trade based soely on fundamentals), this means more QE from the BOJ right – after all horrible news for everyone is great news for the 1%.
Not so fast.
As the Japan Times reported yesterday paraphrasing Bloomberg, while the BOJ has succeeded in boosting inflation to near scorching levels, mostly for such “trivial” items as energy and food prices, it has failed miserably in raising wages which as we have been reporting, have failed to post even one increase in21 consecutive months! As a result, “Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales tax bump.“
Said otherwise: more QE may well be the straw that breaks the camel’s back of Abe’s cabinet support, and unleashes another Imodium-inspired exit stage left for the premier whose second attempt at fixing Japan will surely fizzle as badly, if not worse, as his first one.
The report goes on:
Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of the economy for two years running in data compiled by Bloomberg.
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The challenge for Abe and the Bank of Japan is to keep the public focused on the long-term benefits of exiting deflation when wages are yet to pick up and, according to BOJ board member Sayuri Shirai, most people still see price gains as “unfavorable.†Any jump in inflation that’s perceived as excessive by a population more used to prices falling could worsen consumer confidence and make it harder to boost growth.
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“Households are already seeing their real incomes eroding and it will get worse with faster inflation,†said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position.â€
