Japan's economy stalls in 2nd quarter in spite of stimulus

In the second April-June quarter, Japan's economic growth ground to a halt. There were weak exports and shaky demand domestically.

Japan's economy failed to grow on a quarterly basis during the April-June period, with gross domestic product (GDP) growth coming in at zero and missing already subdued forecasts.There will be even greater pressure for Premier Shinzo Abe to come up with policies that produce more sustainable growth. The economic stimulus is provided based on the premier's Abenomics:

 Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms. The Economist characterized the program as a "mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades."

While the program produced an initial boost its effects appear to be fading rapidly. In January-March the economy had expanded by two percent. Senior Economist at Mizuho Securities, Norio Miyagawa said:"Overall it looks like the economy is stagnating. Consumer spending is weak, and the reason is low wage gains. There is a lot of uncertainty about overseas economies, and this is holding back capital expenditure. The government has already announced a big stimulus package, so the next question is how the Bank of Japan will respond after its comprehensive policy review, which is sure to lead to a delay in its price target."

Capital expenditure declined by 0.4 percent indicating that uncertainty over the global economy and weak domestic demand combined to discourage firms from new investments. Finance Minister, Taro Aso, said: "The breakdown of the data shows that gains in consumer spending lacked strength and exports fell a lot." The slowdown is happening just after an announcement by the government of a $133 billion new fiscal measures designed to boost the economy. The Bank of Japan (BOJ) also modestly increased its stimulus measures by increasing its purchase of risky assets. It is now under pressure to do more. The BOJ has been buying assets for 3 years now. The bank has already bought a third of the countries bonds.

Japanese Economy Minister, Nobuteru Ishihara, said: "Japan's economy is likely to achieve a recovery driven by private demand though the government must be mindful of risks such as slowing emerging market growth and uncertainty over the fate of Britain's exit from the European Union." Ishihara blamed earthquakes in April for a fall in tourism that weakened domestic demand. Some economists were not surprised at the result. Mark Jolley, of CCB International Securities said: "There's been quite a lot of strength in the yen, economic uncertainty and a bounce in oil prices, so it's not surprising that [Japan] is barely growing. That's been the average growth rate for the past five years. As long as Japan is growing between zero and one percent, that's a fabulous result. From the equity market's point of view, as long as you have broad stability in the economy, that will keep people reasonably comfortable with Japanese equities, so this [Monday's GDP data] is as good as you can expect."

The inflation target is 2 percent. Marcel Thieliant of Capital Economics said:"Inflation expectations remain poorly anchored, and the prospect of a prolonged period of below-target price gains raises the risk that expectations will move further away from the 2 percent inflation target. As such, we still expect the BOJ to announce additional stimulus measures at next month's meeting, though the scale of any further easing may turn out to be disappointing."

The Nikkei stock index was down slightly 0.2 percent after the data was released. The yen has risen 16 percent in relation to the US dollar this year making exports more expensive The value of the exports are also less when converted back to yen. Global demand is also weakening causing further declines in demands for export products.

Liberal economist Paul Krugman worries that Japan's "Abenomics" may fail

Paul Krugman, the liberal economist and Nobel Prize winner, said that there was a growing risk of failure of "Abenomics" the policies of Japanese Prime Minister Shinzo Abe designed to boost the Japanese economy out of a two-decade slump.

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Krugman has been a supporter of many aspects of Abenomics. However, he convinced Abe to delay another planned sales tax hike. An increase in the tax last April probably reduced consumer spending and contributed to the resulting depression. Japan has been unable to come near its target of 2 percent inflation. Quite the opposite, for the third time this year in July, the central bank's measure of inflation fell to zero. Kozo Yamamoto of the ruling Liberal Democratic Party said that the Bank of Japan should expand its monetary easing program even more by $83 billion.

Abenomics is a response to the failure of the Japanese economy to grow. In 2010 China already passed Japan as the world's second largest economy. Abe insists that his economic strong medicine is necessary for national security and to retain Japan's position as a prime world economic power.

Abe won a mandate last December to forge ahead with plans that includes an unprecedented amount of quantitative easing, government spending and at the same time considerable deregulation of business. He calls these measures a "three arrow" strategy, borrowing an image from a Japanese folk tale that three sticks together are harder to break than one. At first, the measures appeared to be working. Certainly they sent Japanese stocks soaring and the situation was aided by a weaker Japanese currency that increased exports. However, a sales tax imposed in April to increase revenue and help reduce the world's largest debt burden only helped return Japan to recession. As mentioned, Krugman convinced Abe that he should not increase the rate further as planned. However, he has cut the corporate tax rate further reducing his revenue. He hopes this will encourage business investment.

Abe is also contemplating other measures to make the private sector more competitive and profitable. He wants to change labor regulations that offered lifetime employment at some large companies. He is contemplating other legislative changes that will bring him into conflict with farmers, drugmakers and utility companies. Ever since the Japanese stock market and real estate bubble burst in the early part of the 1990's, Japanese companies have concentrated on cutting their debt and shifting their manufacturing base overseas where they make more profit. Wages did not grow and Japanese consumers failed to increase spending leading to a no growth economy.

The earthquake disaster and problems with nuclear power have not helped the struggling Japanese economy. Japanese demographics are unfavorable as well with an aging and shrinking population. While many economists support the idea of the purchase of government debt as a way to stimulate the economy and fight inflation, the IMF and others claim that Abenomics could cause a spike in bond yields and make the government's already huge debt load unsustainable.

Japan is facing an ageing population with the labor pool shrinking and the number of retired people increasing. As a result the government faces increases in spending on pensions, medical expenses and social security that increases debt. Japan already faces the world's largest debt to GDP ratio at 240 percent. Thomas Piketty the French economist has suggested that Japan should change its tax structure to help a younger generation be able to afford the cost of supporting seniors. Piketty suggests that taxes should be doubled on the wealthy and large firms from 10 percent to 20 percent. Redistribution of wealth could constitute a fourth arrow in Abenomics, Piketty argues.

Japan's economy moves back into recession in spite of Abeonomics

Japan's economic performance was hurt by a recent sales tax hike and investment by business declined. The economy shrank by 1.6 percent even though predictions were that there would be growth following a large decline in the previous quarter.

The decline may increase uncertainty about global economic growth as China's growth is slowing and the Eurozone grew only by 0.2 percent last quarter. Japan is the world's third largest economy. Effects on stock markets were mixed: U.S. stocks ended mixed Monday -- with the S&P 500 managing to set another closing high -- after Japanese markets tumbled on news that the world's second-largest economy unexpectedly slipped back into recession.
The hike in the sales tax appears to have created less demand from consumers, builders and manufacturers. In April the sales tax was hiked from 5 to 8 percent. Prime Minister Shinzo Abe is using the revenue to try to reduce debt which is the worst among advanced industrialized countries. A plan to further increase the tax to ten per cent has been shelved for now. After the recent sales tax hike, investment in housing shrank by 24 percent in the recent quarter while corporate capital investment was down by 0.9 percent. Consumer spending rose by merely 0.4 percent.
As many expected, on Tuesday, Abe called for an election in December: Shinzo Abe told a televised news conference on Tuesday that he would dissolve the lower house of parliament on Friday to pave the way for an election on 14 December. He added that he would delay a rise in the consumption [sales] tax, from 8% to 10%, until April 2017, 18 months later than planned.
Abe has claimed that passage of his three arrow "Abenomics" program is vital to improving the Japanese economy and pursuing necessary reforms. He hopes the elections will give him a mandate to continue with the program which involves monetary easing on steroids, government spending, and deregulation of business. He speaks of the policy as a "three arrow" strategy based upon a Japanese folk tale whose moral is that three sticks together are much harder to break than just one. Wikipedia describe Abenomics as follows: Abenomics refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan. Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms. When introduced in 2013 the policy sent Japanese stock markets to their biggest gain in 40 years but now the policy when combined with the increased sales tax appears not to be working as planned.
Abe has been so far unwilling to pursue some promised deregulation of business and corporate tax cuts as well as labor regulations that in larger companies guaranteed Japanese workers lifetime employment. Japan's population is aging and also declining. Household incomes have not kept pace with inflation. Japanese corporations have outsourced some production outside of Japan to countries with cheaper labor and laxer regulations. Abe has already reacted to the depressing news by adding even further stimulus to the tune of $26 billion to $35 billion. The measures may include some subsidies to low-income families which would stimulate demand. While the lower yen should help exports, many producers depend upon imported components which become more costly as the yen falls in value. Critics blame Abe for not moving faster on changing labor regulations but corporations have also contributed to the situation by not passing on to workers the gains they have had from growing profits and increased stock prices.