Don't pan Japan - Abenomics is still working
Japanese Prime Minister Shinzo Abe has seen better days. His popularity has tumbled, and his flagship economic policy is failing to produce the goods.
At least, that's a view growing in popularity both in Japan and abroad.
Abe came to power in 2012 with a major mandate. He was going to revitalise Japan's flaccid economic performance, ending decades of deflation. For this purpose, he brought in Haruhiko Kuroda as Bank of Japan governor.
Kuroda launched a massive QE programme and introduced a 2% inflation target. QE was later increased in 2014. Abe set about with fiscal stimulus and supply-side economic reform.
It's also impossible to divorce Abe's economic strategy from his geopolitical aims. He is a committed conservative with a revanchist international stance, not a centre-left Keynesian of the sort more familiar in the west.
The passing of his recent security bill goes hand-in-hand with his economic strategy, both pushing towards his overall goal: Make Japan Great Again. It's a matter of national pride as much as national accounts.
It's pretty common right now to hear Abe panned, even by people who were initially positive about its aims. Core inflation in Japan recently fell back below 0% in August, causing some people to declare the return of full-blown deflation.
I thought they were wrong in November last year, and I still think they're wrong now.
Much of the economy is in a good state, on the face of things. At 3.3%, Japan's unemployment is at an enviable level, one which it's unlikely western economies will reach at all. In fact, Japan's labour market at its very worst rarely records unemployment of over 5%. For a country like France, unemployment doesn't fall that low at the best of times.
But Abe can't take full credit for the decline in unemployment, something that was beginning before he took office late in 2012. The real success or failure of Abenomics is based on only two factors.
Second, he promised reflation and its associated benefits. This mean raising inflation in Japan, something that has been missing for a quarter of a century, and it also meant driving investors from the safe government bonds and into riskier investments, like corporate bonds and stocks. This came through the first two "arrows", monetary and fiscal stimulus.
Returning inflation primarily means raising nominal GDP. That's the growth of the economy, including inflationary effects - simply the amount of yen spent in the economy.
Usually, you'll hear figures for nominal GDP, which matters for how well-off a country is. But nominal GDP matters for something else - debt. If you run a $200 debt and have an annual income of $10, it's paid off considerably quicker if your annual income rises by 10% a year than if it's completely stagnant.
Japan's NGDP has been stagnant for the best part of a quarter of a century, and as a result, it has one of the world's highers debt to GDP ratios. Japan's ratio of government debt to GDP is over 230%, in a comparison to just over 100% for the US. Even Greece's debt to GDP isn't get 200%.
So what you want to have is a higher GDP deflator. That's the part of the national statistics that measures how much of the increase in the size of the economy is just down to inflation, rather than real growth (of course, you want higher real growth too).
GDP deflator has risen year-on-year for five quarters; the only time it's done so since 1994. The last similar (but weaker) boost was seen in 1997-1998, but it promptly derailed by the Asian crisis.
Take a look:
In the 10 quarters during which Abe has been in office and which we have data for (from Q4 2012 to Q2 2015) nominal GDP has risen by 5.84%, which is the second-most significant rise over the period, narrowly beaten the Q2 1995- Q4 1997 increase of 5.94%.
You can see that in the chart below:
Those numbers are pretty meagre by western standards. A good increase in nominal GDP might be 4-5% per year. But for a country like Japan, where nominal GDP has risen by less than 1% in a little over two decades, what we've seen since Abe took the reigns is a pretty brisk pace.
Abe also recently announced a target to raise nominal GDP to ¥600 trillion ($5 trillion, £3.29 trillion).
The recent growth is all the more interesting because Japan entered a small recession after the tax sales hike that was brought in during April 2014, and even that didn't derail the expansion. The hike was not part of Abe's plan, with a timetable having been introduced by Noda, one of his predecessors. After the economy began contracting, Abe cancelled the second planned hike and called an election, which he won without difficulty.
But even if you do insist on looking at the consumer price index rather than the GDP deflator, things aren't nearly as bad as the doom-mongers might have you believe.
In fact, the proportion of items in Japan's core CPI basket (the goods used to calculate inflation) with increasing prices is now higher than it was before the financial crisis hit.
Here are some charts included with a recent speech from Sayuri Shirai, a Bank of Japan policy board member:
That's important because it indicates that the reason Japanese headline inflation is low is the same reason it's particularly low in the United States, Europe and the UK - a few volatile and tumbling prices, particularly those heavily influenced by oil.
What's more, Japanese inflation isn't back to zero once the effects of volatile oil and food prices. In fact, by that measure, Japan's inflation is in one of only two periods of growth during the past 15 years:
So complaints about the ability of Abenomics to generate inflation are overdone.
In the early part of 2013 it became an analyst cliché to argue that only the third arrow of Abenomics really mattered. So how has that gone?
In the Financial Times this month, Robin Harding and Leo Lewis give a fair appraisal of how things have gone. Abe's pledge to align the country's labour market is undoubtedly his least fulfilled. There has also been little to no progress on immigration, which Japan may need to boost its demographics.
But in other areas there's been more progress. Agricultural reform has gone as planned, and corporate governance reform has been lauded. Long-term complaints about structural issues, like the number of women in work, are being quite genuinely addressed:
Like the overall unemployment rate, Abe can't take full credit for the increase in female employment (though the rate has been rising a little more quickly since he took office). But it's clear that some of his critics should check they're not throwing stones in glass houses - the United States' worrying struggles with participation mean the Japanese female employment rate is now higher than its US equivalent.
No, inflation hasn't returned to the 2% the Bank of Japan is aiming for, and growth is patchy (though not particularly poor by Japanese standards), but what we're seeing is the first genuine increase in the price level since at least the Asian crisis, if not since the bursting of Japan's colossal equity bubble in 1990.
It's the most serious and sustained effort at revitalising the country's supply-side too, but that sort of thing can't be turned around overnight.
Abe's efforts haven't fulfilled the greatest hopes of his fans, and Japan isn't yet on a sustainable growth path. Other factors, like China's economic trauma, could still derail the plan. But for now, Abenomics is very much alive and kicking when you look beyond the headlines.