After five years, Japan says ‘konichiwa’ to inflation

Economic miracle worker? Not yet, but he’s getting there.

Japanese Prime Minister Shinzo Abe’s much talked about “Abenomics” seems to be slowly turning the course for an economy that has stagnated for a little more than two decades.

The core inflation index, which excludes volatile food and energy prices, climbed 0.3% in October from a year earlier. It represented the first increase in the index in five years and the biggest since August 1998, according to media reports.

A broader consumer inflation gauge, which includes oil products but excludes fresh food prices, expanded 0.9% in October from a year ago. It was the fifth straight month of gains, and the biggest year-on-year increase since November 2008.

Of course, it’s still too early to decide if inflation is here to stay. But the signs are promising. Two other indicators also suggest a fragile recovery is incoming: factory output climbed for a second straight month and the availability of jobs hit its highest level in almost six years.

No doubt, credit must be given to the three-pronged economic strategy of Abe (dubbed Abenomics) – monetary easing, fiscal spending and structural economic reforms.

The rise in inflation is being credited to Part I and Part II of the economic strategy (monetary and fiscal easing). Now comes the hard part.

Structural reforms are what will likely turn a fragile recovery into a sustainable economic turnaround.

That includes, among other things, opening non-competitive sectors (agriculture and pharmaceuticals, for instance) and easing restrictions on hiring and firing workers to stimulate wages and jobs growth.

A structural reforms plan unveiled in June this year underwhelmed observers, who thought it was too timid to improve the competitiveness of Japan Inc.

In the end, monetary/fiscal policies can only create temporary pops in economic activity. Improving productivity and competitiveness, which lead to bump-ups in wages and investments, are key to lifting Japan out of its long-running deflationary spiral.

Stop-go policies have been Japan’s undoing in the past. If Abe can follow through on Part III of his economic strategy, he just might be able to turn Japan into a global economic heavyweight again.

Abenomics, in the nearly one year  that it been in action, has defied the odds stacked up against it for 20 years.

It Prime Minister Abe manages to stay the course, he may yet become the messiah the Japanese economy has been waiting for.

[Image Credit]

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One thought on “After five years, Japan says ‘konichiwa’ to inflation

  1. Pingback: At Shinkansen speed: Japan’s govt readies $180 bn package to boost growth | Wall of Money

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