Weak Consumption and Output Weigh Down Abenomics

Market Trends - 28/12/2015

The Japanese economy continues to struggle to regain its footing as evidenced by the slew of economic data released over the past few sessions.  According to figures announced overnight, industrial output contracted by -1.00% in November, sharply contrasting with a 1.40% improvement in October.  This was the first decline recorded in three months with the softness attributed to weakening exports and declining domestic consumption.  Even though exports recorded a small pickup in November, this development was more than offset by increased concerns about deflation and falling consumption.  Consumer spending data revealed pronounced weakness, with retail sales falling -1.00% on an annualized basis in another striking blow to “Abenomics.”  While manufacturing is expected to improve over the coming months on the back of heightened automobile production, the gains of extreme monetary policy adjustments are beginning to wear off over time, with each additional Yen of stimulus leading to incrementally smaller gains in the economy.

Japan's economy barely managed to avoid a recession in the third quarter which would have marked the fifth such occurrence in seven years.  While analysts are currently forecasting modest growth for the fourth quarter, falling consumption and an export contraction could easily derail those results. Prime Minister Shinzo Abe has reiterated that household spending needs show improvement, and broadly speaking stronger consumption would help offset the crushing impact of widespread commodity deflation.  As consumption increases, prices improve, adding to the upward inflationary pressures.  However, as consumers defer purchases in the hopes of prices dropping, deflation invariably becomes a self-fulfilling prophecy.  To help steer the economy through the latest bout of weakness, the government announced a plan for raising fiscal stimulus to nearly $800 billion starting in the second quarter of 2016. In conjunction with fiscal stimulus, the Bank of Japan has maintained its monetary stimulus measures with plans to increase purchases of exchange trade funds while signaling further stimulus could be added to accelerate inflation and boost the outlook.


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