The latest data suggests that Japanese Prime Minister Shinzo Abe’s inflation targeting policies, known now as “Abenomics”, are yielding at least short-term results in the world’s third-largest economy. Meanwhile, indicators from the largest economy, the United States, shows that prices there are falling.
First-quarter GDP growth in Japan surged to 0.9% (3.5% in annualized terms) according to the latest data. This unexpectedly robust upturn in Japan’s economic fortunes seems mostly to be down to a psychological boost. High expectations about the direction Japan’s economy is now taking under Abe’s “bold experiment” helped boost private consumption by 0.9%.
Meanwhile, the fall in the yen associated with Abe’s quantitative easing program provided a predictable, yet better-than-expected boost to Japan’s exporters during the first three months of the year. The currency has fallen by a fifth of its value against the dollar and other major currencies, helping exports to make a 0.4% contribution to GDP, even after higher import values associated with the currency were balanced out.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Investment, the other driver of GDP growth, did not fare so well. Capital spending dropped 0.7% from the end of December to the end of March, a particularly painful data point given that expectations were for an increase. Rising investment will be needed if Abenomics is to be considered a sustainable success.
Meanwhile, in the United States on the other hand, consumer prices, measured by the consumer price index (CPI) declined in April for the second month in a row. The fall of 0.4% (month-on-month) was sharper than expected, and brings the year-on-year increase in April to 1.1%.
Detailed data shows that falling energy prices, related in part to changes in the US energy market associated with technological changes and production increases, offset slight inflationary pressures in “core inflation” (measured excluding energy and food prices).
The fall in energy prices also allowed consumers to maintain spending in the face of higher taxes and spending cuts that were triggered earlier this year. The sequestration and other measures have brought about a surprisingly fast reduction in the US government budget deficit – the topic of so much political wrangling in Washington this year and during last year’s presidential campaign.
With inflation remaining roughly on target, and the budget deficit falling from 7% of GDP last year to 4% now, the United States seemingly has at least some room to breathe.
For the time being, both countries continue to make modest gains and realize recoveries, albeit at a weak rate. For Japan, the positive sentiment will provide a boost that will continue to help growth, the main risk being the damage that future inflation resulting from “Abenomics” could do to growth if wages fail to keep pace. For the United States, a slow recovery is still a recovery, which is more than can be said for the collective eurozone.