Abenomics Vindicated on Japan GDP Beat


Economists are proclaiming a victory for Japan’s QE-fueled economy as the country announced a second quarter of expansion that beat expectations.

Japan saw 2.4% annualized growth in the first quarter of 2015, the fastest rate of growth in a year and slightly stronger than what is expected for the United States in 2015. While estimates for American growth continue to face downward revisions, the Japanese are surprised to see a strong expansion even despite well-known demographic headwinds stifle aggregate demand.

On a per capita basis, however, the country is seeing a rebound in incomes, which is fueling consumer spending. On top of that, lower energy costs thanks to the fall in oil boosted the country, as it saw household and business spending rise. Households increased spending by 0.4% on a quarter-over-quarter basis, above expectations, while business inventories added 0.5 percentage points to the first quarter expansion.

Weakening Yen

While much of the strength in the economy is coming from domestic demand, the once export-dependent country is seeing net exports fall. After a 0.3 percentage point gain in the last quarter of 2014, net exports cut total annualized growth by 0.2 percentage points, as the weakening yen failed to make the country more competitive abroad.

At the same time, the yen has weakened even further, reaching 120.9 to the U.S. dollar. That is a 30% decline in the last two and a half years, since Shinzo Abe came to power and after several bouts of aggressive quantitative easing designed to weaken the yen and fight deflation.

Part of the goal in that monetary policy was to encourage the notoriously frugal Japanese consumer to spend more and increase both money velocity and domestic demand. With prices rising—the Bank of Japan saw inflation in March after flat prices in February—it is expected that more Japanese consumers will spend more on consumer goods. However, Japan Economy Minister Akira Amari said in a press conference that consumers are still stuck with deflationary expectations, and it will take time to convince them to spend more.

Anti-Tax Victory

The rise in GDP is a victory for the unconventional monetary policies of the country, but it is also an indicator that Japan’s tax increase in April 2014 was misguided. That tax policy, which focused on an increase on sales taxes, which the International Monetary Fund insisted, was in Japan’s best interests, weighed heavily on demand and caused the country to fall into recession by the end of last year.

That also caused Prime Minster Abe to relent against an earlier plan to increase the tax in early 2015, saying late last year that his government would delay the tax for an additional 18 months. That gives Japanese consumers more time to ease into aggressive consumption-based habits.

However, the IMF insists that Japan needs to raise taxes. "Given very high public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline,” said the IMF in an October report. Many economists dismiss the IMF’s position, pointing that Japan’s ability to issue currency, its deflationary demographics, and overwhelming demand at home for government debt, suggest that the country can in fact continue with its Abenomics strategy without spooking bond markets.