International Forecaster Weekly

Japan Markets Hammered as Deflationary Cycle Continues

...deflation remains the bugbear of the Japanese economy, even after the unprecedented easing in recent years by the Bank of Japan.

James Corbett | January 7, 2015

This week's collapse in the Nikkei 225 index in Japan (down over 525 points as of press time to below the 17,000 mark) is bad news for the moribund Japanese economy, but was it unforeseeable?

We are told that the pagans used to scry the entrails of slaughtered animals to predict the future. How about tuna? Every New Year fish merchants gather at the Tsukiji Market in Tokyo to enter a bidding war on the prize tuna catch, with prices for the top tuna getting into seven figures. However this year the highest priced tuna was a 180 kilogram bluefin caught off of Oma, Aomori Prefecture that went for 4.51 million yen, marking the first time the prize catch has gone for under 5 million yen in the last eight years. Surely a sign that times are tough in 2015 Japan.
Not that any other signs were needed. Inflation is hitting any and all imported products or prices in international chains (think McDonald's hamburgers, Apple iPhones and electricity from all that imported LNG), but deflation remains the bugbear of the Japanese economy, even after the unprecedented easing in recent years by the Bank of Japan. This has been spearheaded by the continuing collapse of real wages, which, after a 4.3% drop last year, now makes the country's real wage crash the worst in any country in the 21st century. Go Japan!

Worse, any talk of “growth” over the past four years is completely and utterly undone by putting those growth numbers in context. Plotting the nominal growth of the Japanese economy against real wages show that, while the country's GDP has been hovering in small positive territory for much of the last few years, it means nothing to those workers who are now making nearly 5% less in real terms than they were at the start of this BOJ-led “growth” curve. And the 26% run up in the Nikkei over the past two years has been achieved by debasing the currency by 22%. One only has to look at the chart of USD/JPY plotted against the Nikkei to see they are in lock step, and it is only through inflationary easing that the stock market run up has been accomplished. And with real wages declining, it is now plain to even the most economically challenged observers that none of these supposed stock market benefits are reaching the public.

This is precisely why Abe pulled his snap election stunt last month, of course. As the utter, dismal failure of his “Abenomics” plan begins to be felt more and more keenly throughout the Japanese economy, there will be no way that he will be able to win another election. This four year “mandate” that he won on the back of the lowest voter turnout in modern Japanese history will be his last stand; the only question is how much further the Japanese economy will sink before he and his BOJ buddies are through with their grand experiment.