The wonders of Abenomics, the economic religion of Japanese Prime Minister Shinzo Abe and his ilk whose “bold” and “courageous” actions have been touted with blinding exuberance around the world, are coming home to roost. And they’re whacking the hapless Japanese middle class from all sides.
Japan has two inflation measures: the nationwide index and an advance index for the 23 wards of Tokyo. The nationwide index, released today, was compiled based on prices in March, just before the April 1 consumption-tax hike from 5% to 8%. And it bit into Japanese wallets: the “all-items index” rose 1.6% from a year ago, with services up 0.7% and goods up a stiff 2.6%.
But the Tokyo index covers prices in the current month. It’s an indicator of things to come nationwide, as the consumption-tax hike began infiltrating prices in April. It wasn’t pretty. Businesses have been reluctant to add the additional three percentage points to prices of services and have been eating part of it. Service prices, such as haircuts, rose “only” 1.6% in April year over year. But the all-items index, which includes goods and services, rose 2.9%, the all items less imputed rent index 3.7%, and the goods index a red-hot 4.7%.
The worst bout of inflation since 1992. And that’s what consumers can look forward to for the next 12 months or so: price increases in goods of about 4% to 5%, with prices of services catching up over the next few months. This is going to be a devilish drain on their already strained wallets.
If wages rise with inflation, OK. But total earnings by all employees and contract workers are still down 0.1% year over year, according to the most recent labor survey. Soaring prices and declining wages – the scourge of inflation without compensation, as I’ve come to call it, is a favorite way of hollowing out the middle class (a method employed with great success in the US since the real-wage peak of 2000).
So consumer confidence in March – before the tax increase actually hit their wallets though they’d been doing the math for months – dropped to the lowest level since August 2011, a time of tragedy. It was when people were struggling with the images and real-life impact of the Great East Japan Earthquake and tsunami that had brought businesses and consumers to a near standstill. It was when people were sweltering in offices and at home without air conditioning in an effort to save electricity, and when fears of radioactive contamination were spreading, and when people were holding Geiger counters on fish before buying it. That’s how far consumer confidence has sunk these days.
All subcategories were down: overall livelihood, income growth, employment, and willingness to buy durable goods, which took the biggest hit, not exactly an endorsement of future economic growth. And 89.7% expected prices to continue to go up over the next 12 months, a record in the data series going back to 2004.
The consumer confidence level of 37.5 is the worst in Abe’s reign. It’s down over 2.4 points from when he took over in December 2012. It’s down 8.2 points from its peak under his rule, achieved last May when his honeymoon began to erode.
Those who claim that inflation is good for consumers and workers are lying through their teeth. But there are beneficiaries. Corporations can show revenue and earnings growth when there is none. They can make workers believe they’re getting a pay raise when in fact their getting a pay cut. Stockholders think they’re making more money than they actually are. Governments and other over-indebted creditors get to default on their debts slowly, rather than suddenly. Meanwhile, bondholders get to delude themselves into thinking, during these times of interest rate repression, that they’re not getting ripped off. And so on. But regular folks struggling to make ends meet and hampered by stagnant wages get whacked by higher prices. They’d be better off if prices declined.
Japan’s nationwide consumer price index reached 101 for March, the same level it arrived at, after a long bout of inflation, in the summer of 1993! It’s an idiocy to call this, as it is often done even in the ever so respectable mainstream media, a “deflation spiral.” Japanese consumers are were among the few in the world privileged to experience over two decades of real price stability. But Abenomics has sworn up and down, publicly and in private, to yank that privilege away from them, and to finally begin the arduous and complex process of hollowing out the middle class.
Yet Japan no longer has any good options. Years of incredibly ballooning deficits have pushed the national debt to ¥1 quadrillion, well past 200% of GDP. Japan Inc., politicians, and those who vote them into office have insisted on paying for only half of what the government spends, and borrow the other half. It has been a free lunch. But it set in motion a fiscal doomsday machine with only two possible outcomes: sudden default or slow default.
Abenomics has chosen slow default via inflation. The Bank of Japan will continue to buy every JGB that isn’t nailed down while repressing yields to near zero, regardless of the rate of inflation – financial repression, executed with an iron fist. The JGB market as a place for price discovery is already dead. When the BOJ holds a sufficiently large part of those JGBs, there will be, in addition to the slow default, a selective default.
The BOJ might, for example, offer to take a high and tight haircut on its bond holdings – the reverse of Greece’s selective default in 2012, which spared the European System of Central Banks. And it would continue to buy JGBs to repress their yield and maintain their “value,” even if inflation has by then decimated their purchasing power.
The Japanese know it, though they never talk about it: by now, it’s simply a question of who will eat the loss, and over what time period. Nervously fidgeting in front of the line? The Japanese middle class.