Monday, August 19, 2013

What Does Abenomics Feel Like?

Depending on whom you ask and when, Abenomics is or is not working, and Japan is or is not entering a recovery. What if you ask the people of Japan?

The closest thing to asking them is looking at the Bank of Japan's Opinion Survey on the General Public's Views and Behavior, a quarterly survey with a nationwide sample of 4,000 individuals who are at least 20 years old. The results from the June 2013 survey were recently released, giving us a glimpse of how the general public of Japan is experiencing economic life under Abe.

When asked, in the abstract, about the "growth potential" of the Japanese economy, responses are less pessimistic than in previous quarters.  But when asked about their own household's experience, the situation still looks pretty bleak. In one question, respondents are asked, "What do you think of your household circumstances compared with one year ago?" Only 4.9% say they are better off, while 39.2% say they are worse off, and the rest say it is difficult to tell. While not great, these numbers are a minor improvement over a year prior, when only 3.6% said they were better off and 47% said they were worse off. Of the households who reported worse circumstances, 73% said a reason was that their income decreased and 42% said a reason was that their income was not likely to increase in the future (they could choose multiple options).

The 4.9% of households who thought their circumstances improved were also asked why. About 22% responded that their interest income and dividend payments increased and 26% said it was because the value of their assets increased. Insofar as Abenomics has led to a rising Nikkei, this has only been enough to lead about one or two percent of households to notice improvements in their circumstances. (More households might have benefited from the rise, but not enough to offset other challenges.) The stock market rise greatly increased the net profits of regional banks, but the benefits don't seem to have been widely spread.

Positive inflation and higher inflation expectations are cornerstone goals of Abenomics. Deflation has plagued the Japanese economy since the latter half of the 1990s. Japan's CPI less food and energy rose 0.2% from a year earlier in June, the largest rise since 2008. At Bloomberg, Toru Fujioka and Andy Sharp report that "the world’s third-biggest economy may be starting to shake off 15 years of deflation." Fujioka and Sharp declare this a "Boost for Abe," and write that "the increase in consumer prices could stoke inflation expectations and encourage companies and consumers to spend more, bolstering the economic recovery."

The June 2013 survey shows that consumers are noticing rising prices and expect prices to continue to rise. In particular, 50.5% of survey respondents felt that prices had gone up in the previous year, and over 80% expect prices to go up over the next year. However, of the respondents who noticed rising prices, 81.6% described the price rise as "rather unfavorable." This makes it seem unlikely that stoked inflation expectations will encourage consumers to spend more. In fact, 44.8% of respondents plan to decrease their spending over the next year, and only 6.1% plan to increase spending.

I previously wrote a post about how Europeans really dislike inflation, even when it is low, but I think the reason Japanese consumers dread rising prices is different. If price inflation is not accompanied by wage inflation--and is not expected to be-- then the pass-through from inflation expectations to consumer spending is broken. Fujioka and Sharp quote Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management, saying “business executives must have forgotten how to increase pay after decades of deflation." Japanese companies are reluctant to raise base pay. In June, while average total monthly cash earnings, including overtime and bonuses, rose 0.1%, regular pay fell 0.2%. The rise in total earnings was attributable to higher summer bonuses. Over 80% of survey respondents are slightly or quite worried about working conditions such as pay, job position, and benefits.


  1. Does anyone, other than economists, actually _like_ inflation? In the US, the last pro-inflation movement was the bimetallist movement of the late 19th century (led by William Jennings Bryan of Cross of Gold fame, and where the Wizard of Oz story came from). Higher prices are an immediate, "top of mind" hit, while cheaper debt repayment and such things require a Wall Street trader-level attention to financial detail that few ordinary people have.

    If you ask 100 people "what's better: 5% inflation and 7% loans or 1% inflation and 4% loans", my guess is that at least 90% of people will say the latter.

  2. Depends on how you frame the question. Everybody likes what they sell to get more expensive, everybody likes what they buy to get more cheap.

    But yes, people in general are very bad at thinking clearly about the relationship between nominal and real variables.


Comments appreciated!