Weak spending shows Japanese consumer doubts about Abenomics

TOKYO Mon Feb 17, 2014 4:07pm EST

People browse a bookstore at a train station in Tokyo February 17, 2014. REUTERS/Yuya Shino

People browse a bookstore at a train station in Tokyo February 17, 2014.

Credit: Reuters/Yuya Shino

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TOKYO (Reuters) - Japanese consumers ended last year with a whimper instead of the bang many had expected, reinforcing a nagging worry that the prime minister's aggressive policies are struggling to find support among those key to its success.

Economic growth figures on Monday added to evidence that concern about job security is holding back consumers, trumping the urge to spend before a rise in the national sales tax rate in April makes goods more expensive.

Although Japan's jobless rate is at a six-year low, the number of contract workers, who are paid less than regular staff, is at a record high.

That equation is undermining the government's base scenario that consumer spending will boom in the months before the tax hike, fall sharply immediately afterwards and then resume steady growth underpinned by falling unemployment and rising wages.

Such a scenario is key to the broader goal of dragging the sluggish economy out of almost two decades of stagnation marked by grinding deflation and on to a path of sustainable growth.

"We're facing the uncomfortable possibility that consumer spending won't get any better before the tax hike," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.

"The jobs market is improving, but the problem is non-regular workers. This could be behind disappointing spending."

The government, which has played an unusually prominent role in lobbying companies to raise wages, could come under pressure to use more structural economic reforms to broaden growth and reverse labor market reforms that could increase contract workers.

The Bank of Japan could face calls to ease policy but can likely fend off the pressure, arguing that its economic forecasts already take into account swings in consumer spending. It unleashed a program last year of massive cash injections into the economy that is now bigger than that of the U.S. Federal Reserve.

GDP figures on Monday showed that Japan's private consumption grew a weaker-than-expected 0.5 percent in the fourth quarter of last year. This confounded expectations for 0.7 percent growth.

Overall economic growth in the October-December period was much lower than expected at 0.3 percent.

Purchases of cars were the main reason for the increase in consumption, but Japanese spent less on clothes and food, which pessimists say is a sign of weakening confidence because it suggests lower income earners are holding back.

In December, consumer sentiment hit the lowest level in just over a year due to a spreading fear that wages will stop improving, Cabinet Office data showed.

A six-year-low jobless rate of 3.7 percent should, in theory, give consumers confidence to spend. But new jobs are going to contract workers, who earn on average only a third of what regular employees get paid.

In December, contract workers made up a record 37.5 percent of the workforce, up from 35.3 percent at the start of the year. During that time, the ratio of regular workers fell to 62.5 percent from 64.7 percent.

When Japan last raised the sales tax in 1997, contract workers accounted for around 23 percent of the workforce.

Compounding the problem, Abe is pushing legislation that would make it easier for companies to replace regular employees with contract workers.

The aim of the legislation is to make the labor force more mobile and flexible, but this could backfire by hurting consumption, just as it did when the ruling Liberal Democratic Party first expanded the number of contract workers in the early 2000s.

Abe's government will raise the national sales tax of 5 percent - the lowest equivalent consumption tax alongside Canada in the OECD - to 8 percent in April to pay for healthcare costs in one of the world's fastest ageing societies.

Some optimists argue there is still ample time for spending to pick up in the current quarter and that strong car sales in the fourth quarter showed people were willing to spend big.

However, others argue lackluster spending overall is a symptom of declining confidence that Abe can succeed in encouraging companies to raise wages substantially.

That means consumption could stay weak later this year and make it politically difficult for Abe to secure a second planned stage in raising the sales tax to 10 percent in 2015 - part of a broad effort to rein in the country's massive public debt that is more than double the size of the economy.

Under direct pressure from Abe, a few big-name companies such as Toyota Motor Corp (7203.T) and convenience store chain Lawson Inc (2651.T) have suggested they may raise base pay.

But there are doubts that smaller firms in Japan, which employ most workers, can follow suit. While Toyota expects to post a record operating profit this financial year, those further down the supply chain are feeling cost pressures. Pay rises are the last thing on their minds.

"The gains in wages so far are not spreading to consumption, meaning spending may not be strong enough to drive growth in the second half of the year," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"There will be public works spending, but the scale and the impact could be less than in previous years."

The government has already passed a 5.5 trillion yen stimulus package that relies on public works to prop up demand after the tax hike.

However, the government is already having trouble spending public works money due to a shortage of construction workers. If this delays the stimulus package, aggregate demand could suffer.

(Additional reporting by Tetsushi Kajimoto: Editing by Tomasz Janowski and Neil Fullick)

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Comments (1)
live2golf wrote:
The truth is folks, we have been living in a depression since the start of 2008. The only reason why we are not suffering through this depression now is because of quantitative easing. Once the next round of taper comes into effect, the same thing will happen: stocks will fall and we will have to adjust accordingly. But something is now developing that will keep us in an economic rut for decades to come, which is, the rate of disinflation and why we are closer to a long and ugly period of deflation.
People believe that hyperinflation in just around the corner, all because the Fed’s printed 4 trillion in cash, which in theory, would expand the money supply, naturally spurring inflation as a result.
But this is where things get very interesting. The reason why deflation will most likely happen, rather than hyperinflation, is because demand is falling at a rapid rate.
Remember, inflation can only happen if demand is there to support the rise in prices for goods and services. But if demand is absent at a time when assets are inflating (i.e. equities, bonds, real estate), then bubbles begin to form.
The Fed’s admit that if QE and ZIRP fail to spur inflation, the opposite will follow suit rather abrurptly, which is deflation.
We can learn a lot about deflation, just look at Japan.
They fought deflation for decades, by expanding balance sheets with rounds and rounds of QE to spur inflation. However, this only exacerbates the affects of deflation because monetary policy fails to address underlying fundamentals such as the labor market and wages.
Like the Fed’s, the BOJ only benefits the wealthier individuals that have capital, but since the majority of Japan’s population do not have assets to rely on, they are left on the sidelines and will deal with the burden of added public debt.
Japan, like America, will fail in the end and will be left in an even worse position since the last global financial crisis. Why?
Monetary policy can not and will not save an economy that has debt past 100 percent debt to gdp, because adding debt to the balance sheet will force interest rates to fall. But when interest rates reach zero percent, there is nothing left to do, because any rise in interest rates – at that point – would result in billions, if not trillions of added liabilities to corporate and sovereign balance sheets. When Japan raises interest rates, even by a single basis point, billions will have to be paid just on the interest. That is why Japan’s interest rates will remain below 1 percent for decades to come. Unless their GDP is above 10 percent for years and years, the whole economic structure breaks down and they will remain insolvent forever!
Their debt is 2.5 times their GDP, and Abenomics will only worsen their economic outloook because debt is climbing still and demand is weakening.
It is the end of the world for Japan, and they should tell us something about the unintended consquences of failed monetary policy.
America is not far behind, and I think people are now finally realizing that our future is in big trouble. THE MORE WE DEPEND ON QE, THE WORSE WE WILL BE IN THE END.
I am terrified.
Here is what I predict will happen with America, and soon the world:
The exit of QE will decline stock markets.
Panic ensues once investors agree that assets are way overpriced, way overvalued due to speculative bubbles that have formed since the first round of QE.
Stock market crashes…sometime this year or by 2015.
The decline in asset valuations will remain subdued for decades.
Demand will be non-existant, and it’s feeble attempt to revive this economy will fail.
The Fed’s will either pump more QE to bring back the economy, or remain silent, either way, this economy will undergo a deep depression resulting in hyper-deflation.
Our banks will deleverage, tightening credit standards, and possibly hike rates to create money, rather than depend on QE.
So let me just say, we are in the greatest liquidity trap of our time, forcing our economy and the world to remain in neutral for decades.
People will lose a lot of money as a result of this next crash, and the prices for goods and services will decline – substantially.
The end of the world is a possibility.
For those who are reading this, please act now to save your gains. Park your cash. Short the market if you take the aggressive approach. Sell your home, because by 2015, it may be worth half of what it is now.
The time is ticking before things get really bad. And it is coming soon folks.

Feb 17, 2014 7:58pm EST  --  Report as abuse
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