Japan answers bears with strong data

Abenomics won another victory on Friday when inflation and industrial production data both showed strong improvement.
Shinzo Abe
Shinzo Abe

The downward slide in Japanese share prices reversed on Friday after new economic data showed a surprisingly sharp rise in industrial production and continued success in the battle with deflation.

Seasonally adjusted consumer prices rose 0.2% nationwide in April, the first monthly increase since December, while core consumer prices (excluding food and energy) are up 1.2% during the past three months, according to a note from Klaus Baader, an analyst at Societe Generale. In Tokyo, which reports data more quickly, the May inflation numbers also record a slight rise in prices.

“Deflation may be history,” wrote Baader on Friday.

Industrial production showed an even bigger improvement, growing by 1.7% during April thanks in part to a revival in auto sales to China. Analysts had been expecting growth of 0.6%.

“One is inclined to conclude that monetary policy does work,” Baader wrote, and investors seemed inclined to agree, edging the Nikkei 225 up 1.37% after a week-long correction knocked it down from 15,700 to 13,600.

The IMF added to the positive news flow at the end of its 10-day visit on Friday, reaffirming its support for the Bank of Japan’s asset purchases and noting the improving economic data.

“We fully endorse the BoJ’s sweeping enhancements to its monetary policy framework,” the fund said in a statement. “[It] has taken an important step for raising growth and inflation. Initial signs suggest that the new monetary framework is beginning to work.”

The IMF also seemed to dismiss the notion that Japan was engaging in a currency war against its neighbours and trading partners.

“The recent large depreciation of the yen must be understood in the context of the critical and welcome effort of the BoJ to decisively exit from deflation,” it said. “So long as monetary easing pursues domestic goals, and is accompanied by comprehensive fiscal and structural reforms, we do not see the yen's recent depreciation as problematic.”

This should hardly need to be stated — Japan’s 2% inflation target is not unreasonable given its 20-year battle with deflation.

As ever, the big question is whether Shinzo Abe, the prime minister, can push through reforms that will further modernise Japan’s economy and ease the burden of debt on future generations. The IMF remains cautious on that front, and so do investors.

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