The administration of Shinzo Abe has been in power for a little more than a year. His goal has been to rejuvenate the Japanese economy, reversing years of stagnation, and to end deflation within the economy by stimulating domestic demand. Japan has the world’s highest debt to GDP ratio of any major economy and Abe has determined to increase government revenues by raising sales tax. Sales tax is due to increase from its current level of 5% to 8% in April.
In his first year in office, the Nikkei saw substantial gains of 30% and the Yen lost roughly a fifth of its value against other major currencies. Modest consumer price inflation has been produced, but much of it stemmed from increased costs for power production owing from the switching from nuclear power generating capacity to fossil fuel based electricity generation.
As a consequence of the perceived success of “Abenomics” many economists had expected to see strong Q4 growth in Japan with predictions coming in at a healthy 2.8%. In the end, initial projections for Japan’s Q4 growth suggest that the economy grew by just 1% (figures on annualised basis). The lacklustre result has been blamed on weak consumer spending, poorer than anticipated balance of payments from exports and a fall in capital expenditure. There are conflicting opinions as to whether the increase in sales tax will give a fillip to consumer spending in Q1 as consumers try to beat the price rise or not.
Certainly, the switch from nuclear based power generation (accounting for a third of the nation’s electricity needs) to fossil fuel based generation has led to a significant trade deficit since it needs to be imported and paid for in Dollars. With declining revenue from exports priced in Yen (due to its depreciation) and higher imported goods costs (notably fuel), priced in Dollars, the balance of payments will have negatively affected GDP.