The war against deflation continues in Japan and is far from being close to stop. Despite massive efforts over the last ten years, the release of the February producer price index has shown a decline of 3.4% y/y. It is the 11th straight month of decrease. Strong easing has not yet provided the necessary impulse to pull the country out of deflation and we doubt it ever will. Monetary policies used over the last decade have only sent the debt at stratospheric levels.
For the time being, the government debt stands at around $9.1 trillion. Current Abenomics can be considered everything but a success. Japanese Prime Minister Shinzo Abe has failed to stimulate the economy. In particular spurring consumer spending was the primary target as it accounts for 60% of the Japanese economy. Recent data has shown retail sales still stand on the soft side with January spending contracting by 1.1% m/m.
In addition, the fiscal arrow of the Abenomics had a larger impact than expected in 2014 when the sales tax rate increased to 8% from 5%. We believe that the Japanese Government is very reluctant to increase again the sales tax to 10% as it would certainly prevent inflation from reaching the inflation target of 2%. The major issue is that the central bank of Japan is already all in.
The world is witnessing Japan’s debt becoming unsustainable without inflation ever picking up. Governor Kuroda ends his term in March 2018 and it is very unlikely that the vicious circle will end by this time. For the time being, the yen is only appreciating on safe haven status which is very ironic being a shelter to one of the most indebted countries in the world.