Anecdotal evidence has been piling up. Lamborghini sales in fiscal 2012, ended March 31, hit the highest level in 14 years. Ferrari sales jumped 40% for the first quarter – though new vehicle sales to regular folks plunged 15.6% in March, down for the 7th straight month.Luxury retailers forecast higher profits.
“The sudden improvement in the stock market has led to a big rise in sales at our department stores for luxury brands and high-end goods like jewelry, precious metals, and watches,” said Ryoichi Yamamoto, president of J. Front Retailing Co.
The rich – beneficiaries of the Bank of Japan’s phenomenal money-printing binge – are spending, even if it’s not on products made in Japan.
Now we have the first trickle of statistical evidence. Much of it came in one fell swoop, appropriately enough, during Golden Week, which has nothing to do with gold and isn’t even a week, but a series of holidays interspersed with a few work days. Overall retail sales were down 0.3% in March from prior year, but large-scale retailers booked a 2.4% gain. Spending by households of two or more persons jumped 5.2% in March from prior year. Part of it was ascribed to warmer temperatures, the rest to the stock market.
“This is the effect of Abenomics,” explained Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., giddily oblivious to the misery that asset bubbles leave behind, including the epic bubble in Japan that burst in 1989; to this day, the economy stumbles over its detritus. But everybody loves bubbles on the way up. They make people forget the aftermath of prior bubbles. They make economists and central bankers say stupid things. They make rational people giddy.
But Abenomics wisely didn’t take credit for the unemployment rate that inched down in March to 4.1% from 4.3% – due to women dropping out of the workforce. The number of employed people grew by 310,000 over the 12-month period, to 62.46 million, a solid improvement in a country with a declining working-age population. But that was underway before Shinzo Abe was hoisted to the perch of Prime Minister.
Another trend Abenomics couldn’t take credit for: housing starts rose 6.2% for the 12-month period through March, the third year in a row of growth. Among them, starts for rental homes soared 10.7%. Even industrial output increased in March, for the fourth month in a row, if by a less-than-hoped-for 0.2% month to month. A beginning. For the 12-month period, output was still down 7.3%. Based on the recent improvements, the Ministry of Economy, Trade and Industry increased its assessment for the future. Optimism is winding its way back into the economic fabric.
If Japan is going to go down under its load of debt, Abenomics will make sure it’s going down swinging. Two weeks ago, the Lower House passed the ¥92.6 trillion budget, of which 46.3% has to be borrowed. Once the “supplementary budgets” are thrown on top of it, half of all government expenditures have to be borrowed. Abenomics sticks to the old playbook, the one that didn’t work before: spending on public works projects will jump 15.6%. That budget feeds the corporate and individual welfare state. But no one wants to pay for it. Borrow it instead.
Alas, someone will end up paying for it. And it’s not going to be the taxpayer, as the budget makes clear. It’s going to be the direct or indirect owners of Japan’s debt, it’s going to be savers and anyone with assets. Yup, taxpayers. Abenomics is conjuring a bout of inflation.
In patriotic support, companies are busy raising prices. McDonalds announced proudly that it would jack up the price of some burgers by 25%! The first increase since 2008. Double-digit energy price increases have already whacked consumers and businesses. Now the government confirmed its success story: inflation has arrived!
The preliminary all-items index for the Tokyo area for April, a precursor for the national index, showed inflation of 0.3% month to month, reducing deflation for the 12-month period to 0.7%. Goods were up 0.4% – annualized about 5% inflation! Services rose 0.2%. Almost every item was up. Fuel 1.3%, clothes and footwear 2.2%, in one month! The national index for March, which lags the Tokyo index by a month, showed a monthly inflation of 0.2%, cutting deflation for the 12-month period to 0.9%. This is just the beginning. At this pace, Abenomics will meet the 2% inflation target early.
But the 2% target is just a cover. The BOJ will allow inflation to spiral “out of control” while keeping its iron knee on yields. Inflation will eat into the wealth of savers and retirees, the generation that benefited the most from funding much of the welfare state with debt. It will eat into wages. It will cause mayhem and pain, but gradually, rather than suddenly. In the process, it will diminish the debt’s weight. Abenomics seems to have chosen that strategy as a lesser evil – because, as Vice Finance Minister Takehiko Nakao pointed out in a hilarious understatement, “A debt ratio of 245% of GDP is not really safe.”