February 29, 2016, 20:00 JST

Japan no longer on a reflation path

There is now a significant chance that the Japanese economy is going through a negative growth again in the first quarter of 2016. According to a production plan survey produced by METI, Japanese manufacturers are planning to cut their production in the January-March quarter. The cut is small, mere 0.3% quarter on quarter, but the cut could deepen as manufacturers have a tendency to under-deliver on their production plan.

While manufacturing nowadays account for less than 20% of the economy, there is a high correlation between industrial output and the whole economic activities in Japan.

We do not have much concrete data on the quarter yet, but what we have, such as January retail sales, also points to weak economic activities in the quarter. The steep decline in the stock market since January should also have weakened both corporate and consumer sentiments.

If the Japanese economy is to have a negative growth in the quarter, it will put Japan into a technical recession as it will be the second consecutive quarter in declines. We do not think this definition of a recession is appropriate for Japan any more, but it is a disappointing results nevertheless for the Prime Minister Abe. The Bank of Japan has only recently postponed its target year to achieve the 2% inflation from 2016 to 2017, but the fresh news of a weakening in the underlying economic trend may mean that Japan is completely derailed from the path to reflation. The latest result on the core inflation measure, CPI excluding fresh food and energy, showed a possible cyclical downturn. 

In our view, it is apparent Abenomics policy package has failed. The massive monetary easing and ensuring depreciation in yen failed to persuade Japanese companies and households to start investing in Japan. While policy makers may try to cling to the notion that we need more time for policies to bear fruit, we think they have irrevocably lost their credibility. If they could not make progress in the last three years when the global economy was in favorable position, how can they achieve their policy goals now that the global economic environment is turning against them? 

In this respect, the upcoming Upper House election may provide Japanese population to choose a fresh faces to formulate a new strategy. While the opposition parties are still at a loss to formulate any credible alternative, the wind is in their favor. Opposition parties seem to be gradually waking up to the opportunity. Smaller opposition parties such as Japan Restoration Party and even Communist Party are warming up to the idea of cooperating with the main opposition party, Democratic Party of Japan, in the upcoming election. We will see if Japanese populations are savvy enough to force a change in Japan's public policy.