In news that you may have missed while strategizing about Article 50, thinking about ways to recapitalize Italian banks or pondering the future course of the renminbi …
Japan’s May household consumption data, based on the demand side household data, surprised to the down side.* And the trend here is, alas, clear. Real household consumption has fallen ever since Japan started its fiscal consolidation in 2014. 2016 does not look to be any different: 2016 consumption is running about 6 percentage points lower than in 2013.
I consequently do not think there is any real mystery as to why Abenomincs is floundering a bit.
It is not primarily a result of the difficulties the Bank of Japan (BoJ) faces keeping the yen weak without breaking the G-7 currency peace through direct intervention. A weak yen on its own did not prove to be a boon to internal demand in 2015.
Nor is it in any simple way a function of a failure to deliver on structural reforms: I agree with Larry Summers’ recent comment that many “OECD standard” reforms have an ambiguous impact when deflation is more of a concern than inflation.
Rather, Japan’s troubles stem from a series of policy choices that had a fairly predictable negative impact on household demand.