Not Get Rid of Deflation

While Prime Minister Shinzo Abe stressed his determination to improve economic situation of Japan, business leaders were not so optimistic on their future. Short-term Economic Survey of Enterprises in Japan in September, operated by Bank of Japan, revealed that the index of business conditions of major manufacturers was exacerbated for the first time in these three quarters. Unfortunately enough for Japanese economy, main element of economic slowdown was not in Japan, but in an uncontrollable place called China.

The index of major manufacturers in September was +12, reduced by 3 points from June. 11 types of manufacture out of all 16 claimed that their business situation was worsened. Exporters of industrial machines were affected by negative impact of steep decline of Chinese economy. The index firmly indicated the dependence of Japanese economy on its neighbor economic giant.

On the other hand, major non-manufacturers have positive expectation to near future. The index of them marked +25, increased by 2 points from previous quarter. 8 types of non-manufacturers, including hotel, restaurant or office landlord, expected improvement of their business. Retailers are counting on great purchasing power of Chinese travelers, making Japanese economy more dependent on China.

Kyodo News ran an article that BoJ started considering further monetary easing to support price in the markets. The bank recognized a possibility of delay in reaching the goal of targeted inflation, caused by slower recovery of Japanese economy with weak productivity stemming from Chinese economic slump. Still upholding the goal of price rise by 2%, BoJ had to lower its goal of +0.7% price hike in FY 2015 and +1.9% in FY 2016, which was set only a few days ago.

One of the most optimistic was Abe. In his speech in New York this week, Abe promised that he would completely get rid of deflation. “The deflation mindset that long haunted Japan, we have now shrugged off,” declared Abe in a meeting at Broomberg headquarters. He was confident in reaching the goal of +2% price hike, holding new goal of ¥600 trillion of gross domestic products in 2020. To achieve it, Japanese economy will need to keep 3% of annual nominal growth, which makes business leaders skeptical on Abenomics.

There must be a few reasons to have optimistic view on Japanese economy. Economic slowdown may be extended long, further damaging Japanese economy, and finishing of monetary ease in United States can suck money up from emerging economies. Who except Abe can hold positive view?