Entrance of Stagflation?

Cabinet Office found on Monday that Japan’s gross domestic products declined annual 1.9% in the third quarter of this year. That was worse than the first temporary report released right before the dissolution of the House of Representatives in mid-November. On the other hand, Tokyo Stock Market rallied with external elements, that were growths in Europe and America. Nikkei Average marked new high of ¥18,000 in these seven years and four months on the same day. It is possible that Japanese economy is going into a vulnerable phase close to stagflation.

The main element of further decline of growth was negative asset investment of small and mid-size businesses. While it was -0.2% in the first temporary report in November, the second temporary report showed -0.4%. Higher price of utility, raw material and imported goods damaged optimistic mind of corporate managers. To earn interest, they needed to cut down production cost before investing their assets. According to statistics of corporations, internal reserve reached the highest level, which amounted to ¥323 trillion. Profit of companies had not been handed out to the workers.

Investment on social infrastructures also declined from the first report. It dropped from 2.2% growth to 1.4%. It was a result of recalculation. Social investment significantly grew in the second quarter of this year, and as its consequence, the third quarter marked unexpected down. Decline of annual 1.9% in the third quarter was beyond the predictions of private economists.

Despite those negative indicators, markets are optimistic for the future of Japanese economy. Most dealers believe in Japan’s resilience after winter bonus season and additional basic wage next spring, which they expect to boost personal purchase. Some count on current tendency of cheap petroleum. Although there are some negative elements, such as possible decline of American economy or energy crisis in Russia, most are expecting negative facts to be diminished in coming months.

However, politics does not understand economics. The opposite parties took on those negative digits. “Unpredicted bad number was worsened for our surprise. Economy is going to fundamentally wrong direction,” told Yukio Edano, General Secretary of Democratic Party of Japan. Deputy Chief Cabinet Secretary, Hiroshige Seko, dismissed a perspective of recession, appealing that eventual revitalization was still ongoing and Abenomics was getting into positive circulation.

Prime Minister, Shinzo Abe, keeps on saying that the Japanese need to discard negative mind on deflation. However, if his targeted inflation policy is brought with steep rise of commodity price, nightmare of stagflation will be the only consequence of Abenomics.