A Quick Reminder About How Abenomics Is Supposed To Work...

It’s kind of quiet on the economic data front, but last night Japanese trade data came out,
and it showed that the trade deficit was much bigger than expected.

The weakening yen cuts both ways when it comes to trade. On the one hand, companies that sell in foreign lands benefit from selling in foreign currencies and converting back into a weak currency. But the flipside of that is that parts (and raw materials) are much more expensive when they have to be sourced from abroad.

So if your conception of Abenomics — Japan’s big economic experiment which has seen a weakened yen as part of aggressive monetary policy — is that it’s just about making exports more competitive, you’re totally wrong. It’s not a beggar thy number/currency war move.

If Abenomics is to work — and there are signs that it is — it works by stoking inflation expectations so that people domestically spend rather than horde cash. Japan has famously seen years of deflation, which encourages savings and discourages investment.

So don’t get real hung up on the trade numbers, and make a conclusion about Abenomics. That’s not the game. The game is about domestic demand.

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