A popular conception about Abenomics — Japan’s new drive for economic recovery — is that it’s all about weakening the yen and boosting exporters.
But this really isn’t the play at all. The real idea is to reduce real interest rates, so as to stimulate domestic demand, unlocking dormant investment and consumption spending. Remember, in deflation, it makes sense to horde cash, because prices will be lower tomorrow, potentially leading to a deflationary/recessionary spiral. Abenomics seeks to break this, stoking inflation, and creating an encouragement to spend and invest today.
A quick look at the Japanese trade picture shows that improving the economy via exports is not the play.
Japan’s trade deficit just came in surprisingly high.
Japan’s nominal exports in July rose 12.2% y-y and nominal imports were up 19.6%. Market consensus forecasts (Bloomberg survey medians) had called for 12.8% growth in nominal exports and 16.0% growth in nominal imports. The trade deficit came to ¥1,024.0bn, larger than the consensus forecast of ¥773.5bn. On a seasonally adjusted basis, the deficit was ¥994.0bn, again wider than the consensus forecast of ¥741.3bn and also larger than the June deficit of ¥663.2bn. There had been signs from the beginning of 2013 that the trade deficit would stop expanding and start contracting, but the data have continued to fluctuate and we have yet to see any clear trend of contraction.