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The end of Japan’s inflation affair

Japanese Prime Minister Shinzo Abe got another jolt of bad news Friday, when new data showed inflation slowed to 1.3% on an annual basis in June from 1.4% in May. It’s a sign that his economic revival plan is not working as advertised.

The latest data, which exclude the effects of April’s consumption-tax hike, suggest that Japan is slipping away from the 2% inflation target set by Mr. Abe’s central banker, Haruhiko Kuroda. Price increases for imports, triggered by a yen-devaluation campaign, have now filtered through the economy. Since Abenomics hasn’t included concrete economic reforms, Japan is sliding back into its status quo before Mr. Abe was elected in late 2012.

This stands to reason, since Japan’s economic woes before Mr. Abe were not fundamentally monetary, and they still aren’t. Businesses that didn’t see sufficient reason to invest when interest rates were an ultralow 0.1% in 2012 wouldn’t be persuaded by an additional round of quantitative easing. Exchange-rate appreciation was not at the core of Japan’s loss of export competitiveness before Mr. Abe came to office.

The yen has depreciated 22% against a basket of trading-partner currencies since October 2012, but in that time real exports—measured in units shipped instead of yen-denominated value—haven’t changed. Although real imports into America, the largest market for Japan’s exports, have increased some 15% since 2007, Japan’s real exports have declined 25% in that time, according to economist Rick Katz. More nimble competitors, especially South Koreans, are winning market share from Japan.

Mr. Abe’s fixation on inflation—egged on by professional economists and commentators—has been a distraction from more pressing problems. Mr. Abe should have noticed in the 1970s that rapid inflation does not automatically trigger rapid growth, and he would have been better off focusing exclusively on a pro-growth agenda of policy reforms. Such an agenda would include free trade, unilaterally if necessary, labor-market liberalization and higher immigration.

Instead, Japanese households have seen their spending power erode as import prices rise and the consumption-tax increase kicks in while lack of other reforms obstructs wage-boosting productivity gains. Aging savers have watched the real value of their retirement nest eggs diminish. For these people, at least, the possibility of slowing inflation is good news.

One month doesn’t make a trend, and perhaps more inflation is on the way later this year—although how that can be a good thing if Mr. Abe doesn’t achieve broader pro-growth reforms is a mystery. Either way, it should now be obvious that the monetary component of Abenomics is hardly a panacea, and time is growing short for Mr. Abe to offer a more substantive agenda.

Source: Wall Street Journal


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