Goldman Slams Abenomics; Questions “Validity Of BoJ’s Target”

While we have again and again explained why Abenomics is ultimately doomed as you simply cannot print your way to prosperity (a message The Fed appears to be discovering rapidly), when Goldman Sachs unleashes an Abenomics-bashing piece, one has to wonder just what options Abe has left as economic data starts to collapse (and approval ratings drop just as fast).

Via Goldman Sachs,

Corporate pricing bearish again on falling demand after post-tax hike

The April core CPI, the first reading after the VAT hike, came in at +1.5% (excluding the tax hike impact), an increase from +1.3% in March. Some market observers have pointed to a more bullish corporate stance on pricing as one of the reasons. We used the University of Tokyo Daily Price Index to examine how consumers have been reacting to this aggressive pricing and in turn how companies have adjusted their pricing approach.

Plotting the daily price and sales before and after this year’s tax hike (on April 1) and the previous tax hike (in April 1997), we see two interesting points: (1) corporate pricing is definitely more aggressive just after this year’s tax hike, and (2) a meaningful change can be seen in the price-sales relationship after this year’s hike. Statistically, a significant relationship between price and sales is not visible before this year’s tax hike, but a strong negative correlation is evident after the tax hike.

It is noteworthy that the sensitivity of sales in response to price changes after the April 2014 tax hike was more than double that after the April 1997 tax hike.

This implies that consumers have been forced to reduce spending in response to more aggressive corporate pricing. Seeing signs of a large falloff in consumption, companies lowered prices in mid-April as they searched for a new equilibrium. Ultimately, though, prices have not exceeded year-earlier levels even once since mid-June, indicating that companies are turning more bearish on pricing again.

There is no question that consumers have been compelled to cut spending after the tax hike as aggressive corporate pricing has exacerbated a large decline in real wages, despite successful spring wage negotiations. We think this situation is likely to persist barring major changes in the current wage environment, and hence we expect companies to maintain a passive and bearish pricing stance. We think this trend will affect CPI before long and continue even after the summer. We still question the validity of the BOJ’s 2% inflation scenario and will closely watch trends in the UTokyo’s index for the light it sheds on this.

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But the Progressives Told Us Abenomics Would Be Great for Japan

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Apparently Goldman has shifted its perspective on the J-Curve recovery ever returning… as we suggested previously

On the terrible missing J-Curve (via Patrick Barron of the Ludwig von Mises Institute of Canada):

Perhaps I can shed some light on Japanese Prime Minister Abe’s missing J-curve; i.e., why Japan’s trade deficit seems to be increasing rather than decreasing after massive monetary intervention to reduce the purchasing power of the yen. Monetary debasement does NOT result in an economic recovery, because no nation can force another to pay for its recovery.

Monetary debasement transfers wealth within an economy by subsidizing exports at the expense of the entire economy, but this effect is delayed as the new money works it way from first receivers of the new money to later receivers. The BOJ gives more yen to buyers using dollars, euros, and other currencies, as the article states, but this is nothing more than a gift to foreigners that is funneled through exporters. Because exporters are the first receivers of the new money, they buy resources at existing prices and make large profits. As most have noted, exporters have seen a surge in their share prices, but this is exactly what one should expect when government taxes all to give to the few.

Eventually the monetary debasement raises all costs and this initial benefit to exporters vanishes. Then the country is left with a depleted capital base and a higher price level. What a great policy!

The good news is that Japan does know how to rebuild its economy. It did it the old-fashioned way seventy years ago–hard work and savings.