20141016 by David Pilling
Another reason that a weak yen may not be manna from heaven is that, contrary to common perception, Japan is no longer an export-driven economy. Exports account for about 15 per cent of output, as opposed to 51 per cent for Germany and 54 per cent for South Korea.
That is not as good as it sounds, particularly in an economy where companies have been hoarding cash for years. Higher profits have not done much for investment. Worse, the impact on consumption has been minimal. That is because real wages have continued to fall. That may be an inevitable side effect of inflation, at least in the initial stages before higher profits are passed on in wages. As Jonathan Allum of SMBC Nikko points out, Mr Abe’s insistence on raising consumption tax by 3 percentage points probably did more damage to household spending than a falling yen.
Either way, for the prime minister – who faces important gubernatorial elections this year and local ones in the spring – it is far from ideal that most voters feel poorer because of an economic policy that bears his name.
Mr Abe is correct in his hunch that a weak yen is no longer all it was cracked up to be. He is right too that inflation, without a compensating rise in wages, is more popular with macroeconomists than it is with voters. Yet it would be a disaster if he blinked now. Getting to sustainable inflation is the central tenet of Abenomics. A return to deflation would be to throw it all away. Like it or not, a weaker yen is part of the plan.
