Nikkei Hits 6 Year High as BOJ and Abe Work Overtime, but is Japan Out of the Woods? Part 1

The Nikkei is at a six year high and trying desperately to breakout of its longstanding trading range on the Pavlovian response to BOJ money printing and a mirage created by short-term expansionary fiscal policy. But what about the real economy? Has there been any follow through from all this central bank intervention and these giant budget deficits? In Part 1 of this two part piece we'll have a look at the BOJs activism and try to draw a link between the monetary policy regime and prices and wages. In Part 2 we will take a look at the drivers of Japan's growth over the last year, review the country's dire fiscal situation and explore what lies ahead on the policy front and what it means for 2014 growth.



There is no question the BOJ has been busy this year. Indeed, the monetary base in Japan has increased by 45% YoY.



But when we adjust the monetary base for excess reserves held at the BOJ (read idle money), the monetary base is up only slightly more than 1% YoY. This is exactly the response to QE we have witnessed in the US: a lot of money is being created, but this money is just sitting on bank balance sheets.



Bank loans are up about 2% YoY, which is much improved from the declines we saw in 2009-2011, but certainly nothing to write home about.



Meanwhile, CPI has increased at the fastest rate in five years.



But only thanks to surging import prices resulting from the devalued yen. Thus, core CPI (which is CPI ex food and energy and for Japan is a better measure of domestic pricing pressure) is still flat YoY.




But the average person pays for food and energy and those costs have gone up a lot in the last year since Japan must import the preponderance of its natural resources. Indeed, essential imports (food, mineral fuels and natural resources) are almost 50% of all imports.



So the real kicker is that prices for food and energy have been increasing, but neither real wages nor nominal income have shown a commensurate increase (in fact, they are both down YoY). This is where Abenomics has (thus far) fallen flat.