Abenomics Not All It’s Cracked Up to BeFebruary 05, 2014
We were reminded again today of one of the unfortunate realities of Abenomics, namely that devaluing your currency when 51% of your imports are inelastic to prices causes real wages to fall.
In the first chart below we show that imports of food, raw materials and fuel (all things that are relatively inelastic to prices) compose 51% of total imports (black line). Thus, when the domestic currency falls, these items (of which Japan produces little domestically so there are few substitutes) rise in price. Unless there is a commensurate fall in domestic prices or rise in wages, disposable income and wages adjusted for inflation will fall.
Unfortunately, that is exactly what we are seeing currently. Real wages for December were just released today and showed another YoY decline of 1.1%. In the second chart below we show the relationship between real wages and changes in the JPY/USD exchange rate. We observe a strong positive relationship (i.e. when the yen falls relative to the USD Japanese real wages end up falling with about a two year lag) suggesting even more pain ahead for the average Japanese worker in the coming months. Perhaps this is one reason PM Abe’s approval ratings have hit the skids?