- Naoki Iizuka, an economist at Citigroup Inc.
Inflation is rising and moving closer to the official target of 2%, however, the looming tax hike on April 1 suggesting the progress can be eliminated. What is more important, is the fact the world's third largest economy is smaller now that it was 20 years ago. The economy is going through three phases all over again: rapid growth, bust and stagnation. In general, after gaining momentum for decades, the economy peaked in the 1990s and never made it up. In other words, despite economic growth, the economy should be richer. In case the central bank will not be able to keep inflation rising, consumer will face a serious problem– prices and wages will fall so fast that consumers will not be able to pay back their loans, that do not fall. As a result, it can lead to a mass bankruptcy and record-high unemployment.
It took almost 15 years for the economy to wake up. Shinzo Abe has already made a pickup in inflation a priority. While his measures are boosting growth, inflation and stocks, it may be not enough. Abenomics have added around 1% to 2013 growth and it is definitely a good start. The Japanese economy may find itself in something, what Paul Krugman calls the timidity trap– when policymakers have right ideas in principle, but the timidity makes all effort useless and even intensifying earlier problems. In case the BoJ wants to avoid it, it should intervene markets without waiting for a time, when tax hike's effect feed through the economy.
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