Arrows in a bullseye
Chicks dig the bulls-eye

Early reports indicate that Japan's annualized 2013 Q4 GDP growth likely reached 2.6%, which would make it the fifth straight quarter seeing an increase in annualized GDP. This bit of good news is naturally attached to the government's spiked punch bowl fiscal, monetary and structural reforms dubbed Abenomics. After Prime Minister Shinzo Abe fired the first two arrows of this program - making money out of thin air monetary easing and fiscal stimulus - many are still waiting for a fully fleshed plan for structural reform.

Even without structural reform, Japan's equity market have wasted no time getting drunk off the cheap money, with the benchmark Nikkei 225 rising 57% in 2013. Japan's pension system, labor laws and immigration policy are three potential targets for structural reform but the moving has been slow on these fronts. Tax reform is around the corner, though, and could really put Abenomics to the test. Economics blogger Wolf Richter won't touch the spiked punch with a ten-foot pole.

  • [The] purchases of durable goods have been soaring. Everyone is front-loading big ticket items ahead of April 1 [2014], when the very broad-based consumption tax will be hiked from 5% to 8%. Pulling major expenditures forward a few months or even a year or so is the equivalent of obtaining a guaranteed 3% tax-free return on investment... It’s a powerful motivation. And it has turned into a frenzy. In December, households purchased 32.2% more in durable goods than the same month a year earlier, in November 25.2%, in October 40.4%. These front-loaded purchases have been goosing the economy in late 2013. But shortly before April 1, they will grind to a halt. The Japanese have been through this before. In 1996, after the consumption tax hike from 3% to 5% was passed and scheduled to take effect on April 1, 1997, consumers and businesses went on a buying binge of big-ticket items to dodge the extra 2% in taxes. The economy boomed. But it ended in an enormous hangover. In the spring 1997, as the tax hike took effect, business and consumer spending ground to a halt, and the economy skittered into a nasty recession that lasted a year and a half!

Richter's concerns seem to jive with economics data that shows Japan's recovery has been based on consumer demand rather than a rise in exports, the latter of which many expected to increase with the Yen's decreasing strength. Japan will need to up its export game if it wants to keep this party going. With the upcoming hike in consumption tax, the consumer demand that has been driving the economy may come to a halt. Clearly, we need more arrows.