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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Aug 29 2014

Has the Sun Set Early in Japan?

The prevailing wisdom is that Abenomics is working to help the Japanese economy escape its lost decades. In sharp contrast, ECRI research comes to very different conclusions. Our study also has important implications for other G7 nations following policies similar to those in Japan in order to spur stronger long-term growth.

Following the launch of Abenomics, which aimed to pull the economy out of its prolonged stagnation, Japanese CPI inflation rose to a 23-year high, while GDP grew significantly. With the Japanese economy finally exiting deflation and economic growth recovering, Abenomics has been widely hailed as Japan’s way out of its “lost decades.” However, it is not at all clear that Abenomics can take credit for these cyclical developments.

In fact, in late 2012 ECRI had already forecast Japan’s exit from deflation, as our Japanese Future Inflation Gauge had risen materially since May 2012. Also, we heralded a Japanese economic recovery in the spring of 2013, with our Japanese Long Leading Index growth having improved since November 2012. In other words, ECRI’s cyclical leading indexes had pointed to an end to deflation and the economic recovery, well before Abenomics was on the horizon. This should give the consensus pause as our current outlook diverges from their more complacent view.

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ECRI August 29, 2014

A keystone of current market complacency is the growing conviction that, with wage growth flagging, the Fed will not hike rates sooner or faster than expected. More