by Duncan Wooldridge via UBS
We totally get why many are excited by the recent cyclical improvement in the Japanese economy. However, just because industrial production is turning up on the back of exports and 1Q GDP grew more than expected doesn’t mean Abeconomics is working. Our colleague, Paul Donovan, correctly pointed out these improvements occurred before the Bank of Japan aggressively started to ramp up base money and there’s been no structural reform to date. Hence, most of the improvement in Japan is probably best described as a standard cyclical improvement in the aftermath of very depressed growth that was also heavily influenced by last year’s downturn in global trade. Recent positive momentum in the economy will likely be sustained for a few more quarters and then of course later this year and early next year consumption should accelerate ahead of a consumption tax hike scheduled for April 2014. So for Abe-believers there will be fuel to support their optimism. However, once you move beyond that and think about what comes afterwards things look more challenging.