Economy Offers Japan's Abe and Opponents Ammunition for Campaign

(Bloomberg) -- A slew of data released on Friday showed that Japan's economy is continuing to recover, bolstering Prime Minister Shinzo Abe's case ahead of a general election next month. But the opposition could also find plenty of ammunition in the data to use against him.

After nearly five years of Abenomics, the economy has expanded for six straight quarters, and likely a seventh during the July-September period, which would be the longest run since 2001.

Yet there are few signs that Japanese people are feeling bullish about their personal prospects. Even as corporate Japan stacks up record profits, and the jobless rate sits at the lowest in two decades, soft wage growth and concerns about the future still weigh on consumers, much as they have since the early days of Abenomics.

“What's tricky for Abe is that he can't emphasize his economic success too much because many households aren't feeling it yet,” said Masamichi Adachi, senior economist at JPMorgan Securities. “If Abe makes that mistake, it will create a gap with voters and generate criticism from opposition parties.”

More: Japan's Inflation Hits Two-Year High Amid Tight Job Market

The jobless rate was 2.8 percent in August, the lowest in 23 years, the data showed. Yet retail sales slumped by the most in more than a year. And though household spending rose -- for only the second time in 18 months -- it rose less than forecast. Core consumption fell slightly from the previous month. "Data on consumer spending point to a sharp slowdown," Marcel Thieliant, senior Japan economist at Capital Economics, wrote in a note.

Abe could also point to progress in the Bank of Japan's battle to vanquish deflation. Consumer prices excluding fresh food rose 0.7 percent in August, the most since 2015. Yet that remains well below the BOJ's target of 2 percent -- a goal that a majority of private economists said will never be reached, despite years of enormous fiscal and monetary stimulus.

In fact, most of that inflation can be attributed to energy prices, and their impact is expected to fade in coming months. Underlying inflationary forces in Japan's economy are weak.

"Of late energy prices and the dollar-yen rate have been the main drivers of consumer price moves, and much depends on how they're moving," said Masaki Kuwahara, senior economist at Nomura Securities Co. "There's the view that the tight labor market should theoretically have more of an effect on the core CPI, but in our view the state of the labor market at the moment doesn't have the power to drive up prices quite yet."

Flip Side

Even the low jobless rate, surely the envy of government officials in many countries, has a flip side to it: an unwelcome drop in the size of the labor force.

"It is important to note that the tightness in the Japanese labor market is caused as much by the shrinkage in the Japanese working population as the rise in demand for labor," Japan Macro Advisors wrote in a note.

One big problem for Abe and the BOJ is that disconnect between the labor market and wages, which are still lagging economic growth. Until significant wage growth kicks in it's unlikely consumers will feel like splashing out in a way that will help drive inflation toward the 2 percent goal.

"Today's data overall is favorable for Abe," said Hiroshi Hanada, head of economic research at Sumitomo Mitsui Trust Bank. "He can say to voters ‘Look, the economy is recovering.' But that's not without holes. Consumer spending isn't strong because wages aren't growing much."

--With assistance from Yuko Takeo

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig