The Bank Of Japan (BOJ) says it is looking for consumer spending to stay on a recovery path, focusing on the relatively small increase in nominal wages rather than the steep slide in real wages. Goldman believes the BOJ’s view is founded on money illusion; and crucially, expect the positive effects to be clearly outweighed by the negative impact of lower real wages, and on a net basis see consumption falling. Simply put, once people wake up to the illusion of money, its impact will also fade.
Via Goldman Sachs’ Naohiko Baba,
Can the BOJ rely on ‘Money Illusion’? (Spoiler Alert – No!)
Nominal wages have finally edged into positive territory after more than 18 months of Abenomics. However, prices have spiked on cost-push inflation driven by yen depreciation since mid-2013and on the consumption tax hike in April 2014 (from 5% to 8%). As a result, real wages were still in negative territory (-1.4% yoy) even as of July, when the outcome of the successful spring wage negotiations should have been almost fully factored in.
This post was published at Zero Hedge on 09/05/2014.