Exhibit 1 Exhibit 3
Who Would Have Thought Prices Could Go Up? Nasty Deflation
JAPAN CONSUMER PRICE LEVEL JAPAN PRODUCTION AND CONSUMPTION INFLATION
106 100
TAX INCREASE
104 CPI EX FOOD &
98
ENERGY
102 96
INDEX JAN 2006 = 100
PRICE OF GOODS
Q1 2000 = 100
Money printing doesnt guarantee inflation. But a Put another way, Japan has had to work harder
weak currency (Exhibit 2) and higher (indirect) produce more to maintain real spending. Real
taxes do. The UK had similar inflation in 2010 and GDP growth, while not exactly strong, has exceeded
2011 and that led to recession. real income growth since 2004 (Exhibit 4).
Exhibit 2 Exhibit 4
Yen Falls To Reflect Fundamentals Real Income Lags Real Production
JAPANESE TERMS OF TRADE AND CURRENCY JAPAN GDP AND GROSS DOMESTIC INCOME
150 150 115
TERMS OF TRADE* (LHS)
140 140 113
INDEX Q1 2000 = 100
105
100 100
103
90 90 REAL GROSS
101 DOMESTIC INCOME*
80 80 99
70 70 97
* EXPORT PRICES/IMPORT PRICES REAL TRADE WEIGHTED INDEX * REAL GDP ADJUSTED FOR INCOME EFFECTS OF TERMS OF TRADE CHANGES
60 60 95
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016
The problem is that this is the wrong sort of Current inflation exacerbates this real income
inflation. Good inflation is rising prices for the problem. Japans stronger growth over the past 18
things produced, because that boosts producers months has been driven by consumers lifting real
income (which in turn eases debt burdens). Bad spending without a commensurate pick-up in real
inflation is rising price for things consumed. In a labour income (Exhibit 5).
Page 1 of 3
Friday, 22 August 2014
Exhibit 5 sector. Non-financial corporates have swung from
How Wide Can This Gap? investing more than their profits to investing less
120
REAL LABOUR INCOME AND REAL CONSUMER SPENDING
NOMINAL DEFLATED BY CONSUMER SPENDING DEFLATOR
than their (rising) profits (Exhibit 8).
115 Exhibit 8
INDEX Q1 2000 = 100
% OF GDP
COMPENSIATION OF 11
LABOUR
95 9
2000 2002 2004 2006 2008 2010 2012 2014 2016
5
Spending may not be able to out-pace incomes for
* ORDINARY PROFITS, EXCLUDING FINANCIALS EXCLUDES SOFTWARE
4
Exhibit 7 3
2
12M%
-2
the economy now is wage inflation. Without that
-4
* 3M AVERAGE LEADING BY 2 QUARTERS
good inflation the expansion risks stalling if
-3 -6
1986 1990 1994 1998 2002 2006 2010 2014 consumer spending slows due to lack of income.
Source: MIAC, ESRI; Minack Advisors Higher wages, however, without productivity
offsets would put pressure on margins. If thats
The decline in Japanese household saving has been how Abenomics wins, equity investors lose.
matched by an increase in saving by the corporate
Page 2 of 3
Friday, 22 August 2014
Minack Advisors
Level 8, 167 Macquarie Street, Sydney NSW 2000, Australia
gerard@minackadvisors.com www.minackadvisors.com
Authorised Representative No. 443937
Minack Advisors Pty. Ltd. ABN: 84 163 503 044
2014 Minack Advisors Pty Ltd. This message and attachments are for the sole use of the addressee and are privileged, confidential and
exempt from disclosure. If you are not the addressee, copying, dissemination, or distribution of this communication is strictly prohibited. In
publishing research, Minack Advisors Pty Ltd is not soliciting any action based upon it. Minack Advisors Pty Ltd publications contain material
based upon publicly available information, obtained from sources that it considers reliable. However, Minack Advisors Pty Ltd does not
represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on
Minack Advisors Pty Ltd publications only. All forecasts and statements about the future, even if presented as fact, should be treated as
judgments, and neither Minack Advisors Pty Ltd nor its partners can be held responsible for any failure of those judgments to prove accurate.
It should be assumed that, from time to time, Minack Advisors Pty Ltd and its partners will hold investments in securities and other positions,
in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in
this document do prove to be accurate. Minack Advisors Pty Ltd is not liable for any loss or damage resulting from the use of its product.
Minack Advisors Pty Ltd is registered in Australia, ABN 84 163 503 044. Minack Advisors Pty Ltd is regulated by the Australian Securities and
Investments Commission (ASIC), authorised representative number 443937.
Page 3 of 3
Friday, 22 August 2014