Finally, Japan bids goodbye to deflation

Here's what's next for Abenomics.

According to BBVA Research, in its monthly economic report for August released today, Japan’s Cabinet expressed confidence that the economy no longer faced chronic price declines.

Here's more:

CPI inflation turned positive in June for the first time in a year, rising to 0.2% y/y. Despite a slightly weaker-than-expected Q2 GDP outturn (2.6% saar), the Cabinet judged that the economy is, “picking up steadily and shows some movements on the way to recovery”, evidenced by rising exports, private consumption and industrial production.

The Cabinet also expressed confidence that improving corporate earnings will help boost business investment, which contracted in Q2.

While we agree that the economic indicators are picking up, the lack of rising investment so far is a concern, and market are still looking for implementation of robust structural reforms (the “third arrow” of Abenomics).

We expect growth of 1.7% in 2013. Separately, the Finance Minister denied reports from yesterday that a corporate tax cut is under consideration. The Nikkei fell -2.1% today while the yen was broadly flat at around 98 per USD.

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