Land of the rising expectations: did “Abenomics” deliver?

Japan is an extreme case for many of the sociological characteristics of the western world. Here is an advanced nation who suffers in the last 3 decades from difficulties to adjust its economy to the contemporary global environment, and to its shrinking labor force. Since the end of 2012, Japan is conducting its economy according to a doctrine nicknamed “Abenomics”, after Prime Minister Shinzō Abe. Abenomics is an ambitious plan, aimed to boost growth by bringing Japan again to a competitive position in the world’s economy. It is based on the implementation of bold monetary policy, flexible fiscal policy and a reforms program designed to increase innovation. The government eased restrictions on hiring foreign staff in special economic zones and took measures to add more flexibility to human resources’ management, making it easier for companies to fire ineffective workers. This was combined with new government spending programs which were meant to encourage industrial innovation (e.g. robotics) and to stimulate demand and consumption.

The plan’s fresh “high risk-high yield” strategy portrayed Abe as an audacious leader, and it was received with wide support and optimism from the general public and the private sector, according to the influential Tankan Survey issued by the Bank of Japan (BoJ). The measures taken were supported by a comprehensive monetary policy that tried to make Japanese exports more attractive and increase liquidity in the markets. The BoJ marked an inflation target of 2% as a major indicator that will signal success and trigger a shift towards normalization.

So far, Abe’s strategy seems to prove itself. Since the last quarter of 2015 Japan’s economy is growing steadily, its longest growth period since 1989. This is a result of increased domestic consumption, business investment, and exports. The industrial sector improved its productivity by 1% last year and reached its lowest unemployment level ever. However, Japan failed to achieve its 2% inflation target. Despite optimistic declarations from the BoJ, inflation went down 0.7% in April, after a fall of 0.9% in March. Another alarming point was the 0.6%  decrease in annualized GDP growth in the first months of 2018. In addition, there was a decline in exports and a 0.1% drop in capital expenditure, that may suggest that corporate investment isn’t as strong as many have estimated. The BoJ provides reassuring explanations for this negative data, by attributing it to the hard winter that had reduced private consumption and overall economic productivity. The BoJ added that wages were raised in March by 2.1%.  

The financial markets knew well how to exploit the monetary aspects of Abenomics, and for the near future investors can be indifferent to this data, that may signal a halt to a positive momentum. As part of Abenomics, the BoJ vastly interfered in the Yen exchange rate in order to make Japanese products more attractive to import. The Yen is used by many countries in APAC as a reserve currency, and it is also considered a safe haven asset in periods of turmoil. It proved to be strong even when tensions with North Korea peaked in the summer of 2017 when Kim Jong-Un launched a missile that passed right above Japan. Japan’s pro-export policy and the constant trade surplus offsets the risks related to the high debt level, which is mostly domestic.

The BoJ’s activism was not channeled only to back the Yen. The BoJ turned to be a key player in the market, purchasing enough foreign debt to make it the second largest holder of US securities and bonds after China. The bank is also very active in supporting the Nikkei index and in limiting the yield of Japanese Bonds. The resurgence of bond yields around the world and the rise of the interest rate by the Fed are challenging the ability of the BoJ to maintain its current policy. Japan is still a very big economy, and the financial environment that was created as a result of Abenomics formed unique correlations. The multi-dimensional intervention of the BoJ in the financial markets requires high-resolution analysis, not only between the Yen and other foreign currencies but also between the currencies and several other equities. Up to a certain point, widening interest rate differentials do not necessarily mean fall of the Yen and the Japanese markets. Psychological aspects have a significant role here, and the optimism that appears in the last Tankan survey is a good sign. The linchpin for any strategic assessment related to Japan is the sustainability of healthy economic growth, and Abenomics needs more time to achieve that type of sustainable growth. It is a race between the perpetual momentum of Japan’s economy and the Fed’s normalization policy. Beyond that race, trade wars or a fundamental change in China are the key short-term risks to Abenomics.

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