When Japanese prime minster Shinzo Abe addressed the World Economic Forum in Davos in January, he announced the country was “about to break free from chronic deflation”. “It is not twilight,” he added, “but a new dawn breaking over Japan.”
Indeed, Japan’s recent political and economic turnaround is widely accepted to be the beginning of a long-term recovery in the Land of the Rising Sun. Abe’s election at the end of 2012 brought with it a radical optimism for the country and his ensuing ‘Abenomics’ policy put in place in December 2012 has reflected the regime’s determination to break out of its two decade-long economic woes.
And on the surface it seems to be working. Japan’s Nikkei rose by 56.7% last year, making it the world’s best performing market on paper, while the world’s thirdlargest economy also engineered a dramatic turnaround from negative GDP growth in 2012 to positive expansion in all four quarters of 2013, albeit 1% in Q4.
Abenomics has also seen Japan surface from nearly two decades of chronic deflation with core consumer price index (CPI) inflation, excluding food, rising 1.3% year-on-year in January, which matched a 1.3% annual increase in December – the fastest in more than five years (see chart on p40). However, equity markets fell back earlier this year following the US Federal Reserve’s talk of tapering its quantitative easing (QE) programme and the stock market fell around 7% in US dollar terms.
Any stock market rise was cancelled out by the falling yen because the depreciation in currency fed through to dollar investors in Japan. But while the sun of Abenomics appears to be rising once more over Japan, how sustainable is the economy’s growth? What’s more, could it all be eclipsed if the Bank of Japan (BoJ) begins its own tapering programme?
Hitting the target
Essentially Abenomics fired three so-called ‘arrows’: monetary policy expansion; fiscal stimulus; and economic reform. Specific policies included targeting a 2% annual inflation rate, correcting the excessive yen appreciation, setting negative interest rates, radical QE, expanding public investment, buying operations of construction bonds by the Bank of Japan, and revising the BoJ Act.
The first two arrows, including the BoJ’s current $60bn a month QE programme, had an almost immediate impact and by February 2013 had caused a dramatic weakening of the Japanese yen and a 22% hike in the Topix index. Elsewhere unemployment fell from 4% in Q4 2012 to 3.7% in Q1 2013. Abenomics has also given the BoJ a muchneeded grip on deflation. Japan had long been the punching bag of the world because the BoJ allowed its currency to appreciate every time the rest of the world got into trouble.
But bringing the yen back to a more normal level has been crucial to inciting reflationary sentiment and increasing industrial and consumer confidence. This renewed consumer confidence can be seen in the rapid credit card issuance by operators such as Rakuten who has seen 30% year-on-year rise in card users, as well as a 41% rise in transaction volume.
On the corporate side, the currency’s fall should lift the yen value of the overseas-derived profits generated by Japanese multi-nationals. Nikko Asset Management global strategist John Vail, who is based in Tokyo, says: “Bringing the yen down has affected profitability, not just of the exported units which are much more competitive and profitable than they used to be, but also when you translate overseas production. So, for example, even if a car is made in Ohio and sold there, the profit is worth a lot more in yen terms when the yen is weaker – it is a multi-national translation of profits.”
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