Cabinet Office estimated Japan to have grown by 0.5% in the January-March quarter. The surprising positive growth should provide no solace for Japan watchers though. The reason the economy "grew" was due to the severe contraction in imports, the severest shrinkage since the great recession in 2009. The weak imports may boost the growth on numbers, but the weak import should simply imply weak domestic demand. In any case, we think the growth estimate will be revised down when the Cabinet Office receive more data and publish its second preliminary GDP estimate on June 10. (May 20, 2019)
What more can the Bank of Japan do? This is the question economists in Japan have long grappled with. In the past 20 yrs, the BoJ has been a trailblazer of unconventional monetary policies such as zero interest rate and quantitative easing. As recession risk looms for Japan, the bank has to find a new answer to the question, again. In our view, lowering its policy rate has to be the answer, especially to counter the risk of a sharp yen appreciation. One obstacle against the move is the concern that a lower and flatter yield curve would ruin banks' already fragile profitability. In order to circumvent the dilemma, the BoJ will need to start financing banks at a negative rate, effectively providing a subsidy for banks to keep lending. If you have an FT subscription, I hope you enjoy the article. If not, we will be publishing an expanded report on the subject soon, how the mechanism would work and its financial constraint it will place on the BoJ.
Read more..In April 2019, Japan's Prime Minister Abe enjoyed a sizable bump in his approval rate. His approval rate was 49.2% in April, up from 44.9% in March. His approval rate has been improving since the recent low of 35.3% in April 2018. Media poll reports tend to point to the ascension of the new Emperor as the reason for the boost in the public's assessment of PM Abe's performance.
Read more..BoJ made an important change to its policy statement on April 27 by dropping the specific mention for when the bank expects to achieve its inflation target. The change may have been a sound decision, as the failure to achieve the target has been hurting the credibility of the BoJ. However, Governor Kuroda showed poor judgment by downplaying the significance of the change. In the press conference, he repeatedly said the BoJ never intended to impress upon the public when the bank expects to achieve the target and it was all misunderstanding by the financial market. That is a lie as the BoJ's published statement clearly shows. These miscommunication further undermines the credibility of the BoJ, eroding the effectiveness of its monetary policy. There has been a rumor that the BoJ may be about to taper its ETF purchase and the demeanor from Governor Kuroda suggests that the rumor may be true, however emphatically he denies it. After all the deception, who can believe a word he says?
Read more..For years, ROE among Japanese companies languished in low single digits. No more. The average ROE rose to 9.1% in the fiscal year 2017, clearing the 8% "minimum" target set by the influential government-commissioned Ito Report published in 2014. The Japanese companies managed to raise their ROE not through financial leverage but through higher ROA and fatter profit margin. We find it remarkable that non-manufacturers, long considered an inefficient part of Japan Inc. are enjoying an unprecedented level of ROA in recent years. In our view, the rise in ROE is combined results of the cyclical upturn in the economy and the improvements in the corporate governance in Japan.
Read more..After the landslide electoral victory in 2017, it looked certain that Prime Minister Abe would stay on for a few more years. A new development in a year-old cronyism scandal raises a possibility that he may not survive 2018 as Japan's Prime Minister. A leadership election for his ruling party, LDP, is scheduled this September and there is a chance he would be persuaded not to run. Mr. Abe may stay on as a kingmaker, but a fresh face at the top seat of the government will likely bring substantial changes to the policy mix in Japan. In our view, the changes are likely to take the direction toward fiscal consolidation and more conservative monetary policies.
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