In our view, Abenomics has irreversibly ceased to be a credible policy package. While the financial turmoil in the last few weeks has more to do with a severe deterioration in the global economic outlook, rather than some Japan specific issues, we think the adverse global current is strong enough to put an end to the so called Abenomics. It is unclear what would follow in the aftermath, but the economy is likely to be changing gear toward deflation, rather than reflation.
The time is not yet ripe for us to declare Abenomics a failure, but we must say we are getting there. Two and half years since the advent of Abenomics, inflation in Japan remain earth bound. Exports never took off despite yen falling to its 40 year low in real terms. Corporate managers remain cautious to invest despite the record corporate profits. Time is running out. Out of the original three arrows, only one arrow, the monetary easing, is working effectively. However, with the BoJ already owning 30% of the whole JGB market and expected to reach 50% by early 2018, the easing policy does not seem sustainable. In our view, the credibility of Abenomics as a legitimate policy mix is quickly eroding, giving it at most one to two year of a shelf life.
In this report, we review the progress made by so called Abenomics, a combination of policies implemented by Prime Minister Shinzo Abe to promote growth in Japan. Abenomics policies succeeded in boosting the growth rate in 2013 through bigger fiscal spending and easier monetary policy that resulted in larger consumer spending through asset effects. However, the so called third arrow, a growth strategy package, is failing to ignite corporate capital spending and exports are continuing to stagnate. As the fiscal policy becomes more restrictive in 2014, we expect the growth momentum in Japan to diminish. The private consumption that has led the growth in Japan so far will stall, as household suffers a severely negative real income growth in 2014. Toward the end of 2014, PM Abe will face a difficult choice of whether to cancel the second installment of the consumption tax rate hike scheduled in 2015. In our view, political pressure will force him to maintain the scheduled hike.
Japan Risk Forum, a voluntary association of risk managers from Japanese businesses and academia, published its December 2013 scoring on various economic scenarios for Japan. The results indicate that the “Abenomics to succeed” scenario remains as the main scenario for Japan and its scores have increased from June, the prior assessment. At the same time, however, the score for “Stagflation” scenario has gained even larger points. Under the Abenomics policy mix, Japan is certainly succeeding to pull itself away from the “Deflation” scenario, but it seems still uncertain which of the two inflationary scenarios, “Abenomics to succeed” and ”Stagflation”, Japan is moving toward.
In this report, we review the progress made by “Abenomics”, its implementation and how it has affected the Japanese economy so far. 6 months into its implementation, the "Abenomics" policy combination is working well. The fiscal stimulus is giving a sizable boost to Japan's growth in 2013. There are some critical flaws in the monetary policy management, but the easing seems to be having positive effects on the economy through weaker yen and higher stock market. Structural reforms, or what PM Abe prefers to call "New Growth Strategy" is really a mesh-up of pre-existing policies and random pet projects of policy makers, lacking in any coherent strategies. But the lack of a convincing growth strategy does not seems to be bothering the Japanese economy for now. As a result of these policies combined, the Japanese economy and its stock market have succeeded in outperforming its global peer in 2013. The sustainability of growth remains in question though. A sizable fiscal tightening is scheduled for 2014. In order for Japan to maintain a modest growth in 2014, some infusion of private demand is needed. We are yet to see a sign that Abenomics has succeeded in creating such smooth hand-over arrangement.