Another round of Abe­nomics

Financial Mirror (Cyprus) - - FRONT PAGE -

Two years on, and Abe­nomics is still go­ing strong. The lat­est news from Ja­pan proves that Prime Min­is­ter Shinzo Abe is stick­ing to his strat­egy to boost and re­boot the Ja­panese econ­omy with a se­ries of mon­e­tary, fis­cal, and struc­tural poli­cies. De­fi­ant of crit­ics, Abe’s gov­ern­ment is send­ing a strong sig­nal to in­vestors that it has their in­ter­ests at heart.

When Abe be­gan his sec­ond term in of­fice in De­cem­ber 2012, he made clear that his pri­or­ity was to re-en­er­gise the Ja­panese econ­omy which had flour­ished in the 1980s but had since suf­fered two decades of de­fla­tion and low growth. His Key­ne­sian-style plan, pop­u­larly termed “Abe­nomics”, was to support the ex­port driven econ­omy with a sig­nif­i­cant stim­u­lus pack­age to drive down ex­change rates. The goals were to in­crease pro­duc­tion, cor­po­rate earn­ings, and em­ploy­ment, which to­gether would ul­ti­mately pave the way for long-term and sus­tain­able growth.

So far, so good? Crit­ics ar­gue that hy­per­in­fla­tion could lead to the col­lapse of the yen and cause in­vestors to doubt the real mar­ket value of their in­vest­ments. They also ar­gue that Abe’s poli­cies will not nec­es­sar­ily com­bat the coun­try’s huge na­tional debt, which stands around dou­ble its gross do­mes­tic prod­uct. How­ever, dur­ing Abe’s two years in of­fice so far, the data has been pos­i­tive. Since the end of 2012, the Ja­panese yen has fallen 7.8% against the US dol­lar which has prompted in­creased pro­duc­tion and a rise in stock prices re­flected in the climb­ing Nikkei in­dex. A survey in Oc­to­ber last year in­di­cated that business sen­ti­ment was the most ro­bust it had been six years.

Fast-for­ward to the present. Out of the com­pa­nies on the Topix in­dex that re­leased their quar­terly re­ports in the re­cent earn­ings sea­sons, almost two thirds beat Bloomberg ex­pec­ta­tions for profit. On Fri­day Oc­to­ber 31, the Bank of Ja­pan re­vealed plans to in­crease its mon­e­tary eas­ing, jus­ti­fy­ing their ac­tions as nec­es­sary to rid the “de­fla­tion­ary mind­set” of con­sumers and busi­nesses. On the very same day, the na­tional pen­sion fund, one of the largest pen­sion funds in the world, pledged to invest more in do­mes­tic stocks.

Mar­kets were closed on the Mon­day fol­low­ing the dou­ble news due to a pub­lic hol­i­day, but when they re­opened on Tues­day, in­vestor sen­ti­ment was am­ply pos­i­tive. Stocks jumped quickly, and the Nikkei 225 climbed over 4% in the morn­ing ses­sion. Ex­cept for the Aus­tralian dol­lar, the yen dropped un­sur­pris­ingly against all the G10 cur­ren­cies.

The long-term out­look, and the amount and time­frame of stim­u­lus that the Bank of Ja­pan will deem fit, re­main un­cer­tain. An­a­lysts are rightly ques­tion­ing if the cur­rent poli­cies will give enough of an im­pe­tus for Ja­pan’s econ­omy to sus­tain it­self in the long run with­out con­stant in­ter­fer­ence. How­ever, for short-term in­vest­ments, we have a more de­fined rea­son to be op­ti­mistic. The re­sults to date, com­bined with the very fact of the gov­ern­ment’s back­ing, should in­spire con­fi­dence.

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