Another round of Abenomics
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.