In­vestors sour on Abe­nomics as global gloom deep­ens

The Pak Banker - - BUSINESS -

Re­newed tur­moil in global mar­kets is be­gin­ning to erode in­vestor con­fi­dence in Ja­panese Prime Min­is­ter Shinzo Abe's pledge to re­vi­tal­ize the econ­omy through his mas­sive 'Abe­nomics' stim­u­lus pro­gram. Doubts over the ef­fi­cacy of Abe's cock­tail of mon­e­tary eas­ing, fis­cal stim­u­lus and struc­tural re­forms have been grow­ing for sev­eral months as the world's third-largest econ­omy fails to mo­tor on and in­fla­tion re­mains a long way off the Bank of Ja­pan's 2 per­cent goal.

Those doubts have height­ened in the past few weeks as the freefall in oil prices and con­cerns about China's slow­ing econ­omy and its per­ceived pol­icy mis­steps sent global fi­nan­cial mar­kets into a tail spin at the start of the year.

"The per­cep­tion on Abe­nomics is chang­ing," said To­moichiro Kub­ota, se­nior mar­ket an­a­lyst at Mat­sui Se­cu­ri­ties. "It has been boost­ing share prices es­sen­tially by work­ing on ex­pec­ta­tions. But af­ter all ex­pec­ta­tions were just ex­pec­ta­tions."

Spec­u­la­tors, who were firm be­liev­ers of a weak cur­rency un­der Abe, be­came net buy­ers of the yen 1097741NNET in the past cou­ple of weeks, help­ing to drive the Ja­panese unit to one-year high of 115.97 to the dol­lar JPY= ear­lier this week.

In­fla­tion-linked JGBs are pric­ing the low­est in­fla­tion ex­pec­ta­tions JP10YBEI=JBTC since the bonds were re-in­tro­duced in 2013. It stood at 0.55 per- cent, below its 2014 peak around 1.4 per­cent, and some dis­tance from the BOJ's in­fla­tion tar­get of 2.0 per­cent.

As the global out­look dark­ened and growth at home slowed to an ane­mic pace, Ja­panese shares wiped out all the gains since the BOJ ex­panded its stim­u­lus in Oc­to­ber 2014. Ear­lier in the week, the Nikkei .N225 fell more than 20 per­cent - widely seen as a yard­stick for a bear mar­ket - from a peak hit in June last year. That in turn puts at risk voter sup­port for Abe­nomics given a rally in Ja­panese shares .N225 to an al­most two-decade high last year is seen as one of his ma­jor achieve­ments. While Ja­pan's eco­nomic ills are partly a con­se­quence of global head­winds, in­clud­ing the de­fla­tion­ary im­pact of low oil and slack­ing global de­mand for Ja­panese ex­ports, in­vestors are start­ing to ques­tion if Abe­nomics could put growth and in­fla­tion on a sus­tain­able foot­ing.

The ab­sence of steady growth and con­sumer prices over the last three years have tem­pered in­vestors' hopes that Abe's strat­egy could spur a re­vival of eco­nomic for­tunes. Tellingly, shares of bro­ker­ages .ISECU.T and prop­erty firms . IRLTY.T - for­merly dar­lings of Abe's re­fla­tion poli­cies - have re­turned to lev­els when BOJ Gov­er­nor Haruhiko Kuroda set in mo­tion a burst of mas­sive stim­u­lus in April 2013. "This sym­bol­izes how in­fla­tion ex­pec­ta­tions have fallen," said Mat­sui Se­cu­ri­ties' Kub­ota.

For­eign in­vestors also ap­pear to be los­ing pa­tience with Abe­nomics. "Now we are in the ' wait and see' mode, I think, es­pe­cially for for­eign­ers Abe­nomics has to de­liver also on the re­form side," said Hans Rade­maker, chief in­vest­ment of­fi­cer at Robeco Group.

Some for­eign in­vestors have al­ready pulled out money, with ex­change data show­ing they be­came a net seller of Ja­panese stocks last year, a stark turn­around from 2013 when they bought 15 tril­lion yen of Ja­panese shares. In 2014, they were net buy­ers of a smaller sum.

That is an omi­nous sign for the mar­ket con­sid­er­ing for­eign­ers' net sell­ing oc­curred only twice this cen­tury dur­ing ma­jor mar­ket down­turns - in 2000 when the dot com bub­ble burst and in 2008 when the global fi­nan­cial cri­sis gummed up fi­nan­cial mar­kets. An­other risk is that Ja­panese in­vestors, who have piled up for­eign as­sets on the con­vic­tion that the yen is un­likely to strengthen, may do a U-turn and buy back the yen.

This grim back­drop has stoked spec­u­la­tion that the BOJ will take ad­di­tional eas­ing steps at its pol­icy meet­ing next week. But for some play­ers, more stim­u­lus brings its own risks. "Ja­panese in­vestors haven't repa­tri­ated their funds. If they start to do so, that is quite dan­ger­ous," said Ari­hiro Na­gata, gen­eral man­ager of de­riv­a­tives at SMBC Nikko Se­cu­ri­ties. "But an even more dan­ger­ous thing is to have the BOJ ease its pol­icy next week and that does not work."

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