Ja­panese mar­ket close to read­ing last rites over Abe­nomics

The Pak Banker - - BUSINESS -

When Prime Min­is­ter Shinzo Abe launched his three-pronged pro­gram to re­vive Ja­pan's stag­nant, de­fla­tion­ary econ­omy three years ago, the stock mar­ket cheered ev­ery step along the way.

Not any more. The "third ar­row" of Abe­nomics -- re­forms to make the econ­omy more pro­duc­tive -- is barely a work in progress, but Abe got straight to work on the first two, fis­cal ex­pan­sion and mon­e­tary stim­u­lus, with the en­thu­si­as­tic sup­port of a new gov­er­nor at the Bank of Ja­pan (BOJ), Haruhiko Kuroda.

In the first year of the pro­gram, the Nikkei in­dex .N225 jumped nearly 60 per­cent, draw­ing in a net 15 tril­lion yen ($128 bil­lion) of for­eign cash. En­thu­si­asm for Kuroda's bold stim­u­lus, in par­tic­u­lar, was strong, with each of his first two money- print­ing an­nounce­ments prompt­ing a 7 per­cent weekly surge.

His de­ci­sion last week to in­tro­duce neg­a­tive in­ter­est rates was equally bold, and quite un­ex­pected, but as Abe's ar­rows have sailed wide of their tar­get, in­vestors have sat on their hands.

"The mar­ket's re­ac­tion is get­ting duller day by day. The neg­a­tive in­ter­est rates boosted the mar­ket only for two days," said Nori­hiro Fu­jito, se­nior in­vest­ment an­a­lyst at Mit­subishi UFJ Mor­gan Stan­ley Se­cu­ri­ties, and trad­ing data shows even that was down to short-term "gam­blers", he added.

A week later, even those gains are gone, as for­eign in­vestors with­drew a net 207 bil­lion yen from the mar­ket, tak­ing their to­tal for 2016 to more than 1 tril­lion yen. U.S.-based Ja­panese stock funds also saw an out­flow in the week ended Feb 3.

It is hard to fault for­eign in­vestors' pes­simism, when Abe­nomics has failed in its prin­ci­pal aims to shake off two decades of de­fla­tion and flat growth.

Many econ­o­mists ex­pect last quar­ter's GDP data, due later this month, to show a con­trac­tion, the fifth in the last nine quar­ters. Kuroda's pri­mary goal, to achieve 2 per­cent growth in prices, is as far away as ever, with core in­fla­tion stuck around zero as oil prices tum­ble.

De­spite the eas­ing, the yen JPY= is near its strong­est level in more than a year, dim­ming the prospects for ex­porters. The head­winds, such as slow­down in China, weak ex­ter­nal de­mand and the oil mar­ket rout, are mainly be­yond the con­trol of Abe and Kuroda. But that is why in­vestors think Ja­panese pol­i­cy­mak­ers are push­ing against a piece of string, de­spite Kuroda's de­fi­ant talk that there is no limit to mon­e­tary eas­ing.

"Neg­a­tive rates will do lit­tle to en­hance pros­per­ity and eco­nomic growth ... They are a means to de­pre­ci­ate the cur­rency and boost as­set prices to some ex­tent. But the global econ­omy is al­ready rather weak," said Michael Kretschmer, chief in­vest­ment of­fi­cer at Pe­lar­gos Cap­i­tal in the Hague, the Nether­lands. Some in­vestors are pin­ning their hopes on Abe's third ar­row, struc­tural re­forms such as ad­dress­ing la­bor mar­ket rigid­ity.

But they are not hold­ing their breath. "Real eco­nomic re­form will only make a dif­fer­ence in the longer term. So I can only hope that Abe­nomics doesn't lose mo­men­tum," said Han­nah Cun­liffe, se­nior port­fo­lio man­ager at Union In­vest­ment in Frank­furt.

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