Land of the rising funds: Japan’s ressurection

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24 Apr 2014

When Japanese prime minster  Shinzo Abe  addressed the World Economic Forum in  Davos in January, he announced the country  was “about to break free from chronic  deflation”.  “It is not twilight,” he added, “but  a new dawn breaking over Japan.”

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When Japanese prime minster  Shinzo Abe  addressed the World Economic Forum in  Davos in January, he announced the country  was “about to break free from chronic  deflation”.  “It is not twilight,” he added, “but  a new dawn breaking over Japan.”

When Japanese prime minster  Shinzo Abe  addressed the World Economic Forum in  Davos in January, he announced the country  was “about to break free from chronic  deflation”.  “It is not twilight,” he added, “but  a new dawn breaking over Japan.”

Indeed, Japan’s recent political and economic  turnaround is widely accepted to be the  beginning  of a long-term recovery in the  Land of the Rising Sun. Abe’s election at the  end of 2012 brought with it a radical  optimism  for the country and his ensuing  ‘Abenomics’ policy put in place in December  2012 has reflected the regime’s determination  to break out of its two decade-long  economic  woes.

And on the surface it seems to be working.  Japan’s Nikkei rose by 56.7% last year,  making  it the world’s best performing  market  on paper, while the world’s thirdlargest  economy also engineered a dramatic  turnaround from negative GDP growth in  2012 to positive expansion in all four quarters  of 2013, albeit 1% in Q4.

Abenomics has also seen Japan surface from  nearly two decades of chronic deflation with  core consumer price index (CPI) inflation,  excluding food, rising 1.3% year-on-year in  January, which matched a 1.3% annual  increase  in December  – the fastest in more  than five years (see chart on p40).  However, equity markets fell back earlier  this year following the US Federal Reserve’s  talk of tapering its quantitative easing (QE)  programme and the stock market fell around  7% in US dollar terms.

Any stock market  rise was cancelled  out by the falling yen because  the depreciation in currency fed  through to dollar investors in Japan.  But while the sun of Abenomics appears to  be rising once more over Japan, how sustainable  is the economy’s growth? What’s more,  could it all be eclipsed if the Bank of Japan  (BoJ) begins  its own tapering programme?

Hitting the target

Essentially Abenomics fired three so-called  ‘arrows’: monetary policy expansion; fiscal  stimulus; and economic reform. Specific  policies included targeting a 2% annual  inflation  rate, correcting the excessive yen  appreciation, setting negative interest rates,  radical QE, expanding public investment,  buying operations of construction bonds by  the Bank of Japan, and revising the BoJ Act.

The first two arrows, including the BoJ’s  current  $60bn a month QE programme, had  an almost immediate impact and by February  2013 had caused a dramatic weakening of the  Japanese yen and a 22% hike in the Topix index.  Elsewhere unemployment fell from 4%  in Q4 2012 to 3.7% in Q1 2013.  Abenomics has also given the BoJ a muchneeded  grip on deflation. Japan had long  been the punching bag of the world because  the BoJ allowed its currency to appreciate  every time the rest of the world got into trouble.

But bringing the yen back to a more normal  level has been crucial to inciting reflationary  sentiment and increasing industrial  and consumer confidence.  This renewed consumer confidence can be  seen in the rapid credit card issuance by  operators  such as Rakuten who has seen  30% year-on-year rise in card users, as well  as a 41% rise in transaction volume.

On the corporate side, the currency’s fall  should lift the yen value of the overseas-derived  profits generated by Japanese  multi-nationals.  Nikko Asset Management global strategist  John Vail, who is based in Tokyo, says:  “Bringing the yen down has affected profitability,  not just of the exported units which are  much more competitive and profitable than  they used to be, but also when you translate  overseas production. So, for example, even if  a car is made in Ohio and sold there, the  profit is worth a lot more in yen terms when  the yen is weaker – it is a multi-national  translation of profits.”

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