Sunshine in Japan?
Japan's economy has long faced dark and overcast weather, with some analysts claiming it has been in an extended coma. Over the past 20 years or so, the economic situation has been defined by slow growth, a substantial build-up in govermnent debt and a difficult-to-exit deflation. Successive governments attempted to pull Japan out of its economic malaise, but generally failed. The Liberal Democratic Party (LDP) government of Prime Minister Shinzo Abe is embarking on a new effort, helped by a massive stimulus package coordinated with its central bank. While the Abe plan, also referred to as "Abenomics," carries considerable risk, it is a bold and badly-needed new direction, which has the potential to end deflation and pull Japan out of its economic cul-de-sac.
Our view is that Abe and Kuroda are on the right track - for now. Markets have responded with confidence, foreign investors are looking again at Japan, and the yen has depreciated from the 80s to around 100 to the U.S. dollar. Yen devaluation is critical to help restimulate the export sector that was hurt by a strong yen (it became a safe harbor currency following Europe's sovereign debt crisis). At the same time, monetary policy alone cannot end deflation. In the U.S., the Fed's quantitative easing has probably helped keep the economy moving, but the U.S. Congress and the Presidency have been negligent until recently in conducting economic policy. It is the same issue in Japan - to really change direction, the Diet and Prime Minister also have to do their parts. This means the government must also tackle difficult problems related to a shrinking and aging population and layers of regulations that maintain inefficiencies in daily economic life. Along these lines, we fully concur with Bloomberg's William Pesek: "Prime Minister Shinzo Abe must match BOJ action with equally aggressive structural changes and pro-growth strategies to generate true confidence on the part of households, companies and investors." No doubt U.S. economic growth would be on sounder footing if the President and Congress agreed on policies and implemented them.
David Fuller's view To put risk mentioned in the first paragraph
above in perspective, the alternative of maintaining the world's strongest currency
in a mostly disinflationary and slow growth global economy was death by a thousand
cuts for Japan.
Corporate profits had been under pressure for years. Japan Inc was surviving with the help of some laudable efficiencies but significant downsizing was increasingly required. This savaged research and development expenditure, so Japan, once an impressive technological leader, was increasingly less competitive in global markets. Japan's economy was locked in the grip of a morale sapping systemic decline.
Grimly adhering to those policies was fatalistic to the point of bordering on insanity. Fortunately, Shinzo Abe returned to power, this time as a reincarnation of his original mentor, Junichiro Koizumi, with the crucial advantage of having the Bank of Japan on his side.
Much is made of Japan's aging and shrinking population, which was a key reason why the BoJ allowed the yen to appreciate for so many years. Population is a concern but Japan is better off without the problem we see in too many other countries - teeming and restless masses of unemployed people.
Japan is one of the world's most technologically advanced countries. It needs to rekindle confidence and aspirations to enhance this advantage. Once Japan's young and middle aged citizens feel more prosperous and therefore optimistic, they will produce more children. This was not going to happen within a generally well educated population during Japan's lengthy period of downsizing.
I agree with William Pesek's summary mentioned at the end of Dr MacDonald's second paragraph above. Fortunately, Prime Minister Abe is not economically naïve. As a man on a mission and with public support, it seems inconceivable to me that he would not match BoJ action, which he instigated, with equally crucial structural changes and pro-growth strategies.
Japan's stock market has been by far the best performer among developed economies over the last six months. In an uncertain world, it remains the most interesting prospect for further gains over the medium term and perhaps also longer.
(See also Wednesday's comment on Japan in the 'Today's interesting charts' section.)
(See also 'The crucial question for Japan watchers', posted on 25th April.)