Since regaining the role of prime minister in December 2012 Shinzo Abe has been the figurehead for reforms in Japan, and the driving force behind the ‘three arrows’ of Abenomics. But almost 18 months since his election, how effective has his strategy been?
Alex Lee, manager of Canada Life Investments’ Japan fund, notes the deflationary environment in Japan for the past two decades has had a major impact on its economy and its effects still linger.
“It is that mentality that the investment community generally feels the Japanese private sector is stuck in. The dynamic private sector of Japan two decades ago has lost its way.
“Abenomics is really all about shattering the deflationary mindset of Japan’s private sector and trying to bring back the activity. In terms of doing it, there is ultimately two ways to try and tackle this problem. The first is by returning Japan to inflation and the second is by boosting the longer-term trend growth in Japan, and that is less about an inflationary mindset and more about structural reforms to boost longer-term growth.”
Essentially, the three arrows of Abenomics are: monetary policy, fiscal policy, and structural reform, with the third being seen as the most important, but also the most vague currently.
Mr Lee points out the first two arrows are focused on increasing inflation expectations and improving inflationary pressures, with monetary policy weakening the yen, which raises import prices and makes exports more competitive.
The second arrow has led to expansionary fiscal policy, with the aim of increasing demand in the economy and reducing the output gap, however the manager warns: “They’re both policy decisions. You can expand policy for so long, but at some point theoretically you have to tighten it again, so they are temporary measures.”
Jeremy Lawson, chief economist at Standard Life Investments, suggests Abenomics so far “has been partially but not fully successful”.
He notes the three arrows are meant to be complementary, but while the monetary stimulus arrow, in particular, has been quite successful, with core inflation just below 1 per cent and improving economic demand, the third arrow has not delivered.
“The failure so far is that the structural reform agenda is very weak, either on the scale or depth required to turn around Japan’s potential growth problem. Those reforms have been slow to come through. Monetary stimulus can’t solve Japan’s problems on their own.”
Mr Lee agrees that the current strategy has depreciated the currency, therefore import prices have gone up creating inflation, but real exports have not picked up to a great degree.
“The second concern is on asset prices,” he adds. “There are arguments about whether it is working. Straight after the Bank of Japan did their easing programme, [equities] had a really good year, but in the second half they were basically trading sideways.”
Meanwhile, the looming shadow for economic growth is the consumption tax hike and what that means for consumer spending.
Mr Lee adds: “My feeling is the banks should be one of the big beneficiaries of Abenomics, but if you look at how banks have traded after an initial spike, they’ve actually underperformed. That to me is a signal that the market doesn’t believe Abenomics is working and it is not pricing in success in the future.”
The key remains structural reform: what it actually entails and how it’s implemented.
Mr Lawson points out: “Structural reforms are important for delivering stronger productivity growth and stronger real wage growth. The next 12-18 months is a fairly critical period.”
Nyree Stewart is features editor at Investment Adviser
