Abenomics is failing to deliver feel-good factor

He not only promised bold action but introduced some concrete goals to judge progress by. These were ambitious by design, but unfortunately the credibility of a number of these measures has been seeping away.

Bank of Japan (BoJ) governor Haruhiko Kuroda’s pledge to achieve a 2 per cent inflation target in two years looks no closer than when he announced it in April 2013. The initiative to build a ¥600trn (£4.3trn) economy by 2021 also looks in jeopardy, with nominal growth required to exceed 3 per cent in the interim.

To put this in perspective, two of the past four quarters have seen the economy contract on a nominal basis. The question is has the failure to meet Mr Kuroda’s aims delivered a fatal blow to the Abenomics project?

As anyone who has participated in a lottery can testify, multiple failures are not necessarily a deterrent to buying a ticket. As long as some success stories exist they can impact expectations more widely. The most obvious candidate in Japan is the surge in jobs. With unemployment at a 19-year low of just 3.2 per cent and the jobs-to-applicants ratio at a 24-year high, few labour markets can claim to be as healthy.

Given the inability of Abenomics to generate a feel-good factor, it is no surprise that the deleveraging instinct remains intact among Japanese corporates and households Govinda Finn, Standard Life Investments

This achievement has rightly been celebrated but there is a rather large caveat. With unemployment falling, wage growth would have been expected to rise as employers bid up wages and consumption to grow. But this has coincided with higher participation rates, with the senior labour force having increased by 1.35m since 2013, while female participation has also risen noticeably.

Unfortunately, many of these new additions to the labour force have taken up non-regular employment, which has outstripped full-time employment in recent years and has subdued average total compensation. It has also served to dampen consumption, as the propensity to save among these cohorts is higher given the income is often deemed supplementary.

Another potentially winning story is the decline in corporate bankruptcies, which have fallen to the lowest level in 16 years. Again this would typically be welcomed as a sign of robust corporate health. But investors should be wary about exaggerating the importance of this figure as it may reflect Japan’s unusually slow economic metabolism.

Even during the global financial crisis, bankruptcy rates barely rose, while start-up rates are less than half those in the US.

Perhaps even more worryingly, corporate behaviour does not reflect a renewed confidence, with the yen-induced surge in profitability among Japan’s listed exporters failing to trickle down to the rest of the economy. Indeed, cash hoarding remains a persistent problem, with accumulation of capital and deposits in the past three years reaching 6 per cent of GDP.

Given the inability of Abenomics to generate a feel-good factor, it is no surprise that the deleveraging instinct remains intact among Japanese corporates and households. To conclude that this is a temporary phenomenon, there would need to be a significant improvement in leading sentiment indices. Unfortunately, consumer confidence continues to tread water, while the large and small company indices are both depressed.

The onus is on policymakers to find the tools to succeed, and in so doing convince a sceptical public that the future will be brighter than the past. On the other hand, if the role of monetary policy is diminished the policy mix is unlikely to prove as favourable to risk assets as that seen in recent years.

Govinda Finn is senior analyst in the global strategy team at Standard Life Investments