Prime minister Shinzo Abe unleashed a raft of proposals to drag the economy out of its deflationary past when he was elected at the end of 2012, but the policies – dubbed Abenomics – have delivered mixed success.
Weak data pushed Japan into a technical recession – two consecutive quarters of negative growth – last week, prompting some to question how much the prime minister’s policies can realistically achieve.
A second hike in the country’s sales tax has been postponed after an initial increase from 5 per cent to 8 per cent looks like it may have had a detrimental effect on the economy.
Simon Ward, chief economist at Henderson Global Investors, said money supply numbers –which he deemed a good signal of economic strength – had improved, as had exports, according to recent data.
“But none of this has much to do with policy and I have been very sceptical about the whole of Abenomics,” Mr Ward said.
“The Bank of Japan’s quantitative easing policy has involved buying bonds from banks and then giving banks cash, which is held at the BoJ. That operation has had very little impact outside the financial system.
“Credit demand is still weak and banks continue to sit on that cash.”
Mr Ward added Europe now charged banks to keep money at the central bank, something Japan might need to consider to make its policy effective.
“Quantitative easing is largely ineffective,” he said. “There has not been a fiscal boost because of the tax hike.
“Also, the reforms are going nowhere. I don’t share the medium-term optimism about Japan entering a new era on the back of Abenomics.
“I do think the numbers will be reasonably favourable in the next six months, but beyond that I would have to be cautious.”
Charlie Diebel, head of macro strategy at Aviva Investors, agreed the underlying picture in Japan was “somewhat muddied” and the latest GDP data a “disappointment”.
He said the belief that the easy monetary policy would solve all ills was perhaps misplaced.
“Since policy makers in Japan have, to an extent, gone ‘all in’, there is no doubt an underlying assumption that any additional weakness in the macro outlook will be met with further stimulus measures,” Mr Diebel said.
Maxime Alimi, economist at Axa Investment Managers, admitted he was “slightly worried” about Japan because Abenomics had relied so far just on the first arrow of monetary stimulus, while the second arrow of fiscal stimulus and the third arrow of reforms had been “very much lagging”.
“I would not be so optimistic on additional quantitative easing,” he said.
“Most people are just playing the yen depreciation and I am not sure that means they are positive on the macro. I’m not sure many people are optimistic medium term.”
Mr Alimi said he had expected negative growth in the third quarter and was unsure why the consensus had envisaged positive growth.
“Exports are picking up and we are starting to see some consumption,” he added.
Backers remain bullish in spite of weak data
While many economists seem downbeat about Japan, those with large allocations to the country in their funds are, of course, more bullish.
Neptune manager Robin Geffen had about 27 per cent of both his Global Alpha and Global Equity funds to the country as at last week. He said he had been more than double the MSCI World index weight at the start of 2014 and had added ahead of October’s announcement about raising stimulus.
“My conviction today that Japan is the right market to back is as great as my conviction in emerging markets 10 years ago,” he said.
He added the market was “experiencing a multi-year rally” as policy makers work to reflate asset prices, and in this context the fall in GDP was “not an overly significant issue”.
JPMorgan Asset Management multi-manager Tony Lanning is also optimistic. He said the country’s easy monetary policy was “the icing on the cake” for Japanese equities, which he has a 17.5 per cent weighting to in his highest risk fund.
“Japan is not just a story for next year or the next two quarters – this could be a three-business cycle event,” he said.
Christopher Mahon, Barings’ director of asset allocation research, said the move by Mr Abe to call a snap election would “reaffirm his power base” and help him implement the ‘third arrow’.
“We expect him to win so we expect to see a lot more supply-side reform to meet the third arrow after the election,” he said.
“After 2015, the key will be has the third arrow been delivered?”
