Clearly the wins from a market perspective have been the reversal of a Bank of Japan (BOJ) strong currency policy and subsequent relief rally in Japanese reflation and export sensitive equities. On the direction of future monetary policy, we expect Kuroda and Abe’s “grand bargain” to result in additional BOJ stimulus in return for the Liberal Democratic Party’s (LDP) implementation of the scheduled October 2015 consumption tax hike from 8% to 10%. Additional measures would likely involve more exchange traded fund purchases and a clarification of the open-ended nature of the current program.
Out of all the major economies, Japan’s money printing efforts are the most extreme and whilst it is difficult to normalise the impact of last April’s consumption tax hike, both realised inflation and future inflationary expectations seem to be rising. Clearly, the “tail-risk” associated with the BOJ’s “reflationary” policy would be a larger than expected currency devaluation, after-all, the BOJ is buying around 85% of the annual net issuance of Japanese government bonds and expanding its balance sheet at an annual rate equivalent to around 13% of GDP.
If the Japanese household in true group-think like fashion wakes-up one day slighting spooked by this reality, the domestic move out of Yen assets could be interesting. Paradoxically, individual Japanese equities that represent a true inflation hedge or a call on foreign assets should do reasonably well, at least in local currency terms (and we’re hedging out a lot of the local currency exposure). It’s this “tail-risk” that should have the Abe administration fully focused on productivity-related reforms and whilst the sound bites and atmospherics remain encouraging, there’s been distinct lack of progress on key issues such as:
- Agricultural reform and a Transpacific Partnership trade deal, though this isn’t just a Japanese issue.
- Facilitation of a more flexible and dynamic full-time workforce via employment law reform.
- Linked to this, polices designed to encourage Japanese companies to merge and deal with fixed cost duplication and recycle redundant full time labour into more productive roles.
The slow pace of labour reforms is leading to the paradoxical outcome of Japan suffering labour shortages AND poor income growth. The labour shortages are occurring generally in the more lowly skilled/paid service sector as part-time workers seek higher paying full time roles as the economy recovers, whilst more highly skilled/paid full time workers don’t seem to have sufficient bargaining power to drive real wage growth, an issue in common with other major developed world economies.
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Abenomics Update - Japan
Enough time has passed since the advent of “Abenomics” to justify a mid-term report card.
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