Japan rides 'Abenomics' wave 100 days after election win

TOKYO —

The stock market is roaring, the yen has plunged and Tokyo is jumping into a string of long-delayed trade talks, prompting some to ask a question not heard in years: is Japan back?

Prime Minister Shinzo Abe, who is basking in approval ratings topping 70%, marked his 100th day in office last Thursday, with some observers lauding an impressive start.

The conservative ideologue has largely shelved his mantra of tough diplomacy amid territorial spats with China and South Korea, instead focusing on how to make good on a campaign pledge to stoke growth in Japan’s deflation-plagued economy, the world’s third-largest.

The country has been riding high under a leader who appears willing to challenge the paralysis endemic to Japan’s revolving-door political system—in place since Abe’s first one-year run as premier ended in 2007 amid health problems and plunging popularity.

“He has changed the mood in this country. People are optimistic, hopeful for the future for the first time in a very long time,” said Gerald Curtis, a politics professor at Columbia University.

But some are already questioning whether so-called “Abenomics”—a mix of big government spending and aggressive central bank easing—is all show, a prescription that will saddle Japan with more debt.

Years of tepid growth have left Tokyo with a national debt at more than twice the size of the economy, the worst in the industrialized world, while a rapidly aging society threatens to exacerbate the problem.

For now, investors seem to have shrugged off the mountain of challenges.

Tokyo’s benchmark Nikkei 225 index shot up nearly 20% in the first quarter of the year to sit above 12,000 points as the yen tumbled, largely due to speculation Abe’s hand-picked team at the Bank of Japan (BOJ) will print money.

Brokerage CLSA’s annual conference in Tokyo this year saw a big jump in the number of senior US and European investment managers attending as players turn their focus to long-forgotten Japan.

Nevertheless, “a common question is ‘has anything changed apart from the yen?’” said Morten Paulsen, who heads research in CLSA’s Japanese equities division.

Japanese companies have tried to slash costs to counter the strong yen—which makes them less competitive overseas and shrinks the value of foreign income—but “structurally, nothing has changed”, Paulsen said.

“Even if it’s just the yen, it’s still quite meaningful although Japanese managers are being very cautious. They’re not breaking out the champagne.”

Domestic investors have reason for caution too, having seen the Nikkei peak at almost 39,000 in the last days of 1989 before Japan’s asset bubble popped, sending the index and a powerhouse economy plunging over the next two decades.

“I have benefited from Abenomics,” said 47-year-old investor Eiji Shibuya. “But it’s too early to say the Japanese economy is back.”

Observers point to structural challenges, such as the lack of women in the workforce, the government has gone nowhere near addressing.

But there is movement in some areas—the cabinet this week approved a plan to open up the country’s power sector to more competition.

Meanwhile, Abe has forged ahead on the trade front, entering talks on a Pacific-wide free trade pact with the U.S., as well as with the European Union and neighbors China and South Korea, despite testy diplomatic relations.

Trade deals, which have been put off for years, would help both Japanese exporters and consumers, who pay high prices especially for agricultural products, analysts say.

“There is an ‘it’s now or never’ kind of feeling,” said Ivan Tselichtchev, an economics professor at Japan’s Niigata University of Management.

The deals, however, will put Abe on a collision course with Japan’s powerful farming lobby, among others, while the US auto industry is vehemently opposed to giving Japanese rivals greater access to the U.S. market.

Key to Abe’s success or failure are parliamentary upper house elections this summer which could solidify his power base, analysts say.

But they might also let the premier re-focus on his nationalistic agenda and avoid politically unpopular reforms, said Ryutaro Kono, an economist at BNP Paribas, who added that Abe for now just needs to keep “the economy humming with the monetisation strategy”.

Columbia University’s Curtis said Abe’s post-election moves are critical to knowing if his administration is unique, or more of the same.

After that “we will know whether Abenomics is for real or if it has simply dug Japan’s fiscal deficit hole deeper”.

(C) 2013. AFP

  • -2

    markandmiho2

    "Abenomics" appears to be very successful. Congratulations to the Liberal Democratic Party, and Prime Minister Abe. Hopefully, as time progresses, Japan's economy will continue to grow, and that the Japanese will once again enjoy the full benefits of a robust economy.

  • 9

    gaijintraveller

    Abenomics is nothing more than a huge scam. The stock market may be up 20%, but the yen is down by more than 20%. This means investing in the Japanese stock market has not produced a gain but a loss in real terms.

    I believe the purpose of Abenomics is to print more money, much of which will be used to support corruption. This has always been the LDP policy. Just wait till we find out where that freshly printed money goes.

  • 7

    umbrella

    Japan is back?? What rubbish is this?? The stock market is up. So what?? How does that help the ordinary worker struggling on piss poor wages, maybe in some crappy temporary contract job that Japan loves so much. The yen has collapsed leading to massive price increases in fuel costs, electricity and anything imported or made with imported elements. There's nothing to celebrate whatsoever unless you are rich which is of course the purpose of politicians.

  • 3

    sangetsu03

    Japan is back?? What rubbish is this?? The stock market is up. So what?? How does that help the ordinary worker struggling on piss poor wages, maybe in some crappy temporary contract job that Japan loves so much. The yen has collapsed leading to massive price increases in fuel costs, electricity and anything imported or made with imported elements. There's nothing to celebrate whatsoever unless you are rich which is of course the purpose of politicians.

    Japan has painfully few rich, fewer in proportion when compared to America or other industrialized nations. Japanese workers are not well paid, but then again, neither are the executives. Without excpetiion, Japanese electronics companies have been losing vast amounts of money for several years, and the auto makers have just barely been getting by, do you really expect that that they can hire full time workers at high wages under these conditions?

  • 3

    Serrano

    "the yen has collapsed leading to massive price increases in fuel costs"

    Oh good grief, the yen has weakened ever so slightly from the ridiculous 80 yen to the U.S. dollar to not quite as ridiculous 96. Good grief, somehow Japan bought imported fuel and other stuff when the rate was 240 yen just 28 years ago.

  • 5

    Papi2013

    We can only just laugh.

    When you print money like crazy, of course the stock market will rise, where else is the money going to go? The problem is this, this is an artificial lift. Japan is digging themselves deeper in hole more and more. In few years, it's going to get ugly in Japan.

  • 1

    Surf O'Holic

    The current seemingly good times is a snake-oil illusion. The yen had strengthened against the other two weaklings in the schoolyard only because of the currency printing antics of Helicopter Ben and Super Mario. When the BOJ finally caught on and started to copycat, the exchange rate responded. Now it's a three-way race to the bottom. Why do you think a freeze was placed on J-bonds Friday? Sell! Sell! Sell!

  • 2

    Surf O'Holic

    Handwriting on the wall:

    " The Tokyo Stock Exchange had to temporarily stop JGB futures trading twice in the session as the contract exceeded its daily price limit for the first time since 2008.

    The unusually large moves drew some comparisons to the market action of the late 1980s, before the bursting of Japan’s economic bubble."

    Deja vu.

  • 4

    ThonTaddeo

    Gaijintraveller and Umbrella, I agree entirely.

    The stock market has indeed soared, but with the yen having gone into a corresponding decline, you haven't gained anything. (And don't forget to pay those capital gains taxes!)

    The lower- and middle-classes are being wiped out by this catastrophic decline in their purchasing power; inflation is sure to come in a big way. Everyone with savings in yen has just seen 20-25% of their nest egg devoured by Abe and his government. Cyprus gets the bad press for blatantly trying to go into people's savings accounts to take money out, but Japan's theft from savers has been subtler but much more deadly.

    So what we're seeing is Japan abandoning the "90% of the population is middle class" philosophy that has made the country a very pleasant place to live for the past few decades, and replacing it with a US/Euro-style system where there are the connected super-rich and then there are the working stiffs who lose more of their savings to inflation every year, and pay increasingly more for food and energy, and can't speculate in property or stocks to mitigate their losses.

    This is a serious moral hazard. It's the savers who are the backbone of a prosperous nation, not the banksters and the gamblers and the speculators.

    I admit to being biased -- I have substantial cash savings and have seen my net worth plummet (in non-yen terms) literally faster than I can replace the money with more savings. (As an American working for a securities firm, I'm forbidden from buying stock.)

    Only once in the past decade or so has a major currency collapsed as rapidly and thoroughly as the yen: the British pound in 2008-09, which went from the $2.00 level to the $1.50 that it sits near now. And at that time the Brits were not so unsophisticated to think that the UK was riding some kind of wave because of it.

    I was never a big fan of the Occupy protesters, but I'm starting to get behind them. How much more can the government steal before the people rise up?

  • 1

    motytrah

    Wake me when the US to JPY hits 120. You know, the rate it was for most of the 2000's. Yeah, a bunch of folks took a hair cut on their FX investments. Cry me a river. The Japanese economy has been in the dumps for years yet it's FX values were climbing. JPY was the victim of market manipulation and it had gotten so bad that major japanese manufactures were going to go out of business. Sharp may still never recover. Panasonic and Sony are shells of their former selves.

    Abe did what needed to be done. He wouldn't have had to make such moved if JPY wasn't the target of such rampent market manipulation.

  • 2

    motytrah

    @ThonTaddeo That's an odd restriction for a security firm. My restriction is that I have to use a pre-approved brokerage firm that report the transaction back.

  • 1

    kurisupisu

    Has QE worked in the US? More people on food stamps,unemployed and the economy in a deficit.Why would Japan imagine that emulation of the US would lead anywhere different? Japan's backbone was production yet that has been outsourced to China and unless Japan can compete with wages a 1/10 of Japan's then why would jobs return here? Japanese consumers pay some of the highest prices in the world for goods-even Japanese branded goods can cost more here than abroad and the Japanese are going to be paying even more under the reign of Abe. We should we be rejoicing ?????

  • 1

    bfg4987

    Has QE worked in the US? More people on food stamps,unemployed and the economy in a deficit.

    Things would have been much, much, much, much worse without QE. I mean, it's kind of a big deal when your financial system very nearly collapses. I would call QE a resounding success.

  • 2

    motytrah

    @kurisupisu That's a bit of an apples to oranges comparison. The US has trillions of dollars for wars and will continue to endure hundreds of billions in vetrans benefits for decades to come. The other large driver is health care. Japan has several market controls that keep health care costs in check. I think in the near term the larger issue is the aging population and the decline in exports and manufacturing.

  • 0

    dcog9065

    Well Abenomics isn't QE per say. Japanese have decades of experience with QE, but this isn't as much QE as it is government-sanctioned inflation targeting. Plus there is no need to drive bond yields lower than they already are seeing as that line of policy (ie. QE) failed to resolve the gridlocked economy.

    It's much too early to say whether Abenomics will be successful however it does appear to have broken the traditional business climate. The economy is bad because business isn't investing, and business isn't investing because the economy is bad -> if this attitude is changed, then it could be called successful.

  • 1

    ringoffire

    It's interesting that so many have negative comments re: Abenomics.

    While it is still early days, it's not like the status quo ante was working. 20 plus years of economic stagnation wasn't exactly evidence of prior successful economic management.

    Conservative monetary policy by the BOJ obviously hasn't been working and in my opinion it is long overdue for Japan to try to inflate it's way out of a negative, deflationary low growth malaise.

    It's obvious that corporate Japan has been unable to compete with the high yen in the recent past. Look at the losses at companies like Sony and Panasonic. You can't have a successful economy which doesn't create wealth for companies, individual investors and jobs in Japan.

    Of course the next steps, trade liberalization and structural economic reforms will be difficult given the power of special interests. Here is wishing Abenomics good luck, he'll need it.

  • 1

    ThonTaddeo

    @Motytrah - When I joined my firm more than ten years ago, there were no restrictions, but in my second year new IRS disclosure requirements made the company refuse accounts to Americans.

    Combine this with the rule that employees are not allowed to hold accounts with any other brokers, and you get an American employee who can do nothing but hoard cash. If I changed my nationality (or if the IRS stopped requiring these disclosures) , I could trade just like my co-workers do, which is to get the boss's approval in advance and then hold the stock for at least six months before selling (well, that or trade in accounts with other brokers under their spouse's name ^^). I didn't mind hoarding cash as long as the yen maintained its value.

    I disagree the the JPY's rise from 2007-2012 was due to manipulation. The other major currencies saw significant inflation that took away the buying power of the people; the yen didn't, so it rose in value accordingly. Even going back to 2000 or so, salaries and consumer prices are just about unchanged in Japan. Who can you hire, and what can you buy, in the US for the same price today as in 2000? Not much.

    The strong yen was the main pillar holding up Japanese society. Young people could save their money and look forward to the future; imported products got steadily cheaper; talented immigrants wanted to come work here; the entire country could afford to turn off nuclear power and import massive amounts of energy with the only worries being environmental and quality-of-life related rather than economic. What's going to happen with a weak yen and energy prices soaring? Will foreign-born talent still want to come here and contribute to Japanese companies? Why would intelligent young Japanese people stay in the country and earn a steadily-devaluing salary when they could work abroad and make much more money?

    At least Japan's decline is somewhat orderly and well-managed. I'll give Abe that.

  • 0

    sfjp330

    The kind of appreciation the yen is experiencing now isn't necessarily a bad thing. Majority of Japanese imports are contracted on foreign currency and this would allow for savings on import costs with an appreciating yen and make up for some losses expected in export sales. Some of the Japanese firms have accumulated profits in the past years and they can be expected to live off of this while the yen stabilizes. If you take into account exchange rate and inflation, the current level is much weaker than in the beginning of this decade. Many Japanese firms have diversified their procurements and improved hedging, and have been able to cope with stronger yen.

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