Making a break from the past is important for Japan to move forward!

Well Intentioned Policy from Abe Falls Flat

Abenomics the eponymous economic policy crafted by Japanese Prime Minister Shinzo Abe has been anything but a runaway success. Elected into power on the proviso of turning Japan's economic fortunes around, Abe drafted what is known as ‘Abenomics’. Some have likened it to the Japanese version of ‘Reaganomics’ but the results to date have made such comparisons spurious at best. The Prime Minister had noble intentions when he cobbled together an ambitious economic plan to resurrect the Japanese economy. Of course, he was attempting to reignite the passion and fervor that characterized Japanese industrial success in the 1980s and 1990s.

Back at the time, Japan was the leading power player in electronics, innovation and technology. Products like the Sony Walkman were a worldwide sensation, but things have changed since then. It has been said that you can never recapture situations exactly as they occurred because the environment and the multitude of factors that existed at that time are no longer. Unfortunately for the Japanese Prime Minister, very little could bring back those glory years that Japan enjoyed back in the day. The policy of Abenomics calls for a substantial depreciation of the Japanese yen in order to make Japanese goods, services and companies that much more appealing and competitive on global markets.

Japanese Economic Contraction Likely to Continue

The currency depreciation in Japan actually served to bring about a different result than what the Prime Minister expected. Instead of encouraging an expansion of business operations across multiple industries and sectors, and the employment of far more people, companies began reducing their investments and cutting back on employment. We have already seen that the Japanese economy is shrinking, and two successive quarters of GDP contraction are technically considered a recession. Whatever well-intentioned undertakings the Japanese leadership envisioned have fallen flat. We are now at a stage where the global economy is under tremendous pressure as a result of Asia/Pacific weakness.

Not only is the Chinese economy at a critical crossroads, but Japan is staring down a barrel too. Chinese imports for September declined by 20.4% year-on-year and for October they declined by 18% year-on-year. These metrics are especially important since Japan has China as its major trading partner. For example, Japanese exports to China declined by 3.6% in October 2015 year-on-year. Japanese imports from China were last recorded at $163 billion – a vast sum of money which underpins the strategic importance of a successful economic partnership with China. October exports from Japan dropped by 2.1% (year-on-year) to ¥6,543.96 billion. A month earlier, the September figure was recorded at ¥6,417.356 billion.

Factors Contributing to Poor Japanese Performance

The Japanese recession was brought upon by a worse than expected 0.8% annualised rate in Q3. That the Prime Minister has been attempting to kickstart economic growth to combat deflation has proven largely inefficacious. Japan has many other challenges facing it, not least of which is its declining population. The Bank of Japan, like the Fed and the Bank of England has been targeting an inflation rate of 2%. That figure seems light years away given the inherent weakness in the Japanese economy. With two successive contractions – Q3 and Q2 – the Japanese economy is shrinking fast. There is a contrarian perspective which is of the opinion that Q3 performance figures were largely result of inventories being run down.

When inventories are sold, production is not factored into the economic growth model – despite the fact that sales are taking place and revenues are being generated. Once inventories reach critical levels, production will get started once again. It should be remembered that Japanese corporate profitability is at an all-time high and the level of employment income continues to rise. The problem for Japan however is investment. Many Japanese companies are seeking to take their capital outside of the island nation and this is hurting economic growth prospects. The Japanese government is now also considering further monetary stimulus pending the GDP figure. Analysts are however of the opinion that the GDP data will be unlikely to warrant further quantitative easing. Nonetheless, monetary stimulus will likely continue. The goal of Abenomics is to restore Japanese economic growth and inflation targets.

The Strength of the JPY

Back in 2011, 2012 and much of 2013, the Japanese yen was trading in a tight range against the USD. The exchange rate was approximately 80:1, compared to the 2015 rates which have consistently risen above the key ¥120 threshold. The sharp depreciation in the Japanese currency is a direct result of Prime Minister Abe Shinzo’s ‘Abenomics’ policy. For all intents and purposes, the focus should not be exclusively on Japan's relationship with the US vis-a-vis the Trans Pacific Partnership Deal. Since China is responsible for contributing 13% more to Japanese Gross Domestic Product (GDP) than the US, it makes sense that the focus of Japanese economic policy should be on China at least during this highly volatile phase in the country's history.