Last December, Prime Minister Shinzo Abe was elected in Japan with a promise of economic revival for a country plagued by nearly two decades of deflation and economic stagnation. Abenomics, a term coined in reference to Abe’s economic policies, consists of a three part (arrow) plan that seeks to end deflation, provide short-term economic stimulus, and foster long-term sustainable growth.
Source: via WSJ Bid to Enter Trade Talks Marks New Phase in ‘Abenomics’
The first arrow calls for aggressive monetary policy to defeat deflation. In March, Abe appointed the former Asian Development Bank President Haruhiko Kuroda as Governor of the Bank of Japan. Kuroda wasted little time in office as he announced the banks’ plans to reduce interest rates and introduce monetary easing policies on April 4th. These actions emulate current economic policies in the United States and United Kingdom.
Inflation must occur to overcome deflation. Japan’s central bank announced their intensions of buying 7.5 trillion yen (roughly $75 billion) a month in bonds in hopes of achieving Abe’s inflation target of 2%. These asset purchases will expand the central bank’s balance sheet by over 1% GDP a month – a rate more than double the current rate of the Federal Reserve (United States’ central bank).
The second arrow provides a catalyst for short-term economic growth through fiscal stimulus (government spending) and aid for small businesses. Abe announced a $117 billion stimulus package to in January supporting these goals. The fiscal stimulus and increased spending on infrastructure contributes to the growth of public goods, is expected to bolster GDP by an additional 2% and assists in creating over 500,000 jobs.
Abenomics’ third arrow requires the creation of sustainable long-term economic growth. Prime Minister Abe aims to achieve this goal by joining the Trans-Pacific Partnership (TPP). A partnership of eleven countries that reside along the Pacific Rim, the TPP strives to stimulate cross border trade and economic growth through the reduction of trade barriers.
Last Saturday, Japan received approval from all the TPP member countries and will join the partnership as the twelfth country. As a result, Japan’s tariffs will diminish and certain imports will gain large shares of the market. Small agricultural based businesses and automotive industry will likely be affected on a domestic level. However, a general positive impact is expected from joining the Trans-Pacific Partnership and the removal of tariffs.
The Japanese stock market has enjoyed a rallied based on optimism and monetary policy since Abe’s election to office. The Nikkei index increased over 40% since December 17, 2012 (see below).
The Japanese Yen depreciated against the $Dollar by over 18% since the elections in December. A weaker currency makes Japanese exports more affordable on a global level and increases the demand for Japanese made goods. This increase in demand leads to higher levels of exports and fosters GDP growth. Below is a graph of USD/JPY since the elections in December.
The most recent G20 communiqué announced approval for Japan’s recent monetary policies and believes the country is targeting inflation. Brazil remains skeptical and believes that Japan is actively engaging in a ‘currency war’. Other critics fear the amount of debt held by the Japanese government. Below is a graph of Japanese debt as a percent of GDP.
Collectively the global community approves of Abenomics but the ultimate test is time. Prime Minister Abe is poised to join the ranks of President Regan (Reaganomics) and Prime Minister Thatcher (Thatcherism) as one of the great economic figures in history if his policies succeed.© 2013 Dividend Buddy This website is for general informational purposes only and does not constitue investment advice. Nothing herein should be relied upon as an investment recommendation. While every effort has been made to ensure the accuracy of information provided this website cannot guarantee the completeness or accuracy of any information published.