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Japan: The Sun Also Rises

Shinzo Abe came to power in Japan in December 2012 with his famous three arrows plan. It is time to evaluate Abenomics and ask where Japanese financial markets go from here.

Monetary Expansion. Haruhiko Kuroda became Bank of Japan governor in March 2013 and at his first policy meeting he announced a “Quantitative and Qualitative Monetary Easing” package aimed at raising inflation to 2%. The BoJ has since increased the programme in size and extended its scope as well as pushing interest rates below zero. However, core inflation was only 0.4% yoy in June and has remained stubbornly well short of 2%.

So has Mr Kuroda failed in his mission? Strictly speaking, yes, but Japan has shifted from mild deflation to mild inflation. In the decade to early 2013, consumer prices (ex-food and energy) fell steadily by around 1/2% a year; since then, they have risen by nearly 3/4% a year. While less than Mr Kuroda might have hoped, there has been cultural change.

Flexible Fiscal Policy. The impression is that fiscal policy has been equally bold and expansionary. In fact, IMF data suggests the opposite. Japan’s budget deficit has shrunk, in both nominal and structural terms, by around 3 1/2% of GDP since 2013. There have been “supplementary budgets” but only against the backdrop of an ever-tightening fiscal policy.

The cabinet unveiled yet another economic package, totalling ¥28.1trn or 5.6% of GDP, on 2nd August but direct government spending will be only ¥7.5trn, it will be spread over several years and it includes the purchase of land which of course will not add to growth. In other words, this arrow has not even been fired, let alone been successful or unsuccessful.

Structural Reforms. The big hope was that Japan would introduce some real reforms in order to kick-start the economy. It is hard to measure the impact of structural reforms but the table below, courtesy of the Financial Times last year, gives a sense of what has been achieved.


The conclusion is that much remains to be done. There have been some successes such as getting 1.2 million more women into the work force but, damningly, Japan slipped to 34th in the World Bank’s Ease of Doing Business rankings this year from 30th last year, behind all bar Italy of the G7 countries.

So should a sterling investor be in Japan? The answer is no for the bond market. With negative JGB yields out to 12 years along the yield curve, there is very little reward for significant risk.


However, the answer is a qualified yes for the equity market. Over the past five years, Japanese equities have outperformed UK stocks in sterling terms, turning in a respectable 61% total return. In addition, the correlation between Japanese and UK equities is markedly lower than with the other major equity regions.

Looking ahead, the prospects are fair: the economy will continue to grow; inflation will remain positive; equity market valuations are cheap; monetary policy will remain loose. One note of caution, though – when the Japanese stock market goes up, the yen tends to go down and vice versa. So far this year, the JPX Nikkei 400 is down 17% in yen terms but up 12% in sterling.

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