Japan: Assessing Abenomics, the Verdict Two Years On

The Bank of Japan (BoJ) surprised world markets by announcing a further round of monetary easing on October 31. As befits the day on which the US celebrates Halloween, the BoJ had market watchers on the edge of their seats when its policy committee meeting dragged on past noon, not finally concluding until 1:44pm. Three minutes later, their announcement had sent the benchmark Nikkei index 400 points higher. The buying continued with the Nikkei closing up 755 points, or 4.8%, at a seven-year high of 16,413.

This Halloween treat rippled overseas to other major bourses in Asia. Later that evening, the Dow Jones Industrial average followed suit, riding the announcement to a new high. Meanwhile, in the forex market, the Japanese yen (JPY) hit a near seven-year low of more than JPY112 to the US dollar (USD). In short, this news focused the attention of market players on Japan’s market and the progress of ‘Abenomics’, the name applied to the economic revival programme that was first launched in December 2012.

Almost two months earlier Abe had launched the second stage of the policy, with the reshuffling of his Cabinet on September 3. This offered a chance to appraise his core economic policy.

Abenomics Now: Abe’s Letter to the Wall Street Journal

The reshuffle took place nearly a year after Abe had visited the New York Stock Exchange (NYSE) and announced to US investors that “Japan is back” – its economy having last ridden high back in the late Eighties when Michael Douglas played Gordon Gekko.

Abe put in a repeat performance on December 30 at the Tokyo Stock Exchange’s (TSE) final trading session of 2013, exhorting investors to continue supporting his programme into 2014. Today, Abenomics has become synonymous with Japan’s economy and monetary policy.

In a Wall Street Journal article published on September 18 this year, titled ‘The Next Stage of Abenomics Is Coming’, Abe outlined the points below as integral to the second stage of his plan.

  • Reducing Japan’s effective corporate tax: Currently around 35%, there would be a 2.4% reduction this year and further cuts next year, for an effective tax rate target of under 30%.
  • Enhanced corporate governance: Today 74% of companies listed on the First Section of the Tokyo Stock Exchange have an outside director, up 12% in the past year.
  • New entrants in underdeveloped industrial fields: Encouraging new entrants in sectors that had previously attracted relatively few – namely the electricity business and healthcare services. The number of firms in the electricity market surged nearly 60%, from 38 to 59 in one year.
  • Relaxation of visa requirements: The number of foreigners visiting Japan last year topped 10m for the first time, with a 25% year-on-year (YoY) increase so far in 2014.
  • Promoting agriculture as a growth sector: Establishing regional ‘farmland banks’ to promote farmland consolidation and large-scale farming. Plans also extend to reforming traditional agricultural associations to strengthen the competitiveness of Japan’s farmers.
  • Deregulation: Using national strategic special zones to expand areas where regulatory reforms will be implemented to support new businesses, including non-Japanese startups, and create a welcoming environment for talented entrepreneurs, their employees, and home-support workers from overseas. Since mid-July, more than 200 proposals for regulatory reform have been put before the National Diet, or Kokkai.

Soon after the launch of the second Abe administration, the first and second so-called Abenomics arrows of monetary and fiscal policy were unleashed from the quiver. The third arrow of growth strategy structural reforms and the fourth arrow – which has garnered great attention both in Japan and overseas – are taking longer to prove effective. The market has high expectations that more action will follow on the heels of these arrows, action including efforts to accelerate deregulation, innovation, and globalisation.

Growth Strategy Challenges

Back in December 2012, in his first press briefing as prime minister since his one-year stint in 2006-07, Abe told the media that his administration’s mission was to put Japan’s economy back on a firm footing. He pledged to pull out all fiscal and monetary stops to revive economic growth. Indeed, Abe dubbed his team the “crisis-busting Cabinet” and promised to devote his energies to three main areas: revitalising the economy, rebuilding from the Great East Japan earthquake and tsunami of March 2011 and crisis management. To get the economy in gear, Abe stressed his so-called three-arrow economic scheme, designed to revive the economy through a bold monetary policy, flexible fiscal policy, and a growth strategy. Two years on and ahead of a snap election it is an opportune time to take stock of his results.

Celent on Abenomics table 1

The first arrow brought a new dimension of monetary easing to an economy struggling to shrug off decades of deflation. Nevertheless, today the likelihood of reaching the 2015 core consumer price rise target of 2% remains highly uncertain. Observers expect ongoing monetary easing based on how the inflation data plays out, as well as deregulation and innovation policies.

The second arrow of fiscal stimulus can – through two supplementary budgets – be regarded as contributing to bolstering the economy and easing the impact of last April’s consumption tax hike. That said, stimulus measures have relied on conventional public works projects.

As for the third arrow’s growth strategy, the revised Japan Revitalisation Strategy addresses corporate tax cuts and regulatory reform in employment, healthcare, and agriculture. At the same time it lacks anything appreciably novel in new fields such as energy, or in terms of innovation-promoting policies and global strategy.

In an article contributed to business daily the Financial Times on June 30 this year, grandiloquently titled ‘My third arrow will fell Japan’s economic demons’, Abe offer the following points in touting his third arrow and growth strategy:

  • On the promises associated with his third arrow: Structural reform has shifted into high gear entailing the following: reducing corporate tax, enhancing corporate governance, requiring companies to appoint outside directors, adopting a Japanese stewardship code, and reform of the Government Pension Investment Fund.
  • Dispelling concerns related to April’s consumption tax hike from 5% to 8%: Any negative impact is seen as short-lived. The situation differs from 1997 (when the previous hike, from 3% to 5% was introduced) due to a better employment market, rising wages, and growing imports.
  • Sustaining economic growth amidst an ageing and shrinking population: Since Abe’s administration began to promote ‘womenomics’, 530,000 females have entered the labor market and large companies have pledged to appoint at least one woman executive. Diversity is the operative word and inflexible labour systems will be reviewed and improved to empower women, the young, the elderly, and those with special talents.

The market has, by and large, so far given these policies its blessing. Market expectations were buoyed by the May 2014 new growth strategy – a revised version of the Japan Revitalization Strategy. Japanese stocks jumped, with the Nikkei revisiting the 15,000 level. This rebound followed an earlier sell-off by foreign investors disillusioned by the growth strategy (Japan Revitalization Strategy) in the second half of 2013. Investors rang in 2014 with further selling, but the new growth strategy triggered a buy-back. The market has maintained a level of expectations for Abenomics, However, 2015 will be a year of milestones for assessing the success (or lack thereof) of Abenomics. These include the second consumption tax hike, from 8% to 10%, slated for October (although it now appears highly likely this will be postponed), the 2% inflation target and fiscal consolidation.

Figure 1: Nikkei 225 Index 2011-14

Celent on Abenomics fig 1

Figure 2: Foreigners Trading Value of Tokyo Stock Exchange (TSE) 1st Section Stocks:

Celent on Abenomics Fig2

Future Expectations for Abenomics: The Fourth Arrow of Innovation and Globalisation

In June 2013, Japan’s government announced the revitalisation strategy to spur growth. The firing of arrows one and two restored corporate and citizen confidence. To transform the resultant expectations into reality, three action plans were formulated: the Industry Revitalisation Plan, the Strategic Market Creation Plan, and the Strategy of Global Outreach. The global outreach agenda is designed to boost Japan’s share of the pie in international markets.

One year on, a revamped version of the revitalisation strategy in June 2014 further spelled out 10 policies to address high-priority challenges. To restore Japan’s ‘earning power’, Abe called for enhanced corporate governance, a review of public funds management and promotion of venture business, as well as an overhaul of corporate tax reform and the promotion of innovation. In addition, as an engine to drive this reform and new growth, he called for employment reform to harness the talents of women and foreigners, and renewed efforts to spur the healthcare sector, as well as the agriculture, forestry and fisheries industries that support regional communities. This growth strategy is noteworthy for its emphasis on private business shouldering the growth.

Figure 3: Japan Revitalisation Strategy-Three action plans (June 2013):

Celent Abenomics assessment fig 3

Figure 4: Japan Revitalisation Strategy-Strategy of Global Outreach (June 2013):

Celent on Abenomics fig 4

Figure 5: Japan Revitalisation Strategy – Revamped Version (June 2014):

Celent on Abenomics fig 5

Market attention and expectations are now focused on Abe’s fourth arrow, which initially comprised fiscal reconstruction accompanied by consumption tax hikes. This is changing as elements such as Tokyo’s hosting of the Summer Olympics 2020 are added to the mix. Still, market players are unified in their opinion that both additional stimulus measures and sustainable structural reform are needed.

Celent is convinced that innovation and globalisation are economic growth drivers. Today in the financial arena there are two types of globalisation afoot: one is expanding business overseas, the other globalising the domestic market. The former will entail the public and private sector working together in emerging markets (EMs), with a focus on Asia to support merger and acquisition (M&A) activities and overseas production in line with the development of local financial business. The latter will hinge on the globalisation of financial markets and the development of both corporate and retail global financial services – both fuelled by emerging technologies such as digitisation. It must be hoped that Abenomics’ fourth arrow is aimed at innovation and globalisation and that the arrow flies true.

On the evening of 18 November Abe confirmed that he would go to the polls this month, challenging his detractors to come up with better ideas to put Japan on a stronger growth trajectory. In his short speech, he said “We cannot let this chance go and we cannot go back to that dark, troubled period.” Our belief is that it is truer than ever that “you don’t get something for nothing” and Japan’s challenge will continue.

Figure 6: Three Themes Driving Financial Technology

Celent on Abenomics fig 6

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