Investors reacted positively to Japan’s stimulus moves, with the Nikkei average rising more than 20% by early February. The Yen reacted quickly, too, and exporters expected growth as the value of the Yen dropped from about ¥84 per US dollar to about ¥93 by early February, although the move did spark fears about a possible currency war, which were somewhat alleviated by a later G20 commitmentto ensure this doesn’t happen.
Bolstered by the joint stimulus package in January, Japan rose four places in Bloomberg’s latest ranking of the best countries to do business. Some observers expect the changes to have a positive impact, with AMP Capital’s chief economist, Shane Oliver, saying that raising the inflation target to two per cent and adopting open-ended quantitative easing (QE) is “quite positive”. Oliver expects both an exit from deflation and stronger growth in Japan as a result.
Still, other observers are more skeptical. The ‘Washington Post’ economist, Robert Samuelson, calls the policies familiar stuff and says they won’t work. “For years, Japanese governments have adopted stimulus plans,” he told the newspaper, pointing out that the country is “caught in a trap. On the one hand, it needs stimulus to grow. On the other, the debt from past stimulus measures threatens future growth.” The ‘New York Times’ concurred, saying that the new stimulus package will provide no more than a short-term economic boost at the cost of still more government debt, and a package of structural reforms is needed to achieve sustainable growth.
Some are even more pessimistic, with former George Soros advisor Takeshi Fujimaki telling ‘Bloomberg’ that Prime Minister Abe’s fiscal and monetary stimuli “may trigger a collapse of Japan’s economy as early as this year”. And Bloomberg commentator, William Pesek, observed that: “what Abe’s party fails to grasp is that Japan’s challenge is structural, not financial.” Abe doesn’t have a plan, he said, to “make Japan more competitive to take on China, halt Sony Corporation’s slide toward irrelevance, make the labor force more flexible, or inspire young Japanese to start new companies.”
Some also questioned the timing of any impact from the policy changes. Commonwealth Bank currency strategist, Joseph Capurso, told Australia’s ‘ABC News’ that open-ended asset purchases won’t start until January 2014 and most of the debt that the Bank of Japan will buy will be very short-term debt, so any benefit to the Japanese economy is uncertain.
In response to the criticism, Prime Minister Abe told the Japanese Diet [Parliament] in late January that he’s confident the government measures will help beat deflation and achieve sustainable economic growth.
The stimuli policy is clearly intended to improve corporate earnings in Japan, gross domestic product (GDP) growth and employment levels. In all three areas, however, expectations are mixed.
Japanese GDP growth is clearly a key focus of the stimulus package. While observers expect growth over the next several quarters, there is an emerging consensus that there will be less impact in the longer term. Citigroup predicts economic growth will rise to 2.2% in the fiscal year starting April 2013, for example, and it then expects growth to drop to 0.3% the year after. BNP Paribas also expects the stimulus to have little lasting impact, saying that although the new package will lift growth in the short term, “it does not address some of the problems of the economy and might exacerbate them”, since it does not address structural factors and targets spending on low-growth sectors like construction.
Fitch said that while the Japanese government “appears to be committed to reflating the economy via fiscal, monetary and investment-promotion policies”, its Negative Outlook and present assessment reflects the risk posed by high and rising general government debt ratios. The size of the fiscal stimulus package at JPY10.3 trillion is not yet large enough to alter its rating, said Fitch, and the lack of new fiscal policy measures aimed at stabilising public finances could instead lead to a further downgrade.
Corporates themselves have mixed views about the impact of the stimuli on their profits. While companies like Nintendo and Japan Tobacco raised their profit forecasts, according to ‘Bloomberg’, Honda cut its net income expectations because it doesn’t know what to expect. Dozens of other companies also cut their profit forecasts, as a number of them expect weaker sales in China and Europe to have a greater impact than any benefits of a weakening yen.
“A weaker yen will boost our profits,” Toshiba executive vice president, Makoto Kubo, told CNBC, “but if the yen falls too much, that’s also negative because we require a lot of electricity.” And as ‘CNBC’ observed, while the 33-month high for the Nikkei is based on hopes that a weaker yen will revitalise the Japanese economy and not just exports, a weaker currency also carries domestic risks in areas such as energy costs, since almost all fuel is imported.
Currency War Fears
Rapid changes in the exchange rate are also affecting corporates tremendously and forcing them to shift strategies, while also raising fears about a currency war. US companies that do significant portions of their business in Yen are starting to see some serious costs associated with the currency’s recent decline, according to the ‘Wall Street Journal’, which added that the impact of the plunging dollar-yen exchange rate is taking some companies by surprise. It has the potential to worsen if companies fail to put in hedges to absorb some of the impact. Hawaiian Airlines, handbag purveyor Coach and automobile parts supplier, Commercial Vehicle Group, are among the companies hit by the rapid exchange rate changes so far.
On the jobs front, the Japanese government is optimistic and forecasts that all the major new spending will increase employment. On the other hand, Citibank told ‘Bloomberg’ that the impact of government spending won’t spread far beyond public works projects and it estimates that 100,000 jobs will be created rather than the government’s figure of 600,000. Other observers similarly expect lower increases in the number of new jobs than official forecasts.
In the short term, the economic stimulus package and monetary easing look set to give a boost to the Japanese economy, but this boost may only prove to be temporary.
Whether the necessary structural reforms that are needed will follow remains uncertain or, as some others would have it, unlikely. While much remains to be seen, the emerging consensus about the moves in Japan seems to be that the longer-term impact will be more of the same of what happened in the past and will thus be far less positive than the impact in the shorter term. The Japanese economy may still be mired in the stagnation and deflation that have dogged it for years even after these bold government initiatives.
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