Abenomics 2.0

Abenomics 2.0

After arguably squandering his limited political capital on pursuing a controversial agenda for an expanded role for the military and re-starting nuclear plans, Japan’s Prime Minister has turned his attention back to the economy.   He unveiled Abenomics 2.0. 

Recall that Abenomics was the traditional LDP economic policy but ramped up.  The LDP relied on easier fiscal and monetary policy and a weaker yen.  It has pursued structural reforms, with varying degrees of success.

Abenomics originally had three goals:  end deflation, strengthen current growth, and raise the long-term growth potential.  By this simple criteria, Abenomics has largely failed to deliver the goods.  Last week, Japan reported that core CPI (excluding fresh food) fell below zero for the first time since April 2013.  BOJ’s Kuroda has already postponed when the 2.0% target will be reached, and he seems to be changing the definition of inflation to exclude energy as well.

The economy has contracted in three of the last five quarters.  Over the past eight quarters, the world’s third largest economy has been stagnant.  It is not clear that the structural reforms, associated with Abenomics third arrow, has boosted the potential growth rate.  The most interesting reforms relate to corporate governance and the ascendancy of shareholder value.  It is difficult to evaluate the consequences, as corporate Japan has seen profits boosted by the weaker yen, and the stock market lifted by BOJ purchases, pension fund diversification into equities, and share buyback programs.

In some ways, Abenomics 2.0 is necessary because Abenomics 1.0 has largely failed to deliver on its promises.  Abenomics 2.0 is aimed at boosting potential growth.  Like the first iteration, Abeonomics 2.0 also has three prongs or arrows.

The first is a new GDP goal.  Abe announced a goal to lift the size of the economy to JPY600 trillion from the current JPY500 trillion.  Abe did not suggest a time frame or particular measures to achieve the objective.  Some suggested a 2018 goal, which is the end of the current Diet session though others suggest a 2020 target date.  In any event, it will require more than doubling the pace of growth seen over the last couple of years.  Note that the size of the economy is roughly what it was in 1995.

The second goal is to stabilize the population.  This calls for boosting the fertility rate to 1.8 from 1.43 (2013).  This will entail facilitating household formation by making it easier to marry and have children.  It includes increasing support for families with children and combating child poverty.   Even if the effort is successful, it will take some time before it is economically significant.

The third goal is a new initiative for social security.  Specifically, it is aimed at helping those who work and take care of elderly relatives.  Japan, which has among the worst demographics among high income countries, has yet to take measures that address the implications.  According to government figures, in FY2013, there were half a million Japanese citizens on waiting lists for nursing homes. At least through 2012, around 100k Japanese workers are quitting their jobs to take care of an elderly relative.

There is a certain skepticism that prevails.  Even though the Japanese economy has yet to find a stable path since the sales tax was hiked in April 2014, Abe remains committed to another hike (from 8% to 10%) in April 2017.  In addition, the new initiative to cut mobile phone rates will likely weigh on core measures of inflation.  Mobile phone charges account for 2.2% of the core CPI basket.

It is not clear if Abe plans to go beyond what the large carriers have already done.  The three largest Japanese carriers reportedly offered new discounts to coincide with the launch of Apple’s new phones in Japan.  Since September 11 when Abe first indicated the desire to lower mobile phone rates the carrier shares have fallen 11-13% according to Bloomberg.  The Nikkei is off about 3.5% over the same period.

Japan reported economic data nearly every day this week.  The highlight is the Tankan survey, which is expected to show a small deterioration in sentiment, and more weakness anticipated for the December survey.  Capex plans are expected to be revised lower, despite corporate tax cuts in the pipeline and near-record profits.

The dollar continues to coil in a symmetrical triangle against the Japanese yen.  This pattern is subject to false breaks.  The pre-weekend advance to almost JPY121.25 an example of such.  With falling equity prices and lower US bond yields, the dollar retreated to JPY120.   The bottom of the pattern is seen near last week’s low (~JPY119.20).  The top of the pattern is found near today’s high (~JPY120.60).  Technical studies find that this pattern is most often a continuation pattern (75%), which would point to a weaker dollar.

Given the position shake-out on the China-induced spike to JPY116.20 on August 24, and the prospect oft that the BOJ announces additional measures next month (1 in 3 in a Bloomberg survey expect this) and the prospects of a Fed hike, we do not rule out an upside break of the pattern. A strong US jobs report at the end of the week may help.  Equity markets may need to stabilize first.