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Kishore Narne

By Kishore Narne 05-Jun-2013 | 14:55

From the time we’ve been indulging in the financial markets, Japan has always been deep in debt, mired in deflation with weak consumer spending and low growth, despite repeated attempts by the government between 1992 and 2008 to spur the economy out of stagnation.

With the seventh change in Prime Minister in six years, not much was expected out of current Japanese Prime Minister Shinzo Abe. However, with the will to bring about some change, Abe announced plans to implement new economic policies geared at pushing the recession-riddled country out of its deflationary melancholy. Dubbed as ‘Abenomics’, derived from the preacher of it, Shinzeo Abe himself, Abenomics looks at growth through a three-pronged  plan –

While the policies stated in the Abenomics are not very different from what has been tried in the past, the idea is to put far more firepower behind them this time. Relaxing already very loose monetary policies and sharply raising government spending is expected to boost demand. Infact with two of Abenomics` three policy pillars already in place, we have seen stocks taking off and a free-falling yen that has improved the prospects for exporters. But labeling the strategy a success would be premature.  The third one that requires structural changes is regarded as the most difficult.

What will change for Japan through Abenomics?

The easing monetary policy looks to drive down exchange rates, which will give exports a major boost which in turn will give a rise to corporate earnings. A rise in corporate earnings should ideally lead to higher wages, thus improving private consumption and see a rally in stock prices.

The fiscal push is aimed at reviving growth in the short term through a boost in government consumption and public works investment. The extra spending looks to increase gross domestic product by about 2 percentage points and create about 600,000 jobs by revitalizing local economies.

While monetary and fiscal policies will do most of the heavy lifting in the short term, structural reforms will be the game changer. With investors hoping for changes over the power sector and entry into the Trans-Pacific Partnership (TPP) - a free-trade zone, Mr. Abe has a lot to live up to. His real test will be in creating a “national growth strategy”, which will consist of reforms and deregulation, along with government-led industrial policies. 

Improvements after implementation of Abenomics

Japan’s stock market has risen by over 40% since November. A humongous ¥10 trillion ($107 billion) fiscal-stimulus package has cheered Japanese construction firms. A promise to double the monetary base within two years by the Bank of Japan to end deflation once and for all is targeting 3% inflation in the next two years. A weaker yen has made exports cheaper, helping struggling manufacturers. The first Bank of Japan Tankan survey of business sentiment under the prime minister’s watch shows the mood improving among manufacturers for the first time in three quarters.

What is so different about Abenomics?

While there isn`t much that`s technically new about Abenomics, the sheer breadth and comprehensiveness of its pillars make it somewhat remarkable. Over the past two decades, the Japanese government has spent trillions of dollars in various bids to lift its economy out of a severe downturn catalyzed by the bursting of a real estate bubble in the late 1980s. All it possibly got out of that was the largest public debt in the developed world.

Now there is slight hope that a combination of all these elements and the force will bring about the much needed change.

What does it mean for the global economy?

The effects of this policy will have a long-standing impact on the international arena, especially as the world`s export-led economies begin sounding off warnings about a currency war. Currency war is nothing but competitive devaluation, where countries vie for low exchange rates to boost demand for domestic industry.

A progressive step towards TPP (Trans-Pacific Partnership) could forge an effective partnership between Japan and the United States, who will benefit from a renewed engagement with Asia.

Also, almost the entire rich world is stuck in a zero interest rate liquidity trap situation, and everybody is haunted by the possibility that there`s no way out of it. If Japan shows away out of that, it will be very encouraging. It will put Japan on a pedestal, much like the olden days.

While taking to Abenomics has been fairly simple until now, Japan faces myriad risks in the bargain and there is still a long way to go!

About the Author

Mr. Kishore Narne brings with him a rich working experienceof 12 years in the field of Commodities and Forex and will be responsible forgrowing the group’s Commodity and Currency Business. Prior to joining MotilalOswal, Mr. Narne was associated with Anand Rathi as head of Commodity and Currencyresearch where he played a significant role in setting up their commoditybusiness division He has earlier worked with organizations like RefcoCommodities India (Currently Phillip Capital India) Mr. Kishore Narne is theAssociate Director for Motilal Oswal’s Commodity and Currency Business.

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