Despite the disappointment that the Bank of Japan (BOJ) did not act this week, one should not listen to those proclaiming the death of Abenomics. Indeed, it is alive and well.
Many people somehow suggest that Abenomics has so far been a failure, but this is only partially true if you were expecting miracles. The truth is:
- Even after its recent rise, the current level of the Yen compares favorably with the 78:USD level before Abenomics;
- TPP (the Trans Pacific Partnership) was successfully negotiated, which requires substantial economic reforms, especially in the heretofore heavily protected agricultural sector.
- The 2% CPI target was ambitious, but CPI ex food and energy is now near 1% compared to flat or negative prior to Abenomics
- Japan now believes in shareholder value, share buybacks and improved pretax profit margins, which have soared to record high, especially in the non-Yen sensitive service sectors
- Corporate taxes were lowered by a massive amount, so recurring net profit margins are improving even faster than pre-tax margins
- When looking at the overall economic picture, not the macro-economic statistics, which likely do not accurately reflect the new economy and often get revised, one sees full employment, stable or rising property values (after decades of wealth-sapping declines), and solid international competitiveness in advanced industries
- Political stability reigns whereas previously the prime minister was an annually revolving door; and lastly (although there are many more examples)
- Women are increasing their share of the labor force and over 200,000 kindergarten slots have been created in the last two years.
As for the BOJ, the likely reason why it decided to wait this week was to make certain that its next step was perfectly organized logistically, compared to its negative-rate decision in January. Certainly, the logistics for an ECB-style TLTRO (Targeted Longer Term Refinancing Operations)-like program is much more complicated than simply increasing QE purchases, and requires much more planning and transparency. But delay does not mean surrender, and if anyone thinks that Governor Kuroda is not fully dedicated to achieving positive inflation expectations, they are gravely mistaken and will likely be unhappily surprised when the BOJ takes its next large action, likely in June.
TLTROs, which provide negative-rate funding to banks if they can prove that it is going towards increased lending, are necessary, as in January, negative rates on excessive reserves led analysts to cut banks’ earnings estimates, which led to a broader equity sell off. Since price (including asset prices like real estate and equities, in order create the “wealth effect”) inflation is a key part of Abenomics, banks must not be penalized too much, or else lending and equity prices will not rise steadily.
Besides TLTROs, the next BOJ move will also likely increase the amount of bank reserves that are not subject to negative interest rates. We also expect an increase in ETF purchases to a level that will start to have monetary policy implications instead of just being symbolic of the BOJ’s desire to increase risk appetite by the Japanese people.
As for the fiscal “arrow,” “Helicopter money” is a vague and controversial term. If it means a hazard and extraordinary surge in fiscal spending financed by monetary injection, then such is not likely. However, Japan is soon going to increase fiscal spending substantially, especially due to the earthquake, and the BOJ will indirectly finance much of this.
Thus, the monetary and fiscal “arrows” will accelerate soon, while the economy is likely to continue growing at a moderate rate. It would be helpful if the US would pass TPP, but even if it does not, Japan will likely implement most of the reforms anyway, as such are obviously necessary, especially in the demographically challenged agricultural sectors. Other reforms, including in the labor markets, will also help prove that Abenomics is alive and well. It is critically important, however, that Japanese corporations are pro-active in this effort. They need to invest more locally, rather than abroad, and to be more creative, along with entrepreneurs, in creating new ventures, especially in green technologies. Abenomics is not just about the Prime Minister and his team, it is about Japan’s future as a whole.
John Vail is Chief Global Strategist at Nikko AM.
