Monday 2 September 2013

Too early to call the cards - Abenomics

After more than five years, finally Japan reports increase in prices (inflation). As we all know Japan has been suffering from the decade long deflation and as a result, private investment freezed. In addition, the quantitative easing pursued by the government has induced excess liquidity into the market and as a result of low interest rates and easy access to credit, encouraged the housing market. Bank of Japan is open for further monetary easing. The Yen depreciation further helped the cause that the oil imports became deary! The last quarter saw marginal inflation rate, marginal increase in consumer spending as a result of marginal increase in wages and salaries, and marginal increase in industrial production however not as much promising. Although the Shinzo Abe government that has been in power for the last eight months is showing some promise, there are problems beneath the blanket. 

Japan's aging population is a demographic concern facing the country and baring for extension of retirement age (as also being done by China), there are no concrete measures pursued by the government. 


The economy has not shown any growth ("The lost decade" for Japan) with some extensive thanks to declining private investment, government has plans to bring some momentum - Increase consumption tax (increase tax revenues) from 5% to 10% in two phases and reduce corporate tax rates so as to induce private investment thus resulting in more employment and increased salaries and wages. This is a serious move considering that one of the biggest reasons why Japan is what it is today is because of the consumption tax imposed by Japan during the Asian crisis when the consumption was declining. One has to understand (I am sure it is basic) that when you are struggling to get your population to spend more, inducing tax on the consumption will only result in reduction in consumption thus resulting in reduced tax revenues than when there was no change in tax. Although there are analysts who claim that this tax could bring in early consumption (of things such as car purchase, or asset purchase) and as a result, there should not be any change in tax revenues. 

Finally if you want to see some growth in the economy, you need more private investment. As of now the private sector is just taking advantage of declining yen and exporting and the government is hardly able to motivate big investments. 

I think what Japan is doing is not something new or something innovative. I say this because, they don't have any other choice but to print money and artificially induce liquidity in the market. They have tried all means in the last decade including reducing interest rates but hardly anything moved. By increasing liquidity in the market, making money easily accessible to both private sector and general population, depreciating the value of currency, the present government wanted to achieve - increase in consumption, increase prices (inflation) through rampant consumerism, and increase investment. However Industrial production is a function of consumption (CPI) and profits (Producer Price Index - PPI). CPI on the other hand is a function of wages and salaries and PPI is a function of CPI, Innovation, and reduced cost of imports (has actually increased because of depreciating Yen). Unless there is inflation in the system and unless Producer Price Index moves upwards, Industrial production will not achieve growth rate and as a result it will be hard to motivate any private investment. Both the prices have hardly moved in Japan (Inflation is about 0.7% and PPI has remained constant - 0% - between 2008 and 2013) and so Industrial production is hardly showing positive movement. We all know it will take some time to come out of the lost decade so I am waiting to see if something happens by end of this year. 

With regards to investments, companies such as Toyota are borrowing at extremely easily accessible low interest rates within Japan and investing in China and Thailand. Part of the reason for not investing in Japan is also because of domestic consumption related issues. So capital flight is another concern facing the country. In the last 8 months, Nikkei has gained about 30% and the JGB has been largely fluctuating between 0.8 and 1.3 percent thus indicating that investors are yet to gain confidence in what Shinzo Abe's fiscal policies and Stock market continues to be the best alternative investment. 

However the easily accessible credit has shown positive impact on the real estate and hopefully this sustains (In any developed economy, housing prices movement indicates economic growth). Innovation is something that is at best for Japan because we have not seen Japan on the innovation map for a long time now. But when Investment by itself is not happening in Japan, I am a bit concerned how any innovation could be achieved. Overall, in the nutshell, I think it is too early to celebrate Abenomics. Like many people around, even i am waiting to see what the so called popular "Abenomics" is going to do when they meet in October 2013. Will they bring some reforms in the public policy (Changing demographics), and Fiscal policy (increase revenue potential to the country). There is no better chance for any government in Japan than the current government to pursue any aggressive with little push back because Shinzo Abe for a long long time now has a dominance in both the upper and lower house. Besides what is happening in Fukushima, we are equally concerned about what is Tokyo going to do!

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