Even before Japanese voters returned Shinzo Abe’s party to power, he had already won over financial markets with an economic revival plan as seductively simple as economists say it is risky: print money and spend it.
Lots of it.
The Liberal Democratic Party’s landslide yesterday is likely to sustain a market rally fuelled by economic stimulus hopes, but Abe’s economic legacy will probably be defined by how he tackles chronic ills that easy money alone cannot fix and that were largely ignored during the campaign.
The conservative leader, set to return to the prime minister’s post he abruptly left in 2007, campaigned on a promise to double spending on public works and to push the Bank of Japan for radical action to end deflation and help exporters such as Toyota and Sony by taming the yen.
“The fact that Abe points to changes in the BOJ law or forex levels, or aggressive easing as solutions to Japan’s problems is, if anything, worrying,” said Yuuki Sakurai, chief executive of Fukoku Capital Management which manages $19bn (€14.43bn) in assets.
“They should be treated as tools to buy time to implement structural reforms, but we’re not hearing anything about deep reforms that the LDP wants to carry out.”
The so-called Abe trade — a 4% slide in the yen and more than a 10% rise in stock prices over the past month — shows that for now, most investors just want to see the new leader fulfil his pledges.
The BOJ is poised to heed Abe’s calls for more aggressive easing and a more ambitious 2% inflation target, with markets expecting the central bank to ease policy for the fifth time this year on Thursday.
Investors also expect an extra budget of up to 10trn yen (€90bn) as a down payment on Abe’s plan to spend such amounts per year over the next decade — double the current level — on public works long synonmous with the LDP.
Left to sink or swim with swings in overseas demand for its exports and its currency, the world’s third-largest economy has been in and out of recession and dogged by low-grade deflation for the past two decades.
Now, in firm control of the lower house, Abe has a chance to prove his mettle. So far he has played it safe. His “Abenomics” — a mix of potent monetary stimulus and big public spending — carries little political cost and he has been coy on touchy issues such the US-led Trans-Pacific Partnership free trade pact, or implementing sales tax increases.
With some luck, the new government may even be able to call an end to a brief recession it entered last quarter.
Economists polled by Reuters last week predict the economy will start growing again in the first quarter of next year, largely due to expected recovery in China, Japan’s top export market.
Abe’s first stern economic test will come after August, when the government, armed with second-quarter data, will decide whether the economy is strong enough to go ahead with a first round of planned sales tax hikes.
With 10-year bond yields near a decade low below 0.7%, bond investors are confident he can steer the central bank to buy more bonds from the world’s most indebted government without sparking a market meltdown.
To keep that trust, Abe must convince investors that in his push for big scale-stimulus, he has not abandoned budget discipline. Economists say with Japan’s public debt at more than twice its economic output and climbing, the new government can ill-afford delaying a tax hike that has become a symbol of Tokyo’s fiscal rectitude. Their message is clear: “Just do it!”
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