Japan Economic Update

Japan’s markets are closed until Thursday. The day after they re-open, Japan is expected to report that core inflation fell back below zero for the first time since April 2013. Abenomics has lost its shine with the economy contracting in four of the past seven quarters. 

In some ways, Abenomics was a typical LDP program of fiscal and monetary expansion but on steroids. The reforms that are part of the third arrow have largely failed to capture the imagination of investors though we see the corporate governance reforms as significant. 

S&P’s recent downgrade of Japan to A+, matching the earlier move by Moody’s, was coupled with an ominous warning Abe will likely fail to reverse the deterioration over the next 2-3 years. Debt-to-GDP is around 246% and the budget deficit during the current fiscal year is near 6.2%, more than twice the size of the US shortfall. 

Abenomics has succeeded in boosting the profitability of Corporate Japan. This is a function of the weaker yen and corporate tax cuts. The weakness of the yen has not been used to boost market shares for Japanese exports but has translated into greater foreign earnings.   

August trade figures released last week showed that exports on a year-over-year basis were up 3.1%. However, this is a function of value, not volumes. Consider that Japanese exports to the US are up 16% in value terms but are virtually flat by volume. The value of exports to the EU are up 5.1%, but less by volume. Exports to China drive home the point. By value, they are up 1.6%, but down 4.4% by volume.   

In fact, many expect that over the next couple of months Japan may announce additional fiscal support in the form of a supplemental budget. Expectations of additional monetary stimulus in the form of additional asset purchases are also running high, and will likely be boosted by a the re-emergence of deflationary pressures. Many look for a BOJ announcement toward the end of next month.