Japan is back | Signs of recovery
For 23 years, Japan saw it all but growth: depressing fertility rates diminished the long run stability of the country, a NIKKEI as low as 6,000 yen, two enormous earthquakes (Kobe in 1995 and Tohoku in 2011), deflation and stagnation, Fukushima nuclear crisis, trillions of yen in private and national debt, the decay of once feared tech giants (PANASONIC and SHARP, to mention a few), etc.
Then Mr. Abe came. He had been on power once but this time is different. With a strong commitment to end the long period of stagnation in the middle of its 5th recession in 15 years, Abe came back to power on the 16th of December of 2012, 5 years after his first attempt to change the economic growth fate of the country. The question is, will he be able to achieve his objective this time? Can he deliver the so much needed economic growth to the country? Can Japan, under Abe, be back on the economic growth track?
The man who vowed to reverse falling wages, near zero interest rates, depression and the highest debt to GDP ratio in the world (220%) came up with a plan that we call Abenomics:
1) Talk the talk: Promise you will actually solve the Japanese problems. State it once a day. Shout it to everybody. Bully those who do not believe in your words, like conservative Central Bank governors. Fire them. Make the market believe in your words. If they believe it can happen, it will happen: bravado all the way
2) Weaken the yen: Abe has said he will be very comfortable with a 100 yen per dollar exchange rate.
3) A 12 trillion yen stimulus package, mainly with infrastructure plans ($137 billion dollars) and perhaps more on the way.
4) Lift the 44 trillion cap on debt.
5) Buy and lease back industrial plants to promote investment.
6) Get a 2% inflation target or die trying. Use "whatever it takes". Change the bank power balance. Continue with asset purchases. Print the way out to economic growth.
7) Repeat 1 to 6 until you make it.
Three early signals he might be doing it right so far:
1) Japanese equities are hot again
Signs of a recovery in the country’s equity capital markets are emerging as stocks rally and the yen looses against its 16 peers. On December 4th the Nikkei was trading at 9432 yen and now it is trading at 11,652 yen. This is almost a 20% increase. NIKKEI 225 is not an exception. Even small caps are performing well! And in a country famous for having not so many startups, this could be a good sign that more innovation and entrepreneurs are on their way.
2) The Yen is low
Specially after Kuroda's nomination. Kuroda has literally stated that he will take whatever it takes to weaken the yen. Now at 93 yen per dollar, it is very likely that the trend will continue for several weeks. The initial balance sheet expansion that the Bank of Japan planned at the beginning of the year could be further expanded, with additional asset purchases (a 15-20 trillion yen increase), in order to continue pushing the yen down.
However, pure monetary policy combined with rethorics cannot sustain the weak economy of Japan for months. Sooner or later, highly political structural problems -like the lack of stimulus for entrepreneurship or the low fertility rates- would need to be addressed. We hope that Abe continues walking the walk when that moment comes.