Examination of four concerns regarding Abenomics(Feb 2013)

Maintaining fiscal discipline, shoring up growth strategies indispensable

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  • Mitsumaru Kumagai

Summary

◆In light of the first preliminary Oct-Dec 2012 GDP report (Cabinet Office), we have revised our economic growth outlook for FY12-14. We now forecast real GDP growth of +0.9% y/y for FY12, +2.7% for FY13, and +0.4% for FY14. Forecast revisions were made by taking a broad account of such factors as the formation of a large-scale supplementary budget, and the ongoing depreciation of the yen/ascent of share prices accompanying the Bank of Japan (BOJ)’s adoption of inflation targeting.


◆Abenomics prioritizes three thrusts: (1) bold monetary policies, (2) flexible fiscal policies, and (3) growth strategies to stimulate private sector investment. We believe that it has the potential of sparking the revival of Japan’s economy and that its basic direction is set on the right course. In this report, we examine four concerns involving Abenomics, namely (1) the government failing to maintain fiscal discipline could invite the triple blow of falling JGB prices, falling stock prices, and a falling yen, (2) medium/long-term improvements in the nation’s economic foundation/structural reforms are currently insufficient, (3) employee income will not grow as inflation progresses, and (4) large companies will benefit but small companies will be left out. The first two are the most worrisome—the key to the future success of Abenomics will be (a) selective investment in public works projects while maintaining fiscal discipline and (b) the implementation of policies to improve the foundations of Japan’s economy, such as deregulation, participation in the Trans Pacific Partnership (TPP), and the reduction of the effective tax rate borne by corporations.


◆Japan’s economy slipped into recession after peaking in March 2012. The economy now appears to have hit bottom in November 2012 and to have bottomed out. It is expected to continue expanding, supported by (1) the recovery of the US and Chinese economies, (2) the continuation of reconstruction demand and the formation of a large-scale supplementary budget, and (3) the ongoing depreciation of the yen/ascent of share prices accompanying BOJ’s adoption of inflation targeting. With regard to the last, we believe that a correction of the yen’s excessive appreciation is currently underway in foreign exchange markets. Also, a comparison with the real economy suggests that stock prices are potentially still undervalued at current levels.

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