“The excitement Japan’s fresh start once aroused has long since ebbed,” says the FT. The Nikkei took off like a rocket in 2012 when ‘Abenomics’, the government’s attempt to end years of stagnation and deflation, was launched. But it has been treading water for much of this year.
Prime Minister Shinzo Abe decided to raise the consumption tax, the equivalent of VAT, in April in order to boost government revenue and help cut borrowing. The move restored some fiscal credibility: the budget deficit has declined to a five-year low of 6% of GDP.
But weak data in recent weeks fuelled fears that it has also snuffed out the economic recovery. There is now talk of postponing a further tax hike, which had been planned for next year.
However, it’s too soon to write off the rebound. Industrial production has been sliding since February, but the economy should by now have adjusted to the slump in sales triggered by the tax increase, says Capital Economics.
Firms are reporting little spare capacity, which bodes well for higher capital expenditure. And retail sales have ticked up, suggesting that consumption is recovering. Japan should also benefit from falling oil prices, as petroleum products comprise a fifth of its imports.
Nonetheless, the Bank of Japan seems likely to increase the pace of its quantitative-easing programme, as inflation looks to be weakening again. Looser monetary policy bodes well for equities, and also implies further weakness in the yen.
That in turn means higher profits for Japan Inc: the yen’s slump accounted for almost half of the 30% jump in corporate profits over the last two years, says Capital Economics.
What’s more, some of Abe’s biggest reforms are coming to fruition, adds Peter Thal Larsen on Breakingviews. One of the most investor-friendly is a shift in the holdings of the Government Pension Investment Fund towards riskier assets. It plans to raise its allocation of domestic stocks to about 25%, from 12% today. Labour market liberalisation is on the agenda, but will take time.
Meanwhile, Japanese firms are under pressure to raise dividend payouts, given their relatively strong balance sheets. And they are also still reasonably priced, with many trading below book value. All told, the latest setbacks for Abenomics “are a speed bump, and not the end of the road”.