Abenomics: doing whatever it takes
In response to a spate of natural disasters and the risk of an economic downturn, Prime Minister Shinzo Abe’s Cabinet approved a JPY 13.2 trillion (about USD 121 billion) fiscal stimulus package in early December. This is the Abe government’s first fiscal stimulus in three years.
In more detail, the fiscal package targets three main areas: 1) providing disaster relief and recovery; 2) mitigating downside risk to the economy; and 3) maintaining economic momentum after the 2020 Tokyo Olympics.
In our view, this stimulus will likely add 1.2 percentage points to Japan’s real GDP over the next four or five years. While potential fiscal support was part of our 2020 scenario for Japan, the latest stimulus is greater than we expected, particularly in the fiscal spending part. As a result, we have decided to revise up our Japanese GDP growth forecast for 2020 from 0.3% to 0.5%.
Japanese companies enjoyed strong earnings growth in the first three years of Abenomics, as the massive weakening of the yen that resulted from bold monetary policy boosted earnings and the stock market. But the correlation between the yen and the TOPIX has weakened since the introduction of yield curve control.
Earnings growth in Japan is sluggish today and margins, which have trended downwards over the past two years, remain lower than in other developed markets.
While the Bank of Japan has bought massive volumes of equity ETFs, foreigners have been net sellers of Japanese equities in recent years. However, foreign buyers have been showing renewed interest in Japan since mid-October.
Japanese equities have a value tilt due to their strong cyclical exposure despite a relatively small financial sector-weighting. This has helped them outperform since the global rotation to value in September. The appeal of Japanese equities will lie in their capacity to improve cash returns to shareholders in an environment of low yields.
At a time when monetary policy is becoming less effective globally, Abenomics, unveiled in 2013, is still central to efforts to stimulate the Japanese economy, with the fiscal package announced in early December just its latest iteration. The package is a step in the right direction, but still may not prevent a slowdown in Japan in 2020.
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