What has Abenomics achieved? Pioneer’s Defend responds

Pioneer Investments’ Head of Global Asset Allocation Research, Monica Defend, assesses the progress of Abenomics – the series of economic reforms implemented by the government of Prime Minister Shinzo Abe – and discusses her outlook for the Japanese market.

What has the new policy course known as Abenomics achieved and what is yet to be done?
Japan managed to exit a long stagnation, also marked by deflation, thanks to aggressive monetary expansion. That was probably the easy part of Abenomics, as it got a major implicit endorsement from the US Federal Reserve; Japan’s quantitative easing accounted for an even larger part of GDP than the US version, but had the Fed not led the way with quantitative easing, we have legitimate doubts that it would have been as effective.

Abenomics has probably succeeded in changing the Japanese mind-set in terms of inflation, anchoring it to a positive number (2%). This change will be tested soon, with the start of pay negotiations’ spring season. To maintain the 2% inflation target, wages have to increase around 4%-5%, but we expect much lower gains from incoming settlements, so that the battle against deflation is set to continue.

Another key arrow of Abenomics is the push for economic reforms, with the aim of making Japan a business-friendly place, especially to foreign investors. Based on early developments, however, this side of Abenomics proved uninspiring and we expect it to fall short of expectations.

How do you value Japan’s market, in relative terms?
Most investors were caught off guard by Abenomics and bought a long-neglected market at relatively cheap valuations. On longer time frames the comparison still looks unflattering, as benchmarks remain a long way from record highs. However, those highs were reached during one of the most notorious speculative bubbles of modern times.

What are the most notable risks going forward?
Global trends aside, the main downside may come from the unconvincing commitment to economic reforms, blocked once again by Japan’s vested interests. Another caveat comes from the currency market, where a strong yen would impair export earnings; domestic demand is unlikely to offset this loss as higher consumption taxes may bite.

Last but not least we have to mention the geopolitical risk, as skirmishes with surrounding countries over territorial issues may escalate. The stand-off with China over a few islets is menacing in itself, but poses risks for economic reasons as well, as China has become Japan’s main trading partner and the two countries share many business links. Any setback, also on the side of reforms, may undermine propects for either party.

Could these risks turn into real opportunities?
Most of the good news seems to be built into market prices, while in the long run there may be opportunities in real estate and building infrastructure in the run-up to the 2020 Olympic Games; the government’s effort to improve the fiscal treatment of equity investments to prompt savers to switch out of bank deposits should also be a positive.

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