When the G8 meets in Lough Erne in Northern Ireland Monday night, high on the economic agenda will be Japan’s ‘Abenomics’.
“With this growth strategy we would like to consolidate our economic growth which would contribute to the world economy as a whole,” Yasushi Takase, deputy director-general of the Economic Affairs Bureau, Ministry of Foreign Affairs (MOFA) told a foreign press briefing in Japan on Thursday.
But as the Nikkei plunged 20 per cent from its recent highs on the same day, concerns about the effectiveness of the economic policy in Japan grew.
Acknowledging the volatility on the markets as he spoke Takase said: “So far, I understand that the market has responded positively, although now, at this moment, there are some adjustments or some volatilities that can be observed, but by and all it is giving an effect on our economy.”
There are three parts to Prime Minister Shinzo Abe’s Abenomics, which have variously been translated as prongs or arrows, or in one instance at least, a bazooka.
There is the monetary policy reform, which consists of buying up government bonds, ETFs and REITs to increase the money supply and lower the value of the yen, fiscal reform and the final “arrow” of structural reform, which was announced late last week.
“Japan has had QE before but it was always hesitant QE. This is non-hesitant QE and thus it’s a bazooka,” chief global strategist, investment strategy group at Nikko Asset Management Japan, John Vail, said of the first arrow.
“Japan has hit an inflection point and there is no doubt in my mind things will not be the same as they were in the past. It may not be fun all the time.”
Also as part of Abenomics, the massive Government Pension Investment Fund (GPIF), which manages over US$1 trillion in assets, recently changed its asset allocation to allow greater investments in growth assets, which is also designed to boost domestic growth. The fund’s changes are:
Vail says that the recent market falls are more due to the understanding that the US Fed will eventually wind back it’s QE program and hedge funds and commodity trading advisors (CTAs) that were caught off guard.
“A lot of it is driven by the fact that hedge funds and CTAs around the world have built up huge positions that might or might not be fundamentally driven,” he says.
“They were massively short on the yen. They were long Japanese equities … they were long emerging markets, quite a lot of them had an interest rate carry trade with the US treasuries, that hasn’t blown out but it has certainly moved a lot.
“They’re being forced out of a lot of these trades…and there is a lot of that going on right now.”
Overall, Vail says fundamentals are still strong and he expects equities to finish the year “not lower” than they are now.
“Long term investing in Japanese equities now makes sense and getting out of cash and low-risk instruments here seems to make sense,” Vail says.
– Penny Pryor, in Tokyo