Japan Economic Outlook- Abenomics

Macroeconomic Update

· BOJ expects 1.4% GDP growth, Economic Growth 1.5%.

· Inflation to rise to the target 2%.

· Unemployment 3.3%

In 2017 the Japan Economy has benefitted from a weaker Yen, the recent interest hikes by the US Fed have strengthened the USD against the Japanese Yen as the BOJ has kept its rates steady at 0%. The BOJ has been fighting deflation and is getting closer to reaching its goal of 2% inflation. The tight monetary policy that the BOJ has been implementing is starting to show positive effects, as housing prices are beginning to rise, this will lead to increased lending and investment.

Fiscal

Japan’s General account budget rose for the 5th year in a row since Prime Minister Abe came into power and started implementing his plan named Abeconomics. The biggest driver of growth is increasing social security spending, which takes up 30% of the government’s annual expenditure. One of the plans of the Abe administrations was to be able to raise tax revenue but not stifle growth, this would require greater fiscal discipline and flexible policy making. The growth in tax revenue has stagnated in the government’s budget for 2017.

The government has continued to issue bonds that have been bought up by the BOJ in the name of resuscitating the economy. The fiscal position remains shaky as tax revenues are not growing as quickly as the government wants them to.

Private Sector

The Japanese government has focused on policy to drive growth and not engaged the private sector to capture other growth opportunities. Productivity growth in Japan has remained low below 2%. (McKinsey & Company Global Institute)

Industries in Japan continue to record high profits but this has not impacted Japan’s wage growth. Private Sector investment in Japan remains low due to low private consumption, an ageing population and slow population growth. Private industries in Japan have remained hesitant to increase their CAPEX in Japan because the future is uncertain.

The lack of private sector growth may continue to stifle household purchasing power, and local consumer demand will remain low.

Outlook

Growth may not be robust enough to sustain the level of inflation that the BOJ is aiming for. Government may have to look to other means of economic stimulus other than increasing government spending. There is increasing concern that the budget deficit may balloon and government will lose control.

The increase in Global protectionism may have an impact on the exports this, could lead to businesses being hesitant to increase production and raise wages. Manufacturers are very concerned with the policies that the US will develop. This is likely to determine whether we will see increased productivity or a decrease.

The biggest challenge for the Japanese government remains increasing private demand, dealing with the issue of the ageing population and increasing social expenses. The positive for Japan will continue being the weakening of the Yen which should have a positive impact on the country’s exports.

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