Quarterly Investment Strategy
Japan: an accidental winner?
Cyclically, the policy changes promised by the next US President could serve to vindicate Abenomics – enhancing 2017 prospects for the Japanese economy.
The Bank of Japan (BoJ) is now the undisputed pro-cyclical leader of the western world.
Longer term, however, Japan needs much more than monetary or fiscal measures to fix its structural issues.
What should be read into the fact that Prime Minister Abe was the first head of state to meet Donald Trump in person after his election to US presidency? The hard line on protectionism expressed by the President-elect during his campaign and potential strategic changes in the US-Japan security treaty are obvious concerns from Japan’s standpoint– not least because they eventually stand to reinforce China’s leadership across Asia.
At the same time, though, Trumpflation is likely to concede a number of “accidental” victories to Abenomics, actually enhancing the cyclical prospects for the Japanese economy. First, the unexpected upward shock to yields has made the BoJ’s current policy framework the most powerfully pro-cyclical one of the western world. Not only did the BoJ commit last September to controlling the slope of the yield curve and allowing inflation to overshoot the official 2% target, but it has since then – and more quietly – launched unlimited bond purchases to prevent the yield curve from shifting higher.
On the corporate and trade fronts, tax cuts implemented during recent Abenomics years will mitigate Japan's competitive problems vis-à-vis similar potential cuts in the US. Also, while many other countries face a possible unravelling of existing trade deals, Japan would merely have to give up on agreements that it aspired to conclude – with a bargaining position that should be made stronger by its high level of direct investment in the US.
Turning to the military, the fact that Donald Trump wants US allies to boost their defence spending or pay for US support should actually help Prime Minister Abe achieve his goal of making Japan a “normal country”, meaning full-fledged Japanese armed forces unencumbered by the post-war pacifist strictures. Naturally, aggressive defence spending would also provide substantial fiscal stimulus.
Geopolitically, the immediate future is not that grim for Japan. Its arch-rivals in the region both find themselves in difficult positions. Korea is mired in a perfect storm of policy paralysis, corporate mayhem (read: Samsung) and potentially catastrophic disagreements with the US on trade and defence. China meanwhile is very much in the cross-hairs of the US President-elect’s foreign policy rhetoric.
Last but not least, having once been known as the country that changes premiership every ten months, Japan is now the only developed country in which the ruling party controls a majority large enough to amend the constitution at will and can boast one of the longest-serving prime ministers in history.
All this is not to say that Japan’s longer term debt and demographic limitations have magically (or should we say “accidentally”) disappeared. To bolster its structural prospects, the Japanese economy will need much more than “Abenomics meets Trumpflation”.
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