Capital Trust Markets – Early this week, a number of key Japanese fundamental data will offer insight into the state of the Japanese economy. Trade and monetary policy is in the spotlight, as traders and investors continue to scrutinize the effect of the ongoing aggressive Japanese stimulus package. The package looks to be working, but looking a little deeper, is Japan heading for trouble?
First, a short history lesson. The lost decade, or two decades, depending on who you ask, have been covered in depth, but it’s worth a quick recap to introduce the situation. In short, throughout the 1970s and 1980s in Japan, low interest rates and excessive monetary easing fueled a huge speculative asset bubble. House prices, land prices and stocks boomed to unsustainable levels, and in response, the Bank of Japan raised interest rates sharply. The raise caused a wave of default, which led to the effective collapse of the Japanese financial system. The collapse fueled a sustained period of deflation, pretty much right the way through until 2012. At the end of 2012, Japan appointed Shinzo Abe as its Prime Minister, and things started to change. His “three arrows” policy, combining fiscal stimulus, monetary easing and structural reforms has started to tackle deflation, and many suggest he is responsible for helping Japan avoid prolonged and serious recession.
However, some have suggested all is not as it seems. Proponents of Abe’s policies point to the increase in CPI starting from June last year as a signal of Abenomics’ effectiveness. Yes, inflation has returned, but core inflation, is still a way behind its raw data counterpart. Why? As is so often the case, it’s all about supply. The nuclear power accident in Japan led to a closing of all the nation’s nuclear stations, which means it is no longer self-sufficient in terms of power production. This shortage of supply (coupled with the increased cost of imported energy as a result of the weakened Yen) increases energy costs, which distorts CPI.
Another problem comes from the increasing government debt. Japan’s current gross public debt is approximately $10T, equating to about 250% of its GDP. Couple this with Japan’s famously aging population (and the near term pension levels this infers), and you get the makings of a potential crisis. An April sales tax hike, from 5%-8%, it intended to counter this potential crisis, but it could just as easily damage consumer spending. Slowing consumer spending could undo the positives of Abenomics and, once again, send Japan into a drawn out deflationary period.
To add balance, Abenomics has sparked an increase in employment, a booming stock market, increased industrial production and rising GDP. In short, all is not doom and gloom. However, traders need be aware that aggressive expansionary policy has consequences, and it can only be a matter of term before they surface.
Written by Samuel Rae – Currency Strategist at Capital Trust Markets
Capital Trust Markets is a fully regulated and compliant online Forex Brokerage, offering a flawless trading environment to traders of all types. The world class trading infrastructure – backed up by advanced trading tools and cutting edge trading software and technology – is combined with award winning customer support to provide a highly successful blend of customized trading solutions.
