Turning Japanese (Part 2)

What is Japan trying to do?

On the face of it, end deflation, weaken the yen, and revitalize the economy. Abenomics is the fiscal and monetary policy package put together by Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda. It consists of monetary reflation, deficit spending, and labor market reforms. For years, Japan was regarded as the sick man of Asia. But if Abenomics can get their economy moving again, that won’t be the case anymore.

As stock prices shot up and the Yen fell, some investors looked at Japan’s potential GDP and thought the market could treble before reaching fair value. But trees don’t grow straight to heaven, and a stray word from the Prime Minister in mid-May broke the up-trend; now the market is down about 20% from its peak. Traditionally, a 20% decline constitutes a bear market. Is Abenomics dead?

Probably not. The market shot up so quickly that investors’ expectations were bound to be disappointed. A minister discussing his concern with Japan’s 240% debt-to-GDP ratio doesn’t constitute a divided cabinet. The Nikkei is still up 50% over the last seven months.

Japan has many options for dealing with its debt and other financial issues. If Abe and Kuroda can break the back of deflation, everyone will be better off.

Douglas R. Tengdin, CFA

Chief Investment Officer

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