Is Abenomics working?
Almost one year ago, Abenomics surfaced in Japan. Last November Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda unveiled a strategy of monetary reflation, fiscal stimulus, and structural reforms aimed at ending deflation and reinvigorating a sclerotic economy. How’s it going?
The strength of the recovery in the first half of the year has been striking. The stock market is up 41% in Yen terms year-to-date, and the Yen has fallen 26% from its level a year ago. GDP growth reached an annualized rate of almost 4% in the first half of the year. Year-over-year inflation turned positive in June, lifted by energy and import prices. But core prices continue to fall.
The government plans to increase the VAT—or consumption tax—from 5% to 8% in 2014 and to 10% in 2015. That will show that the they are serious about tackling its debt—but it could also undo the stimulative effect of the lower yen. Far better would be an increased estate tax—taxing holders of government debt to pay down government debt.
A year ago Japan was entering its third recession in five years. The road ahead is bumpy, but Abenomics just may turn Japan’s economy around.
Douglas R. Tengdin, CFA
Chief Investment Officer
[category Global Market Update]