Abenomics Q&A December 2013


Europacifica CEO Naomi Fink offers timely insights on Abenomics:

1) We know Japan’s GDP growth slowed in the third quarter. The upcoming consumption tax hike was blamed for dampening sentiment.  Is the slowdown a concern for the government and how do you see the outlook for the next 12 months?

It is unlikely that the Q3 drop in GDP is of great concern for the government, as it was well signaled.   Whether asset reflation abroad and price reflation domestically persist is probably of greater interest for the government than one quarter’s soft GDP, particularly after several quarters of healthy recovery.  Moreover, the government announced a Y5.5trn stimulus package in anticipation of slower demand growth following the implementation of the consumption tax hike from 5% to 8%, also meeting market expectations that a stimulus package would be enacted to soften the blow of the tax hike. 


 As I have mentioned in my presentations on Abenomics, expectations (and recovery of risk appetite) are paramount in the reflationary process. It is useful to note here that the survey of consensus forecasters in Japan have upgraded their inflation expectations, while downgrading real growth, so for the time being, the worry of deflation has not increased.


We have had a favourable recovery period, supported by both domestic and external demand.  Even the slower 1.9% annualized growth rate is above the estimated rate of potential growth (0.5%-1% according to the BOJ).  According to the ESP poll (of 40 domestic economic forecasters), the cause for not domestic but external demand growth was the greater concern for the latter half of the current fiscal year. Japanese forecasters have downgraded are their forecasts for 2013 US GDP growth from 1.68% to 1.64% in November.  Yet they seem to be recovering confidence somewhat in December, given their upgrade again to 1.67%. 


If indeed the US economy is slowing, this is potentially a cause for concern, though not necessarily cause for alarm.  Providing the US demand will speed up again (the poll of Japanese forecasters foresees US growth accelerating to 2.58% in 2014), the dip might be one conducive to accommodative conditions abroad, which is helpful for asset reflation. 


See http://europacifica.com/portfolio/abenomics-qa-december-2013/ for full article.