Has Japan fallen off the map again?
It is six months since I blogged about Japan. In March I asked whether Abenomics needed a re-boot, as Japan seemed to be sinking back into deflation and Abe’s three arrows to have run their course after six years.
Six months later, rather than Japan struggling to re-join the world, it looks more as if the world has decided to join Japan. Growth in much of Europe is zero, and bond yields globally are also falling towards or beyond zero. Inflation is still on a different trajectory but the policy prescription is likely to be similar.
That is because monetary policy loosening over ten years still has not got western economies, with the exception of the United States, anywhere near where they wish to be. For political reasons, governments of left and right are having to look for other solutions. A combination of some fiscal relaxation combined with more radical monetary easing seems to be the preferred flavour.
As so often at times of change, the more flexible and less dirigiste Anglo-Saxon economies are in the forefront, whether the next government be of the left or right. Europe will almost certainly be a laggard because it finds change difficult, full-stop. I see Japan somewhere in the middle. It has already taken Quantitative Easing further than other countries, with the Bank of Japan lending against a broader range of assets and even purchasing equity ETFs.
In one sense Japan’s high participation rate (nearly 80% of all working-age adults are employed) masks the problems. If you are employed, deflation benefits you because costs come down. On the other hand, the Japanese economy is entwined with China’s more closely and if command-led China goes down a more radical route to support its economy, Japan will have little option. Also, as a society, Japan has little problem with radical change once it has been decided. Witness both the Meiji Revolution and the aftermath of the last war.
Bringing this back to markets, what might fiscal and more radical monetary easing mean? At the economic level, it should of course help domestic-focused company profits. More importantly, though, will surplus cash go into ‘safe’ assets, driving highly-priced companies to even more extreme valuations? Or will ‘free’ money encourage some risk-taking, helping the long tail of cheap companies? Which matters: if the first, we will likely see a continuation of current market trends; if the second, something more akin to normalisation, with the valuation stretch reducing.
If Japan has fallen off the map, it is no longer alone. And I would put a little money on it embracing change rather faster than some other developed countries. Could the forthcoming rugby World Cup and next year’s Olympics act as a catalyst?