Can Abenomics save the Japanese economy?

ABENOMICS Japan's dangerous experiment SAXO CAPITA L MARKETS After years of sluggish performance and two decades of deflation, Abenomics aims to boost Japan's real economic growth to 3% by 2020 and raise inflation to 2% within the next two years. But will this untested formula work? What is Abenomics? Abenomics is a radical policy experiment engineered by Japan's prime minister, Shinzö Abe, to revive Japan's economy using a three-pronged campaign of monetary easing, fiscal stimulus and structural reforms. Quantitative Easing Fiscal Structural Stimulus Reforms JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER 11.01.2013 04.04.2013 01.10.2013 Shinzö Abe reveals plans to launch a ¥10.3 trillion ($116 billion) fiscal stimulus programme, including public spending on infrastructure and renewable energy. After setting a 2% inflation target, the Bank of Japan unleashes a massive quantitative easing programme worth ¥134trn ($1.4tn). Abe announces plans to raise the sales tax in Japan from 5% to 8% in a bid to raise an additional $81 billion in revenue. Sources: Bank of Japan, Financial Times How does Abenomics work? The three economic policy levers have helped stimulate export growth, boost share prices and increase consumer spending in Japan through a number of policy transmission channels. Fiscal Quantitative Easing Structural Stimulus Reforms weaker yen -14% lower long term Interest rates higher Inflation Increase In private consumption +0.9% Increase In public Investments' +13.9% -1.05 bp +0.9% rise in согрогate profits Increase In exports +14.7% higher wages higher share prices ? +39.3% economic growth 2 +1.9% 1 Year-on-year growth in March 2013 2 GDP for H1, 2013 3 Year-on-year growth in August 2013 4 YTD against the US dollar from October 1, 2013 5 year to date decline in 10-year Japanese government bonds 6 CPI inflation for August 2013 7Year to date growth in Nikkei as on October 1, 2013 8 Private consumption for Q1, 2013 Sources: Bloomberg Market Data, Statistics Japan Structural reforms key to Abenomics success While quantitative easing will move key economic levers and fiscal stimulus will lay the groundwork for future growth, structural reforms will be key to Move 10 Japanese universities in the global top 100 in a decade, up from two today. UNIVERSITIES the success of Abenomics. Streamline the approval process for new medicines and hospital equipment by creating a Japanese version of the US National Institutes of Health. Join the Trans Pacific Partnership with the aim of increasing the ratio of Japan's international trade under free trade agreements from 20% to 70%. TRADE WOMEN DRUGS Increase the number of tourists visiting Japan from 8.4m last year to 20m in the medium term. FOREIGN TOURISTS Raise women's participation rate in the workforce by creating 250,000 day care places and request companies to have at least one female Split electric utilities generation and transmission businesses and open the monopoly-dominated residential electricity market to competition. * POWER executive. DEREGULATION ZONES Allow cities and regions, including Tokyo, to experiment with deregulation measures not yet approved for the nation as a whole. INFRASTRUCTURE FARMS EXPORTS Help Japanese engineering companies sell more high-speed trains and nudear power plants abroad and triple consolidation of abandoned the value of transport and power-generation exports. Doubling agricultural incomes in a decade through the promotion of exports and the Use tax incentives to restore BUSINESS annual domestic private sector investment to around Y70bn, its level before the global financial crisis, in three years. INVESTMENT and underused rural land. Double the amount of foreign direct investment taken in by Japan, which currently accounts for less than 4% of GDP, by 2020. FOREIGN MONEY Source: Financial Times Abenomics lifts consumer sentiment Abe's economic reforms have been widely welcomed by investors, with Japan's stock market up 42 percent* so far this year. But will Mrs. Watanabe, Japan's archetypal housewife, continue to loosen her purse strings? Aug Jul 43 Jun 3,66 44.3 43.6 May 13,775 45.7 *as of 1 October, 2013. Аpr 13,86 44.5 "The new experiment in Japan has boosted Mar consumer sentiment and that has now 45 Feb resulted in consumers 11,559 44.2 spending more of their money.“ Jan Mads Koefoed, Head of Macro Strategy 43.2 at Saxo Bank. Dec 39.9 Nov ΝΙΚΚΕΙ 225 INDEX 40.1 Oct CONSUMER CONFIDENCE INDEX Sep 3.928 40 40.2 TradingFloor.com Insights Q4 2013 http://www.tradingnoor.com/blogsiquarterly-outiook The dangers of Abenomics While the Bank of Japan's aggressive easing programme has helped the yen devalue against the US dollar, it has created significant uncertainty in bond markets, with Japan's 10-year government bond unexpectedly rising to a record high in May 2013. "We have seen some positive signs from Abenomics, but that was during the anticipation phase. We are now seeing the reality - more volatility in financial markets." John Hardy, Head of FX Strategy at Saxo Bank. USDJPY JGB 10 YIELD USDJPY USDJPY FORECAST 110 - 100 - 90 - 80 - 70 - 60 50 - 40 - 30 - 20 - 0.84 0.77 0.80 0.56 0.96 10 - 2012 JUN SEP 2013 MAR JUN 2014 JUN* *JOHN HARDY FORECASTS USDJPY AT 105 BY THE END OF 2013 AND 110 BY MID-2014. Sources: Saxo TV, TradingFloor.com 83% USDJPY LONG USDJPY 83% of Saxo Capital Markets' clients based in the UK hold a net-long position in the US dollar against the Japanese yen compared to 17% of Saxo Capital Markets' clients in the UK that are net-short USDJPY*. 17% SHORT USDJPY *AS OF OCTOBER 16, 2013 Source: Saxo Bank Research SOURCES: The Bank of Japan: http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf Bloomberg Market Data: http://www.bloomberg.com/ Statistics Japan: http://www.stat.go.jp/english/ TradingFloor.com: http://www.tradingfloor.com/tools/financial-calendar Saxo TV: http://video.saxobank.com/video/8245779/japans-dangerous-experiment Financial Times: http://www.ft.com/int/cms/s/0/693cdd54-ccfe-11e2-90e8-00144feab7de.html Japan Cabinet Office: http://www.esri.cao.go.jp/en/stat/shouhi/shouhi-e.html This infographic has been produced for Information purposes only and should not be considered as investment advice. 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