Next year, we’ll find out whether Prime Minister Shinzo Abe’s “three arrows”—fiscal stimulus, monetary easing and structural reforms—will hit their target, stimulating Japan’s ailing economy and pulling the country out of stagflation.
The biggest x factor remains the implementation of much-needed reforms to taxes, labor policies, agriculture, immigration, education, social spending and the electoral system.
However, the arrows of fiscal stimulus and monetary easing have hit their marks, with the Japanese yen falling to US$0.009 from US$0.0116 at the end of 2012—an outcome that the market widely expected. Even college investment clubs have appeared on CNBC explaining why they had decided to short the yen.
Weakness in the yen increases the price competitiveness of Japanese exports in the global marketplace.
A weaker Japanese yen also benefits Japan because the nation is one of the world’s largest net foreign creditors. Assets denominated in a foreign currency, account for 60 percent of Japan’s gross domestic product (GDP), whereas liabilities are yen-denominated; a weaker domestic currency increases the value of these foreign assets.
Not surprisingly, Japanese equities rallied when the yen started to tumble in early 2012.
But Japanese authorities understand that a weak yen isn’t a cure-all. Nevertheless, some investors and commentators fixate on the depreciating currency and its implications, losing sight of the bigger picture.
For example, a weaker yen squeezes consumers, forcing them to pay higher prices for the imported energy needed to run Japan’s power plants. The shutdown of much of the nation’s nuclear reactors after the Fukushima-Daiichi disaster has exacerbated this problem.
And dollar-denominated exports have failed to pick up materially, reflecting weakness in the global economy and Japanese companies opting to build more of their production facilities overseas to counter high domestic energy costs.
As a result, Japanese exports declined 3.2 percent from year-ago levels over the first eight months of 2014. However, manufacturers’ overseas production ticked up.
Policymakers have come to the realization that quantitative easing alone won’t solve Japan’s economic woes.