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Point of view: On the ground insights from Japan

Japan’s government has unveiled an aggressive stimulus package in an effort to reinvigorate its economy. While Japan has previously experienced several false dawns in its attempt to drive a recovery in its economy, we have seen positive economic developments and many signals from the government that it is serious in its resolve to boost Japan forward.

Given these developments, we sat down with our Managing Director in Japan, Toshiaki Yamashita, to get an inside view of the current sentiment within the Japanese economy.

A more prosperous Japan would be a strong source of global demand and an important outcome for Australia, as Japan is Australia’s second largest trading partner. How did Japan come to assess it required bold stimulus measures?

Prior to Japan’s share market bubble burst in 1991, Japan was acclaimed as a global economic powerhouse. The period since 1991 has been referred to Japan’s ‘lost decades’ as Japan, unable to grow its economy, has seen its position as an economic leader become increasingly challenged by other nations. Consequently, its share of global output has shrunk and it has struggled with persistent asset price deflation.

Under the leadership of Prime Minister Shinzo Abe, Japan has begun to implement a mix of strategies to reanimate its economy. This includes:

Steps towards these ends have seen some encouraging developments.

Prime Minister Shinzō Abe has embarked on aggressive actions to get inflation in the economy and deliver a reasonable amount of growth. We have seen a fall in the value of the Yen, stocks rise and some signals of growth.

How do people in Japan currently feel about these developments?

Overall sentiment has been optimistic. People and businesses are encouraged about what could occur within Japan’s economy.

Sentiment can be negatively influenced, at times, by broader macro issues. Tensions between Ukraine and Russia, and concerns surrounding sanctions can impact global sentiment. However, what will be of chief importance within Japan is a change in people’s mindset. In order to underpin a sustainable inflationary environment, consumers and companies would need to be willing to purchase goods and invest. An important observation on this front will be to monitor cash accounts to track if Japan is moving from a savings environment to an investment environment.

Given high levels of government debt Prime Minister Abe decided to raise Japan’s sale tax by 3% in April with some discussions of another increase. The proposed consumption-tax rise will bring the rate to 8% in April from the current 5%.

What is the danger that this rise in sales tax could prove counter-productive to growth?

If factors such as sustainable wage increases are included in the period ahead, than this will likely offset the impact of a tax hike.

The government has been assertively working with companies and labour unions to negotiate sustainable wage increases and some companies, including Toyota and Panasonic, have already announced they will increase staff salaries.

There are signals that the government will put aggressive pressure on companies that do not comply with wage increases. What this tells us is that the government is serious about creating outcomes that could foster an inflationary environment. If wages increase, consumption should improve and that's positive for corporate profits. The aim is to get the Japanese economy into this cycle.

But again, a key factor will be wages. On the whole, wages need to increase around 4% to get an inflationary environment of target 2%.Given the firm stance of the government to promote this environment, if sustainable wage growth is successful, it is likely that any negative effects on growth from raising the consumption tax would be temporary. If initial data suggested the downturn was deeper than anticipated, the Bank of Japan has reiterated it would move quickly to support growth through stimulus measures.

There are discussions of structural reforms to the economy, including efforts to make supply side (e.g., gains from trade) more effective and boost work force participation (e.g., more female workers). These efforts have been articulated as politically challenging.

As these structural reforms are happening, how confident can one be that they’ll prove successful?

While any change is slow, measured and not without its obstacles, as Abe has political consolidation to 2016 his ability to leverage changes will be made easier than if there was a split parliament.

In winter 2012 Prime Ministers Abes’ Liberal Democratic party won a land slide victory in the lower house and in July 2012 the upper house. So this has given the Prime Minister political consolidation until 2016. In addition, his approval rate is very high. Sound political backing and a generally high approval rate makes Abe well placed to push through policies.

Toshiaki Yamashita joined AMP Capital in July 2009. He has over 20 years’ experience in the investment management industry, having worked with a diverse range of international and domestic companies. He holds a Masters of Business Administration from the University of Michigan, a Bachelor of Law from Kyoto University, and is a Charted Financial Analyst (CFA). He is also a Chartered Member of the Securities Analysts Association of Japan (CMA).

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