Some Reasons To Be Concerned About Abenomics

Japan’s Nikkei stock index is up another 0.8% today, hitting a new 6-year high.

2013 has been a banner year for Japan, as financial markets have responded quite favourably to “Abenomics” which is the economic stimulus strategy put forward by Prime Minister Shinzo Abe, which consists of aggressive fiscal and monetary stimulus.

There are signs that Abenomics is working to get Japan out of its deflationary slump. Certainly markets like it, with both stocks and the yen responding favourably.

So what does the future hold? Hopefully for Japan, the economy continues to break out as businesses invest more and consumer spend.

But it’s not a slam dunk. And there are some reasons to be concerned.

Japanese corporate cash hordes climbed to record highs last quarter, which is the exact opposite of what you’d hope to see if the economy were entering into some kind of self-reinforcing recovery. What you want to see is inflation start to lift, prompting businesses to want to invest to take advantage of that. But that’s not actually happening. Surveys do indicate that higher spending is on the way, but it’s not happened yet. So we’ll see

Meanwhile, Shinzo Abe’s personal approval ratings have been tanking lately. This makes pushing forward on measures of economic reform (or getting anything else done) more difficult and give strength to opponents pushing for a different approach.

As for inflation, it’s true that Japan is getting some (finally) but a substantial portion of it has come from importing expensive energy (because the yen has weakened). Real core inflation isn’t actually doing much.

So it’s a mixed bag. There’s some inflation and perhaps some export competitiveness. And companies say they’re going to spend more, but aren’t doing so yet. As 2013 comes to a close, it’s not quite ready to declare victory for Abenomics.

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