Since its election last December, Japan’s new government has radically altered the country’s monetary and fiscal policy.
The man behind the change — Japan’s Prime Minister Shinzo Abe — has, quite simply, stimulated like nobody’s business in an effort to jump start a long-moribund economy.
The long-term consequences of “easy money,” the critics will tell you, may outweigh the short-term jolt. For now, The Nikkei is up 50% year to date. The yen, which Abe has sought to devalue, has reached lows against the dollar and aided Japanese exports.
While the market’s current reaction to “Abenomics” has been a big story of 2013, how Japan’s real economy reacts in the years to come — GDP growth and the end to deflation — will cement Abe’s legacy (not to mention his sidekick Haruhiko Kuroda, governor of the Bank of Japan).
Abe’s policy approach has three prongs (or “arrows”): quantitative easing-like monetary stimulus, government spending, and structural reforms to make Japanese businesses more competitive.
Interestingly, Abe served a first term as prime minister, from 2006-2007, but resigned amid low approval ratings. Now, Abenomics seems to have “worked,” insofar as the economy chugs along with some signs of life.
Looking forward, these “extraordinarily expansive” policies will lead to more growth in 2014, according to PIMCO’s Saumil Parikh. “The lagged positive effects of easy monetary policy will be felt in steady consumption, higher investment and better net trade contributions,” he writes.
“But, tighter fiscal policy via higher consumption tax rates will likely cap the growth trajectory somewhat as Japan looks to find ways to transition to a self-sustained growth path in the year ahead. Expect Japan to grow between 1% — 1.5% next year,” Parikh predicts.
There’s still a long way to go.