A new run for the rising sun

3 min read

Once feted for its extraordinary post-World War II growth, Japan now flirts with recession. Tim Rocks, Head of Market Research & Strategy, looks at the challenges in Japan and the potential for turnaround.

Japan’s stellar growth started to wane in the 1990s, starting with a real estate bubble burst. While there was some recovery, the Global Financial Crisis soon put an end to this.

Prime Minister Shinzo Abe was elected in 2012 offering bold plans to regenerate the economy through ‘three arrows’ known as Abenomics.

  • Fiscal stimulus – using government revenue to influence the economy such as through stimulus packages or construction.
  • Monetary easing – where the central bank purchases market securities to reduce interest rates and encourage lending and investment.
  • Structural reforms – such as implementing trade agreements or changes in tax rates.

As part of this approach, the Bank of Japan (BoJ) introduced negative interest rates in January 2016. This policy was designed to encourage banks to lend as they would be penalised for depositing excess funds with the BoJ. However data suggests this hasn’t worked, as unlike in Sweden, the negative interest rate incentives were not enforced on the banks and in turn, bank lending policies have continued to be conservative

What will Japan do next?

Many expect the government to announce a new stimulus package with a range of projects, like a new Tokyo-Osaka maglev train that will travel at over 500km/h, almost twice the current Japanese bullet train.

There are pros and cons to new stimulus.

On one hand, more stimulus will mean poorer government finances. On the other, some studies have shown that more stimulus can help stimulate economic growth by encouraging spending to support businesses and the economy.

If this step is successful, other countries may follow – companies and investors alike may benefit from this.

The next question is how Japan will finance stimulus and it appears likely it will do this by printing money.

Considering the impact to markets and investors

A new stimulus package from Japan may see a boost to the Japanese economy and in turn, translate to benefits for Japanese companies. How long this boost lasts – and whether it is only a short-term result – will depend on the extent and timing of the stimulus.

There can be opportunities for investors from government policies and decisions, but there can also be risks from the potential for volatility during these periods. In our own portfolios, we are monitoring developments in the Japanese market to assess where opportunities and risks may lie and currently have a conservative position on Japanese shares.

Will the rising sun see its economy profit again? Time will tell.

For more information on the impact of Japanese policies on your investments, please contact your financial adviser.

This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Projections given above are predicative in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. Information in this document that has been provided by third parties has not been independently verified and Westpac Financial Services Limited is not in any way responsible for such information. Past performance is not a reliable indicator of future performance.

Information current as at 20 July 2016. © Westpac Financial Services Limited 2016.