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HOT TOPIC: Japan’s Market Performance Spurred by “Abenomics” and Revival Hopes

By February 28, 2014No Comments

The Japanese Nikkei Stock Average surprised many investors when it surged 57% in 2013 — posting its best year since 1972 — while Japan’s economy showed promising signs of life after more than 15 years of weakness and deflation.1

A long period of deflation in Japan deteriorated into a spiral of falling prices, wages, and asset prices that stifled economic growth. When prices are falling, consumers tend to spend slowly, save more money, and resist taking on debt because they expect items to cost less in the future.

Shinzo Abe became Japan’s prime minister in December 2012 after campaigning on pro-growth monetary and fiscal policies that have become known as “Abenomics.”2 His goal is to end deflation by sparking a “virtuous cycle,” turning improvements in corporate earnings to wage increases and increased consumer spending.


Aiming for Growth

Prime Minister Abe has used “three arrows” to symbolize his three-phase plan to turn around the world’s third largest economy.

  • Easy money. In April 2013, Japan’s central bank started using bond purchases to expand the money supply and hold down interest rates in pursuit of its 2% inflation target by 2015.3
  • Fiscal stimulus. Two major public spending packages were approved in January and December 2013.4 Government spending increased 6.5% year-over-year, largely on investment infrastructure for the 2020 Olympics and reconstruction from the March 2011 earthquake and tsunami.5
  • Structural reforms. The prime minister has proposed regulation changes that strive to loosen the labor market, keep Japanese women in the workforce, and encourage immigration, although they have proven difficult to implement.6

Progress Report

So far, action related to the first two arrows seems to have produced some measurable results.

  • Monetary policy helped weaken the yen by up to 20% against the dollar in 2013, and corporate profits surged as Japanese exports became more competitive.7
  • Prices have started to rise. Core inflation reached a year-over-year 0.9% in October 2013, a five-year high.8
  • Japan’s economy grew at a 3.8% annualized rate through the first half of 2013. Growth slowed to 1.1% in the third quarter but is generally expected to rebound.9

There is some concern that the economic recovery could be derailed by a consumption tax increase (from 5% to 8%) scheduled for April. The tax was intended to help control the nation’s debt burden and pay the rising costs of social programs that provide support for the country’s aging population.10

To help offset the sales tax hike and foster consumer confidence, the prime minister has asked companies to start raising employee salaries by this spring. However, it is still unclear whether prodding will induce the wage increases that may be needed to sustain the recovery.11

International Investing

Japan’s resurgence shows how investing globally could potentially enhance investment growth opportunities and help diversify a portfolio.

Though it may be tempting to shift more assets into a booming region or nation, there’s no way of knowing how long a “hot” market might last. Investors who chase performance might be more likely to buy at high prices and suffer losses when economic or market conditions shift.

A more appropriate strategy might be to spread a portion of your investment dollars around the world and periodically rebalance your portfolio to help align your asset allocation with your investment strategy over the long term.

Asset allocation and diversification do not guarantee a profit or protect against investment loss. They are methods used to help manage investment risk.

All investments are subject to market volatility and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

1) The Wall Street Journal, December 30, 2013
2–4, 8), December 11, 2013
5, 9) The Guardian, December 9, 2013
6–7) CNNMoney, November 6, 2013
10) The Wall Street Journal, December 29, 2013
11) Bloomberg Businessweek, December 9, 2013

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