Expectation Feeds Abenomics


Japan is slowly allowing more information about its upcoming economic reforms to trickle out into the media. Some of the information is coming from the government, while other pieces are from financial holding companies and investors who likely have connections with Prime Minister Shinzo Abe’s administration. The anticipation surrounding Abe’s so-called third arrow of economic reform is growing, as the effects of the previous two arrows show signs of stalling.

The government floated part of its plans to address the issue of population decline on Sunday, a longer-term strategy for growth that the Council on Economic and Fiscal Policy will finalize later this month. The Abe strategy is beginning to solidify around the target of stabilizing the population at 100 million people around 2020, and sustaining that level for at least 50 years. News of the plan was reported in the Japan Times, yet specifics on how the population target will be reached were not forthcoming. The source simply said that the government’s strategy will include encouraging women to have more than two children, providing support for childcare, and improving education.

The report noticeably left out any reference to changing Japan’s rigid immigration policy. Previous government reports have shown that Japan would need to allow 200,000 new immigrants a year, in combination with a full fertility rate of 2.07 by 2030 (the current rate is 1.39), in order to meet the country’s population target. The Sankei Shimbun reported earlier this month that Abe’s government was considering a drastic increase in immigration, yet officials have given scant indication that real change is on the table.

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While population was the main item brought forth on Sunday, the government “blueprint” also brought forth plans to expand new individual investment accounts that began in January, and a plan to achieve a primary balance surplus, which means in fiscal 2020 Japan “could finance government spending other than debt-servicing costs without issuing new bonds.” Specifics on corporate tax cuts were also not mentioned, as the government’s coalition partners are still undertaking tax discussions.

Apart from plans that the government is circulating, there is also substantial expectation in the financial community. Bloomberg reported Monday that Nomura Holdings Inc. forecasts that the Japanese Government Pension Investment Fund (GPIF) could sell as much as $1.3 trillion in local bonds. Abe’s government has been pushing to restructure the GPIF so that it will invest in more profitable forms of debt (which could boost pension payments), and many investors expect the government to announce a reshuffling within the GPIF this month when Abe unveils his growth strategy to the Diet. Nomura’s forecast predicts that the “GPIF and other public pension funds will shift an additional 12.4 trillion yen ($122 billion) into foreign bonds and 7.5 trillion yen into overseas stocks.” Besides restructuring the GPIF’s assets, the sell-off of government bonds would also further weaken the yen, with a Bloomberg poll based on the median estimate of 79 strategists suggesting the Japanese currency could trade at 108 yen to the dollar by the end of the year.

As the government releases more information, and investors begin to anticipate major structural reform, there are parts of Abe’s new policy that are likely to see little movement. One of those areas is agricultural reform, specifically in relation to Japan’s intention to join the Trans-Pacific Partnership (TPP). Economics Minister Akira Amari told a TPP meeting in Singapore earlier this month that Japan won’t abolish all tariffs on the key imports of beef, pork, wheat, rice and dairy. U.S. farmer groups The National Association of Wheat Growers, U.S. Wheat Associates, USA Rice Federation, the National Pork Producers Council and the International Dairy Foods Association released a joint statement saying Japan should be suspended from TPP talks if it cannot eliminate its tariffs, according to Reuters. While Japanese participation in the TPP is a controversial domestic issue, many experts see it as integral for Japanese competition in regional trade. Being suspended from the talks could create unwanted headwinds for Abe’s government as it seeks to impress foreign companies and investors about its commitment to deep, systemic economic reform.

Expectation surrounding Abe’s next phase of structural reform is building apace, with the government remaining cautiously vague about the specifics the new set of policies will include. Investors are already anxiously anticipating sweeping change in the government’s investment strategy. However, there is little public information to suggest the timing and extent of any reform. Abe’s strategy over the past few months has been to fuel the public’s expectations, in the hopes of building momentum within the economy before the details of his plan are brought to light. Much of Abe’s plan rests on consumer and business enthusiasm for change, which will keep the economy performing while the reality of his reform settles in. It is a tightrope policy that allows for few mistakes. Abe’s management of both information and the timing of his reforms will be paramount.

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