BNY Mellon: Ailing Abenomics

December 10, 2018

By Neil Mellor, Senior Currency Strategist, BNY Mellon

In Friday’s briefing we highlighted the clear upside risk to the JPY posed by unceasing trade-related gloom. Suffice to say that any imminent currency strength would arrive at a most inopportune time for Abenomics.

Due to a curious sensitivity to modest increments in its tax burden, the Japanese economy struggled to retain momentum after the sales tax was hiked in the April of 2014.

By 2016 – after the ill-starred introduction of the negative deposit rate at the start of the year – many felt that Abenomics had arrived in the last chance saloon.

But in 2018, Abenomics’ rose from the dead as it were, and by the autumn, we even felt that the BoJ might soon feel inclined to speed up from a dawdle to a stroll on the road to policy normalization (by November last year, BoJ ‘stealth tapering’ had been an open secret for some time).

More than this in fact, with wages and investment growing, Abenomics was finally seeing improvements in areas that are indispensable to a self-sustaining recovery.

But then the positivity faded amid a run of figures that belied the positivity that appeared eminently justifiable just a few weeks earlier – a trend encapsulated by today’s GDP data showing a 2.5% annualized fall, or the weakest figure in four years.

There are mitigating circumstances - not natural disasters from which industry may be posting some ‘catch-up’ growth. But the reality is that the global trade disruptions have exposed Japan’s over-reliance on its export sector, and the economy may now be suffering the ramifications – something the government recognizes all too clearly.

Investment growth has slowed sharply (culminating in today's sharp GDP downgrade)