Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 159

How Japan’s 'Abe-nomics' affects Australian investments

'Abe-nomics' is the name given to the economic programme of Japan’s Prime Minister Shinzo Abe, with another former PM Taro Aso as finance minister, since they were returned to power in the December 2012 election. This radical programme has important implications for Australian investment markets.

Japan’s boom and bust

Japan’s economy has been virtually stagnant since the great Japanese bubble burst at the start of the 1990s. Japan was the great ‘emerging market’ of the post WW2 era – much like China has been for the past two decades. Actually Japan was more of a ‘re-emerging’ market since it had previously ‘emerged’ from three centuries of isolation to become an industrial and military giant in the late 19th century and early 20th century. Japan grew literally out of the rubble of WW2 to become the richest country in the world by the 1970s and 1980s. It became the second largest economy in the world behind the US despite having only half the population of the US. Over the same period the US went from being the world’s largest creditor nation to the largest debtor while Japan became the largest creditor. In the late 1980s, the Japanese stock market even overtook the US market in total value.

But it all came crashing down when the bubble burst after peaking on the last day of the 1980s. The collapse triggered a massive banking crisis that still has not been fully resolved nearly 30 years later. Prices of Japanese shares and real estate have still not recovered their late 1980s peak values even today (so much for ‘buy and hold’ investing!). The economy stalled and has been drifting in and out of recession ever since. Even worse, deflation took hold, driving up the yen and hurting exports and tax revenues. Japan is now the world’s largest debtor and the largest creditor is China.

Abe-nomics

After more than two decades of stagnation and failed experiments, Japan needed a radical new plan. Shinzo Abe and Taro Aso’s radical 'Abe-nomics' programme has several aims: to stimulate growth by cutting interest rates and raising asset prices to encourage spending and investment; to depress the yen to assist exporters and protect local industries from imports; and to create inflation so people will spend rather than save.

The four arrows in the plan

There are four ‘arrows’ in the plan:

  • Monetary policy, with low and now negative interest rates and QE and central bank buying of assets with newly printed money.
  • Fiscal policy, with deficit-funded spending programs
  • Structural reforms, such as in the labour market and in protected industries.
  • (An unwritten but potentially very powerful fourth) Nationalism, aimed against China, since there is nothing like uniting a nation against a common enemy to spur confidence and spending.

There are also additional measures, including directing pension funds to invest more in shares and other ‘risky’ assets.

From late 2012 until mid-2015 Abe-nomics worked well on the yen and share prices but did nothing to revive economic growth or inflation. The yen fell 40% and the Nikkei 225 index of stock prices rose 140% in lock-step, as shown in the chart below.

Then Abe-nomics ran out of steam in mid-2015 and things started to reverse: the yen rose and share prices fell back. Ultra-low and even negative interest rates and QE were losing their effect and structural reforms ground to a halt.

Impact on Australia

Why is this important for Australia? Japanese buying of foreign assets (driven by negative Japanese interest rates and a collapsing yen) has provided a major boost to the prices of Australian shares, bonds and property (listed and unlisted) since 2012. The above also shows how the Australian All Ordinaries Index has followed the path of Japanese stock prices and the yen during the period.

The Abe-nomics effect is likely to receive another boost (flowing through to Australian shares, listed property and bonds) in the coming year as the yen resumes its falls while the US dollar rises with US rate hikes.

Three factors are now in play.

The first is that the US Fed seems ready for more interest rate hikes. This expectation is driving up the US dollar once again after it receded in early 2016 while the Fed sat on its hands.

The second is the Japanese government and central bank appear to be preparing further stimulus actions after several months of inaction.

The third is geo-politics. With the US dollar rising again, the US is now openly opposing yen depreciation – a big switch in strategy since it had supported Japan’s depreciation efforts initially. The switch in US policy is due to the increasingly protectionist rhetoric from both Donald Trump and Hillary Clinton in the US election race.

We expect Japan to win the next phase of the currency war, which would see the US dollar rise, the yen fall and more Japanese money flowing out of Japan to buy foreign assets like Australian shares, property and bonds.

Rising global currency wars and protectionism means the RBA may need to cut rates even further to keep the AUD from rising as the US, Europe, Japan and China all compete to lower their exchange rates. Further rate cuts here would reduce interest rates on bank deposits and would also risk re-igniting the local housing bubble.

 

Ashley Owen (CFA, BA, LLB, LLM, Grad. Dip. App. Fin) has been an active investor since the mid-1980s, a senior executive of major global banking and finance groups, and currently advises investors and advisory groups in Australia and Asia. This article is general information only and does not consider the personal circumstances of any individual.

 

RELATED ARTICLES

Liquidity is abundant despite QE wind down

QE causes currency and fiscal impotence

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.