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Is Abenomics still working?

Is Abenomics still working?

Questions about Prime Minister Shinzo Abe’s reforms have gathered pace in recent weeks, following Japan’s worst GDP slump since the 2011 earthquake and tsunami.

Japan’s second-quarter GDP fell 6.8% relative to the previous three months, largely due to the effect of the recently introduced sales tax on consumer spending. This is in contrast to the 6.1% GDP rise in the first quarter of 2014, attributed to a sales rush before the consumption tax came in. Overall, Japan’s GDP is estimated to have fallen by 1.7% quarter-on-quarter.

Capital Economics expected a narrower 1.3% quarter-on-quarter decline and, following the weak GDP data, has adjusted its growth forecast for Japan for 2014 from 1.5% to 0.9%.

Japan previously experienced a consumption tax hike in 1997, with similarly negative effects.

Andrew Rose, Japanese equities fund manager at Schroders, said that even though the impact of the sales tax hike was more severe than 17 years ago, the contraction in figures was not as bad as initially expected. 

‘While undeniably weak (and significantly worse than the quarter immediately following the last consumption tax increase in 1997 – although the degree of front-loaded demand was also lower at that time) the rate of decline was slightly ahead of consensus expectations,’ he said.

Rose said some figures from Japan were encouraging, including survey data on private capital spending and exports. ‘Whilst the dislocations caused by the tax increase render it difficult to gauge the underlying strength of the economy, it seems reasonable to expect growth to resume in the third quarter,’ he added.

Marcel Thieliant, Japan economist at Capital Economics, said retail sales were already recovering faster than after the previous sales tax hike in 1997. ‘Our forecasts still foresee a return to growth in the second half of the year,’ he said.

However, Thieliant added that growth in the current fiscal year might be close to zero, rather than the 1% expected by BoJ, highlighting the case for policymakers to do more. ‘The upshot is that a more aggressive policy stance may still eventually be required,’ he said.

Simon Ward, economist at Henderson Global Investors, said Japanese monetary trends continued to show remarkably little impact from quantitative easing, and extending the policy would be unlikely to make a difference.

‘The BoJ and banks have, in effect, swapped Japanese government bonds and reserves, with no impact on the supply of money to households and firms,’ he said.

Ward said the government needed to enhance confidence in the credit markets. ‘Rather than further monetary experimentation, the Japanese authorities should enact “third arrow” structural reforms to boost supply-side economic performance,’ he added.

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