Japan: The Sun Also Rises?

QuintStuart P. Quint, CFA, Brinker Capital

This is part two of a two-part blog series. Click here to view part one.

What are the signposts?

Japan also might be recognizing its opportunity for major change out of years of frustration with both voters and the political establishment.  Current Prime Minister Shinzo Abe assumed office in December 2012 on a platform of promoting economic growth with the use of “three arrows”: monetary, fiscal, and structural economic reform.  So far, he has won positive reviews on the “first arrow”.   Naming a new head of the Bank of Japan with support from both ruling and opposition parties has resulted in an aggressive acceleration of quantitative easing in Japan.  The goal is to change price expectations from deflation to inflation, and thus improve prospects for savings, investment, and economic growth.  Major companies also gave employees small positive wage increases for the first time in many years.  Consumer sentiment and financial markets thus far have responded positively.

Monetary policy is not enough to solve Japan’s woes.  Structural reform must be tackled, though it will not be easy and could take more time.  On the political front, the government must undertake electoral reform in accordance with a ruling from the Supreme Court that could potentially rebalance voting power to younger, urban voters who benefit from more reform.  The question is whether leaders on both sides have the political will to implement a real reform.  If not, Prime Minister Abe could lose approval and momentum to reform.

shutterstock_17785696Additional structural reforms include trade, energy, tax, health care, and agriculture.  Agriculture is key not only to the economy, but also to national security.  As an example, the average age of the Japanese farmer is around the mid-sixties.  Very few large farms with economies of scale exist.  The acreage of farmland in Japan is also declining.  Japan is vulnerable to rising food prices, particularly if other countries restrict exports, such as what occurred several years ago when rice prices spiked.

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