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Suganomics: Abenomics rebooted

Anthony Fensom  |  27 Oct 2020Text size  Decrease  Increase  |  
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“Abenomics” delivered Japan its longest period of economic growth for decades. Amid the COVID-19 pandemic, can new Japanese Prime Minister Yoshihide Suga mend the world’s third-largest economy?

Japan’s economy has been stuck in recession for three straight quarters, hit by last October’s consumption tax hike and the subsequent shock of the coronavirus-related shutdown to business activity.

In the June quarter, Asia’s second-largest economy registered an annualised decline of 28 per cent, the biggest fall under gross domestic product data since 1955, with companies across all industries slashing capital spending.

While rising exports saw the economy return to positive growth in August, economists do not see a return to the pre-pandemic normal until the fourth quarter of 2021, despite Japan’s relatively few covid-19 cases compared to Europe and North America.

In its latest “World Economic Outlook,” the International Monetary Fund sees Japan’s economy contracting by 5.3 per cent in 2020, but rebounding to 2.3 per cent growth next year as the world gradually recovers from the “worst crisis since the Great Depression.”

The Japanese stockmarket has proven more resilient, however. The benchmark Nikkei Stock Average closed on 23 October at 23,516, showing a one-year return of around 5 per cent, having recovered from its March low of 16,552.

While former prime minister Shinzo Abe won praise for defeating deflation and slashing unemployment to post-war lows through massive monetary and fiscal stimulus, critics pointed to slower progress on the “third arrow” of structural reform.

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Abe’s shock departure on 28 August after nearly eight years at the helm left his former chief cabinet secretary and right-hand man with a long list of reform tasks. These include labour market reform, pro-competition deregulation and reinvigorating “Womenomics”, while tackling the coronavirus and rising public debt together with structural headwinds such as adverse demographics.

Regulatory reform

In his first press conference after assuming office on 16 September, Suga indicated he would be tackling reform head on.

Declaring “regulatory reform is my agenda”, the 71-year-old political veteran said he would start by taking on barriers within Japan’s bureaucracy.

“During my seven years and eight months as chief cabinet secretary, I noticed that when policies are slow to move forward, it’s usually because of bureaucrats’ sectionalism and a penchant for sticking with precedents,” he told reporters.

Digitalisation will be one of his first major reforms, with a new agency to be established ensuring the bureaucracy embraces digital transformation. This follows criticism over the slow distribution of cash handouts provided in response to COVID-19, with reports of paper-bound officials faxing reports to head office.

Among other “micro” reforms, Suga has pushed for lower telecommunications fees, ended a ban on online medical sales and urged consolidation among troubled regional banks, as well as calling for higher minimum wages.

The renewable energy sector is also set for a boost, with Suga planning to commit the government to reducing greenhouse gas emissions to net zero by 2050, in line with the European Union’s target.

The immediate priority however is “responding to the coronavirus and working hard to put the economy back on track.”

An extra budget is being compiled, adding to two earlier supplementary budgets aimed at supporting households and businesses during the coronavirus pandemic.

Suga’s Cabinet line-up also points to a continuation of Abenomics, with the retention of key ministers including Finance Minister Taro Aso.

One minister to have already made his mark is Taro Kono, minister in charge of regulatory and administrative reforms, who has declared war on fax machines and the use of ‘hanko’ stamps in official documents.

a picture of new Japanese PM Yoshihide Suga

Japan's new Prime Minister Yoshihide Suga says he will start his term by taking on barriers within the country's bureaucracy.

Naoki Kamiyama, chief strategist at Nikko Asset Management (Nikko AM) described Suga as retaining Abenomics but also implementing “economic initiatives that are distinctively his own.”

“Of the initiatives that Suga intends to undertake, reducing mobile phone fees and consolidating Japan’s struggling regional banks are the two with strongest market implications, in our view,” Kamiyama said in a 7 October research note.

“These initiatives differ from Abenomics as they are focused more on the micro aspect of the economy rather than the macro.”

Kamiyama also noted the move by Warren Buffett’s Berkshire Hathaway to invest in five of Japan’s largest trading companies.

“Such significant moves by the ‘Oracle of Omaha’ are accompanied by extensive media coverage. This raises the profile and recognition of the Japanese equity market, in turn providing an opportunity for foreign investors to take note and discover the array of undervalued stocks available to them,” he said.

Looking ahead, Nikko AM sees the Japanese economy growing by 2 per cent in 2021, below the United States and the Eurozone. However, Japanese equities are expected to outperform their US and European counterparts, thanks to reasonable valuations, continued monetary stimulus and a pick-up in external demand.

Asked the prospects for “Suganomics”, WisdomTree Japan advisor Jesper Koll says Suga is “all about managing the detail. It’s all about the third arrow, the strategic growth policy and getting things done.”

He added: “You look at the weak points of Japan and you can come up with a whole list, but in the final analysis a key weak point is the ability to make a decision. Everything is consensus-based, process-driven, people shy away from taking responsibility.

“Yet Prime Minister Suga does not—he makes quick decisions and gets things done. No is not an answer.”

Suga’s term as leading of the ruling Liberal Democratic Party lasts until the end of next September, with lower house elections due by October 2021. Yet should he manage the economic recovery and the Tokyo Olympics successfully, the son of strawberry farmers from Akita Prefecture could earn an extended stay in office.

Australian investors willing to back Japan’s expected rebound can gain exposure to Japanese stocks via various exchange-traded funds. These include the iShares MSCI Japan ETF (ASX:IJP), which provides exposure to large and mid-sized companies such as Toyota Motor, Softbank and Sony, or the BetaShares Japan Currency Hedged ETF (ASX:HJPN), which focuses on Japanese companies generating substantial overseas revenues.

is a Morningstar contributor.

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