Nomura: Make or break year for Japan

by **Cals** Tue 08 Apr 2014, 12:55

Business & Markets 2014

Written by Supriya Surendran of theedgemalaysia.com

Tuesday, 08 April 2014 09:32

KUALA LUMPUR: Japan’s economy is at a critical juncture, with public debt making up 200% of its gross domestic product (GDP) and consumption tax increasing from 5% to 8% last week.

Speaking at the APAC Investments Summit yesterday, Nomura chief economist Rob Subbaraman said 2014 will be a make or break year for Japan, as the risk of Abenomics not working could put pressure on the yen, and the country would need to decide by the fourth quarter this year whether to hike up consumption tax again.

Abenomics, deemed as a “giant economic experiment” by some, refers to the measures introduced by Japanese Prime Minister Shinzo Abe which aims to reduce the sluggish economy with three arrows.

The first arrow is a massive fiscal stimulus, the second is more aggressive monetary easing from the Bank of Japan (BoJ) whereas the third arrow is about structural reforms to boost Japan’s competitiveness.

“The risk of all this is if growth does not pick up late this year, people might start to get very concerned about fiscal sustainability, as Japan has one of the highest public debts around the world,” said Subbaraman.

“We could get a bond market sell off, and the yen could weaken very sharply” he added.

However, according to Subbaraman, the growth rate would be at a maximum of 2.5%, given the demographics of Japan.

He said that if things do work out in Japan, deemed as the sleeping giant of Asia, there will be a stronger domestic demand, which in turn will help Asian exports to an extent.

However, if the opposite happens, the BoJ would need to do a lot more to stop a bond market blow up, on which the yen could potentially go up to 150 against the greenback or even higher, which will have a bigger implication to the rest of Asia.

When asked how Japan fares compared to neighbouring China, Subbaraman said that China is a US$9 trillion (RM29.45 trillion) economy, whereas Japan is half that size, and while exports to China from other Asian countries like South Korea are re-exported to the US and Europe, Asian exports to Japan stay in Japan.

He added that in terms of capital flows, Japan’s predominantly domestic financial assets are all vested locally, and looking at that proportion, it opens up the scope for Japanese banks and insurance companies to invest in other Asian markets.

This article first appeared in The Edge Financial Daily, on April 8, 2014.