“Super-Abenomics” on the horizon: Nikko AM

Nikko AM uses the expression ‘Super-Abenomics’ to describe our expectation that Japan will exceed its own targets, as well as consensus expectations, for its new economic plans and reforms. 

Of course, not every improvement desired in Japan will occur, and those who are looking for wide-open immigration, headline corporate tax cuts, or aggressive labour reform are likely to be disappointed. However, in our view:

• The amount of monetary stimulus in the first arrow has exceeded expectations;
• Due to the Olympics, the fiscal stimulus will be larger than targeted; and
• Economic and regulatory reforms of the third arrow will exceed consensus expectations, with the Trans-Pacific Partnership (TPP) negotiations (and the associated farm tariff reduction and other reforms) being the most closely watched imminent item.

We believe that Japan is already ‘different this time’ and change will continue accelerating as Prime Minister Abe has more power than any other Prime Minister in the last few decades and resistance to his strong ‘all-in’ beliefs is dissipating from other factions. For instance, even though previous Prime Minister Koizumi was popular with the people, he had strong resistance from his political rivals and the bureaucracy and despite some successes, his long reign did not achieve much reform. Conversely, Abenomics is not just one man’s belief, but a shift in the view of the large majority of the citizenry. In our view, it is durable and also supported by major global geopolitical re-alignments.

The Abenomics Wealth Effect

One area that is not highlighted enough is the role of the wealth effect. Inflating asset prices, while keeping interest rates down, has been the hallmark of the US economic recovery (and a trend for past three decades, along with higher leverage ratios).  The wealth effect is hardly covered in most economics text books, mostly because equity and housing prices are so difficult to predict and because they are reflexive with the economy (higher risk asset prices equal a better economy and vice versa). While simplistic (and dangerous, if carried too far), the underlying logic is similar to our knowledge that consumer and business confidence is key to economic growth.

When asset prices are rising, as they are in the US with nearly USD 4.5 trillion (27% of GDP) of household net worth being created in H1 2013, consumer confidence clearly rises, as does the economy via consumption, residential capex, etc. This leads to higher income taxes and higher business capex. Coupled with tax hikes and the US sequester, this has cut the US fiscal deficit by almost half in the past two years.

Japan is well advanced in this process too, with more than Yen 71 trillion (USD 720 billion) of household financial net worth (excluding real estate) created in the 12 months to June 2013, totalling Yen 1.2 quadrillion of net financial assets. Many analysts will likely be surprised to see that it is at a record high. The data including all household net assets is frustratingly lagging (only 2011 full year data is available), but total net assets are nearly twice the size of financial net worth.

Total household net assets have been nearly flat since 1993. Indeed, assuming that real estate was the vast portion of the non-financial net assets, this would imply that since 1997, its Yen 1.4 quadrillion level has declined to Yen 1.0 quadrillion. This is a 28% decline in non-financial net assets since 1997, with the Yen 0.4 quadrillion increase in net financial assets mostly offsetting it.

2012 likely showed a moderate rebound in net assets, but in 2013, with land prices rising along with equity prices, one can expect that the wealth effect has started to play a key role and will have an even stronger positive effect on Japan’s economy and tax revenue in future.

 Tyndall AM – part of the Nikko Asset Management group (Nikko AM , a leading independent asset manager in Asia – has access to on-the-ground insights and research from the global Nikko AM offices. This paper has been compiled from interviews and papers developed by the Nikko AM investment experts.

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This document was prepared and issued by Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No: 237563 (“Tyndall AM”). The information contained in this document is of a general nature only and does not constitute personal advice. It is for the use of researchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation or needs of any individual. Tyndall AM is a owned by Nikko Asset Management Co. Limited.

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