Monday 15 February 2016

Japan adding further woes to the global economic outlook

Japan's economy delivered another blow to policymakers who are beginning to feel hopeless after exhausting every means possible to stimulate the economy that has yet to return the desired prosperity that was intended to free Japanese citizens from the black hole of economic stagnation.

Under the leadership of Prime Minister Shinzo Abe, the government of Japan laid out a bold strategy that would reverse the adverse impacts of years of deflation and economic contraction by employing what it called "The Three Arrows" namely a extremely accommodative monetary program and stimulus measures, an expansive government spending spree as well as economic reforms aimed at parts of the economy that were seen to be drag on progression forward.

Three years later and questions are mounting up as to the success of the policy agenda that has failed to light up any ray of hope so far with many speculating that not enough emphasis is being placed on reforms needed to break away from established convention that has held back the Asian nation for many decades and resulted in a slip from second to third largest economy in the world.

Dismal GDP numbers means that policymakers will need to continue to mission on with its agenda with lack of any support from economic data that indicates failure on their part but not without dire consequences of their own. The increase in government spending has resulted in an inflated government debt to GDP ratio that's made most rating agencies wary that such masses of debt can be reduced at a brisk pace that would satisfy investors of the government's ability to service that would be free of obscuration from the overburdened nature of existing debt.

However the number drove up Japan's benchmark index the Nikkei 225 over 7% as speculators saw an increasingly likelihood that more stimulus would come to market from the Bank of Japan who recently lowered interest rates to below zero for the first time ever in an effort to power things forward.

Although a positive for the stock market, some would feel puzzled by the the rather large daily movements in the index given that the rest of the world would respond in a much similar way but spread out over a number of trading days. It would suggest that there may be some disconnect between the Japanese equities market and the rest of the world which is very much the case.  
 The BOJ decided to included equity ETFs into its basket of assets that it buys up when it wishes to stimulate the market. This decision was taken to entice those with hordes of cash to place it in better use where the returns would be higher than that earning in a bank account where very little interest is offered. The returns generated would have a knock-on effect on spending thus broadening expenditure which would further boost the size of the economy.

But this has not materialised as should have been the case and now the BOJ sits in an onerous positions of having accumulated over half of Japan's listed ETFs placing great risks on the financial system in Japan and possibly the entire world.  Over inflating stock valuations puts pressure on companies to bear greater returns than what they are at present however the situation brings about skepticism in judging the current global economic outlook coupled with a struggling policy agenda in Japan, one does begin to feel worrisome that something bad might be brewing.

I think the perfect phrase that best describes the situation is "leading the lamb to slaughter" in the sense that the falseness being injected into Japanese equity markets does not match up to the reality on the ground and although policymakers may be able to hold out for now there will come a time when the chickens come home to roost...      
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