Japan could be forced to ramp up QE this autumn following its economic contraction – while experts are suggesting Abenomics has been a failure.
Latest figures from the world’s third-largest economy show Q2 GDP shrunk 1.6 per cent on an annualised basis, brought down by lower consumer spending and weak exports.
Private consumption fell 0.8 per cent from Q1, while exports were down 4.4 per cent – mostly on weaker demand from a slowing China.
The news is raising question marks over whether the “Abenomomics” battle plan is even working at all. Now two and a half years into the programme, President Shinzo Abe’s declaration that he was firing the “bazooka” that would revive Japan’s stagnant economy seems to ring hollow.
“Abenomics is definitely not working, it is nonsense,” says Gary Reynolds of Courtiers Investment Services. “You can see it’s not working because of what’s happening.”
The disappointing figures mean Japan is on track for growth of just one per cent this fiscal year, well below the Bank of Japan’s July forecast of a 1.7 per cent increase in GDP, according to Capital Economics. The central bank’s inflation target of two per cent will also be missed.
“The Q2 figures are better than expected, however they are a contraction. So this does raise question marks over Abenomics and its effectiveness, because we keep seeing this sluggishness in the economy,” says Adrian Lowcock of AXA Wealth.
Now speculation is rife that the Bank will resort to a further round of QE this autumn, to extend its ¥80 trillion yen (£412bn) in annual asset purchases. Short positions on Japanese government bonds have leapt in size, as traders bet yields will be pushed down as the Bank increases purchases.
“We remain convinced that the Bank of Japan will announce more easing in October,” says Marel Thieliant of Capital Economics.
In the meantime, China’s decision to devalue the yuan by nearly two per cent is also going to put pressure on Japan. A key aim of Abenomics was to weaken the yen and end its decades of stubborn strength.
The yen has fallen 35 per cent against the dollar in the last 30 months, although it has recently found a floor and resisted further falls. Now China is undercutting Japan’s devaluation, the Bank of Japan may be under even more pressure to print money.
“Competing economies are unlikely to stomach their rivals becoming more competitive, so they devalue their currencies. This is potentially the start of currency wars,” says Ben Gutteridge of Brewin Dolphin.
Arguably this could mean good news for stock market investors (even if Japan’s economy fails to respond), as some experts believe the sole purpose of QE is to raise asset prices. “That is what it did in the UK and US… If you thought QE in Japan would raise asset prices then it has been a success,” Lowcock says.