Japan Bull Markets Die of Anemic Demand


Japan’s reflation campaign looks impressive. Unfortunately, it is unlikely to work.

True, the substantial depreciation of the yen brought about by the BoJ policy of massively injecting liquidity into the system has driven up corporate profits since the start of the year—even way up in some cases. But this competitive surge has had such a depressive effect on other economies in the region that they now offer a shrinking market for Japanese goods. In fact, what Japan is exporting may well be its own deflation, and to a degree at least commensurate with the inflation target set by the government.

So what can be expected of “Abenomics” if it fails to engineer a rebound in exports? Domestic forces certainly won’t generate inflation: population aging has already done serious damage to the country’s growth potential, and encouraging mass immigration—the only policy with a chance of reversing that trend—is simply not on the government agenda today.The other measures announced will therefore be about as effective in boosting potential output as a band-aid on a wooden leg. With its supply-side bias, the Abe administration’s strategy will have no lasting impact on growth unless it succeeds in re-igniting demand.

All this makes it hard to buy into the current stock market enthusiasm. The Nikkei bull run since last December just doesn’t square with the persistently bleak outlook for the Japanese economy. What follows is a new analysis of this issue by Frank Benzimra, one that concludes with the firm recommendation to dump Japanese equities.