In 2013, Prime Minister Shinzo Abe introduced his "Three Arrows" program to jumpstart the Japanese economy. Which policies have achieved success and which ones have been more difficult to implement?
Prime Minister Abe's three-prong policy plan includes aggressive monetary easing, a fiscal stimulus package and a series of growth strategies. The first two policies were launched in early 2013. Since the two programs were under the control of the Japanese government, implementation occurred quickly and the impact was more immediate. The third arrow is comprised of a number of structural business and tax reforms geared to provide lasting benefits, such as wage growth on the corporate side and new savings programs aimed at increasing equity ownership by individuals.
These reforms and programs require the cooperation of the Japanese business community and citizens to achieve success and long-term growth. None of these reforms can be implemented overnight and progress will be measured in years and not months. However, we believe that Japan is on the right track and that long-lasting growth and a more robust Japanese economy will likely occur over time.
2. Would you give some examples of progress made as a result of Abe's policies and the impact on the Japanese economy?
In 2013, monetary policy caused the yen to weaken, which made Japanese goods less expensive to purchase by the world community. As a result, exports were very strong and many of these export-oriented companies are expected to post record earnings.
Also, thanks to monetary easing and the weaker yen, inflation is starting to appear once again. The Bank of Japan has set a target inflation rate of 2% before easing will subside. While inflation is not currently at that level, positive inflation is a welcome sign and encourages Japanese citizens to buy now rather than postpone purchases. Additionally, strong corporate earnings and the reappearance of inflation allow companies to increase wages and thereby personal income can rise.
Lastly, the political environment is stable. In July 2013, the ruling party won control of the Upper House. For the next three years, the political landscape should be stable, with elected officials working in unison. This affords Prime Minister Abe the time to implement his various growth policies.
3. The Japanese market was up approximately 50% in yen terms in 2013. Is Japan simply a yen play or are Abe's policies positioning Japan for sustained success? We believe that Japan is much more than a yen play and the seeds for sustained growth have been sown. For example, fueled by exports, corporate earnings are strong and growing rapidly. It is important to keep in mind that corporate operating expenses have been reduced significantly over the years for Japanese companies to stay competitive at a much higher currency rate.
Now with favorable top line and bottom line results, cash flow is enhanced, which can stimulate future capital expenditures and R&D spending. The trickle-down effect should benefit many domestic industries and create a positive economic cycle. We believe that corporate profits should remain strong for years to come. As a result, investors worldwide should take notice and find Japanese equities much more attractive than before.
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