The Japanese Prime Minister Shinzo Abe is in full control after winning the country’s upper house elections. Now he must urgently implement far-reaching reforms to make his economic revival stick.
But whether or not he succeeds, Japanese money will increasingly wash over Asia – especially the ASEAN countries. The cash will help protect against downside risks from a sterner US Federal Reserve and a wobbly China. This may be the more lasting effect of Abenomics.
July’s election result allows Abe to fire his “third arrow” – an aggressive reform programme to unshackle the economy.
We’ve heard such brave talk before only to be ultimately disappointed. However, for the rest of Asia, the effects of Abenomics are beginning to be felt and will prove more powerful than most expect. The Bank of Japan’s massive balance-sheet expansion will eventually rival the Fed’s third quantitative easing programme. Much of the extra cash will flow into countries such as Indonesia, Thailand and Malaysia and will help accommodate the region’s leverage cycle, even as the Fed cuts its own injections.
Japanese money will increasingly wash over Asia – especially the ASEAN countries
But powerful as the measures are, their effect will only gradually filter through to regional and global markets. Even so, signs of the impending lift are starting to become visible: higher rates on foreign bonds are attracting Japanese investors, for example.
It may not be portfolio purchases by Japanese investors that prove most powerful, however, if Japan’s banks raise their direct lending to the region. In the mid-1990s and mid-2000s, during previous Bank of Japan easing cycles, it was the banks, not portfolio investors, that transmitted a potent monetary kick across the region.
It’s too early to tell if that will be repeated, but Japan’s financial institutions are already seeking greater direct involvement, especially in ASEAN. Its banks have bought significant stakes in lenders in Thailand, Indonesia and Vietnam while life insurers are eyeing local stakes there, too. That could ultimately draw in more portfolio investment as well.
The other effect of Abenomics will likely be to spur further foreign direct investment. A weaker yen should reduce the incentive for off-shoring from Japan, but this new wave of foreign direct investment represents a strategic shift by corporate Japan, with full government support, to pursue market share abroad more aggressively. Establishing profit centres beyond its shores will provide an income stream for the ageing population back home. The Bank of Japan’s aggressive monetary easing is designed to accelerate, not slow, this process.
Fed tapering raises volatility and delivers a stiff headwind to leveraged economies in emerging Asia. But, the Bank of Japan’s monetary easing – whether or not Abenomics ultimately succeeds – should provide a welcome cushion. The large ASEAN markets look set to benefit most. It’s now up to Abe to make sure the local Japanese economy receives a lasting boost, too.
This research was first published on 19 July 2013.