Have Japanese policy makers miscalculated the impact of a falling Japanese Yen currency?

The Japanese Trade Ministry released its 2013 current account balances on February 10, 2014, which according to various business news reports, was touted as one of the smallest surplus in nearly three decades due to the growing demand for energy, amid widespread shortages, and generally robust demand coming from the impact of Abenomics, which push up import volumes. In addition, the impending consumption tax increase in April 2014 from the current 5.0 percent to 8.0 percent also helps to push up demand in anticipation of the consumption tax hike.

According to a news report published by the Nikkei Asian Review on Feb 10, Japan’s balance of payments (BOP) figures, which measures net receipts from trade and investment with the global trade partners, produced a surplus of Japanese Yen (JPY) 3.31 trillion (USD 32.3 billion), which was down by 31.5 percent from 2012, and was said to be the smallest surplus recorded under the existing calculation method that began in 1985. For the month of December 2013 alone, the current account incurred its third straight deficit with a shortfall being recorded at JPY 638.6 billion, due to the rising energy imports, partially offset by overseas receipts from investments made abroad. Imports for the entire 2013 totalled JPY 77.0 trillion.

The latest current account balance figures have caught many economists by surprise who have earlier expected that the near 20.0 percent fall in the value of the Japanese Yen in 2013 will help to increase exports, but the impact of Abenomics did not really translate into better terms of trade, while domestic demand for overseas imports have risen. However, the rate of sustainability of the domestic demand factor will be much in focus come April 2014 with the consumption tax hikes, and the lagging wage growth in Japan. These issues might complicate matters as Prime Minister Shinzo Abe tries to steer the Japanese economy out of its decades-old slump.

There are growing concerns among investors on the sustainability of the economic outlook for Japan, given that the domestic markets are rising, but not at a robust pace as many will have anticipated under Abenomics. The thought that with a weaker Japanese Yen currency to around 101.0 to the US Dollar this year could add impetus to exports volumes has so far been seeing disappointment as exports fell, and imports rose due to the energy shortages as a result of the slow start on powering up the various nuclear power plant facilities around the country following the three-year shutdown of the crippled Fukushima Nuclear Facility as a result of the March 2011 triple disasters (Tsunami, earthquake, and nuclear). In addition, the assumption that exports pickup coming from overseas markets appeared to have been backfired as many Japanese manufacturers are increasingly shifting their production overseas due to better economies of scale, and efficient use of resources.

The Nikkei 225 index has entered into a correction phase last week at around 14,000 levels, following the impacts of a rising Japanese Yen (JPY) currency, and other global macro concerns involving the emerging market economies. Last year’s 60.0 percent rise in the index was mainly the result of more foreign purchases being accompanied by the carry trade activities and general investor optimism about Abenomics and the impact on the Japanese economy. However, risks continue to remain as we approached the April 2014 consumption tax hikes and the uncertainties on the duration of issues involving the emerging market woes. With the US Federal Reserve starting to unwind its massive monetary stimulus, and Japan maintaining its monetary stimulus measures in a bid to achieve the overall 2.0 percent inflation target by 2015, it remained to be seen whether the global number one and three economic powerhouses will be able to wade through the current global macro uncertainties, and achieve their respective macroeconomic targets including unemployment and inflation levels by the end of 2014 and early 2015.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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