Doubts over the efficacy of Abe’s cocktail of monetary easing, fiscal stimulus and structural reforms have been growing for several months as the world’s third-largest economy fails to motor on and inflation remains a long way off the Bank of Japan’s 2% goal.
Those doubts have heightened in the past few weeks as the freefall in oil prices and concerns about China’s slowing economy and its perceived policy missteps sent global financial markets into a tail spin at the start of the year.
“The perception on Abenomics is changing,” said Tomoichiro Kubota, senior market analyst at Matsui Securities. “It has been boosting share prices essentially by working on expectations. But after all expectations were just expectations.”
Speculators, who were firm believers of a weaker yen under Abe, became net buyers of the yen in the past couple of weeks, helping to drive the Japanese unit to one-year high of 115.97 to the dollar earlier this week.
Inflation-linked JGBs are pricing the lowest inflation expectations since the bonds were re-introduced in 2013. It stood at 0.55%, below its 2014 peak around 1.4%, and some distance from the BoJ’s inflation target of 2%.
As the global outlook darkened and growth at home slowed to an anaemic pace, Japanese shares wiped out all the gains since the BoJ expanded its stimulus in October 2014. Earlier in the week, the Nikkei fell more than 20% – widely seen as a yardstick for a bear market – from a peak hit in June last year.
Although the Nikkei recouped some losses on Friday, unstable stock markets put at risk voter support for Abenomics given a rally in Japanese shares to an almost two-decade high last year is seen as one of his major achievements.
While Japan’s economic ills are partly a consequence of global headwinds, including the deflationary impact of low oil and slacking global demand for Japanese exports, investors are starting to question if Abenomics could put growth and inflation on a sustainable footing. The absence of steady growth and consumer prices over the last three years have tempered investors’ hopes that Abe’s strategy could spur a revival of economic fortunes.
Tellingly, shares of brokerages and property firms – formerly darlings of Abe’s reflation policies – have returned to levels when BoJ governor Haruhiko Kuroda set in motion a burst of massive stimulus in April 2013.
“This symbolises how inflation expectations have fallen,” said Matsui Securities’ Kubota.
Foreign investors, who initially cheered Abenomics, are becoming more cautious.
Some foreign investors have already pulled out money, with exchange data showing they became a net seller of Japanese stocks last year, a stark turnaround from 2013 when they bought ¥15tn of Japanese shares. In 2014, they were net buyers of a smaller sum.
That is an ominous sign for the market considering foreigners’ net selling occurred only twice this century during major market downturns – in 2000 when the dot com bubble burst and in 2008 when the global financial crisis gummed up financial markets.
Another risk is that Japanese investors, who have piled up foreign assets on the conviction that the yen is unlikely to strengthen, may do a U-turn and buy back the yen.
This grim backdrop has stoked speculation that the BoJ will take additional easing steps at its policy meeting next week.
But for some players, more stimulus brings its own risks.
“Japanese investors haven’t repatriated their funds. If they start to do so, that is quite dangerous,” said Arihiro Nagata, general manager of derivatives at SMBC Nikko Securities.