How Abenomics may affect Singapore's investors

As Japan continues to try to claw its way out of 20 years of deflation and stagnation, Singaporean investors would be wise to be vigilant to the reverberations the world’s third-largest economy has on the Singapore dollar and other asset classes.

Under Prime Minister Shinzo Abe, Japan’s economic policy, known as ‘Abenomics’, is based on “three arrows”: fiscal stimulus, monetary easing, and structural reforms. Tokyo’s ultimate goal is to lift Japan’s flagging economic growth rate and it has been a successful strategy thus far, but many market experts are beginning to question its sustainability.

To date, the Bank of Japan’s (BoJ) concentrated effort through quantitative and qualitative easing (QQE) to weaken the yen has produced its intended result. But Japan’s current-account deficit ballooned to a record high last January, and the consumption sales tax hike the Abe government imposed on taxpayers in early April has many concerned about the country’s fragile, export-reliant recovery.

The tax hike is badly needed to try to reduce Japan’s crushing public debt, which is an estimated 240 percent of the nation’s gross domestic product.

The BoJ’s actions and subsequent impacts on the Singdollar have been somewhat muted so far. When Abenomics was first introduced following Abe’s rise to power in December 2012, emerging markets fretted it might trigger a meltdown similar to the one in 1996-97, but it has not materialised.

As Abenomics is designed to encourage Japanese banks to give out more loans and not solely to weaken the yen, it could help to inject more liquidity into regional markets across Asia.

Singdollar versus the Yen
The world is now aware that the U.S. Federal Reserve’s gradual winding down of its stimulus programme will continue throughout the year. Meanwhile, the European Central Bank (ECB) recently declared it is open-minded to printing money if required to keep the moribund Eurozone from sliding into deflation.

Globally, the Fed, ECB, and BoJ are collectively influencing the pace and rise and fall of currencies. However, should the American and European economies falter, the yen will rise regardless of any BoJ action.

With respect to trade, one of Singapore’s largest trading partners is Japan. However, according to figures from the Department of Statistics Singapore, Singapore’s trade with Japan, South Korea, and the European Union decreased in 2013, while its trade with Hong Kong, China, and the U.S. increased.

In 2012, Singaporean exports to Japan totalled S$22.61 billion while imports from Japan reached $29.54 billion.

Should the yen rise dramatically it will increase Singapore’s trade deficit with Japan. However, and under this scenario, any detrimental impact felt by Singaporean importers could be offset through increased trade with lower-cost suppliers in neighbouring countries.

On the other hand, if the price of Japanese exports to Singapore drops significantly and the yen slides against the U.S. dollar, it’s fair to reason Japanese exports to the U.S. will increase and quite possibly at Singapore’s expense.

Some analysts have predicted the yen will depreciate against the Singdollar by 5 percent toward the end of 2014, while the yen’s slide against the American dollar is estimated to be approximately 8 percent in the same timeframe.

Should that happen, it is reasonable to ponder the possibility the MAS will move accordingly to weaken the Singdollar.

Abenomics or Abegeddon?
Further complicating matters for the success of Abenomics is Japan Inc. Corporate Japan has certainly been enjoying the benefits of increased profits on the back of Abenomics, but it has not fully embraced the Abe government’s desire for corporations to raise wages, hire more, and spend more.

And Abe’s sales tax hike may yet prove detrimental to Japan’s fortunes as it did to one of his predecessors in the late 1990s. When Prime Minister Ryutaro Hashimoto’s government raised the Japanese consumption tax in 1997, it had a negative effect on consumer demand, essentially killing the country’s economic recovery at the time.

It remains to be seen if Abe’s sales tax increase will result in the same punishing fashion as Hashimoto’s ill-timed gamble and turn Abenomics into what’s been dubbed ‘Abegeddon’ (read: stagflation).

Many Singaporean investors may have adopted a wait-and-see approach with respect to their portfolios as they bide their time until more convincing evidence in one direction or other presents itself. But if this worst-case scenario does come to fruition, Singaporeans should expect the BoJ to act quickly in an attempt to limit the damage with further QQE.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.