Discussed here are some of the key themes and events that Michael Lane, the Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management, predicts will have an important role to play in shaping Japans markets and Economy in 2014.
1. Consumption tax increase
With the sales tax hike in place, Japans government will be collecting an extra 8 trillion Yen which is expected to shape the economic growth. Japans economy is anticipated to experience an increase in demand in the first quarter, a decrease in the second quarter, and then recovery in the final half of the year. However, Japans debt surpassed $10.46 trillion or 1 quadrillion Yen, which is close to 240% of the GDP, in the second quarter. In fact, the debt is larger than those of France, UK and Germany combined. Yes, you heard me right! The tax hike will affect the economy positively by helping raise the revenue and showing commitment to fiscal reports, and negatively by dragging economic growth. It is like a two edged sword that can cut using both sides. To counter the effects, the Japanese government has rolled out a 5.5 trillion Yen stimulus package because it is aware that the growth may not be compared to that in 1997, the last time they embarked on such a move. Shizuoka Capital Wealth Management predicts a 1.5% growth compared to 1.8% this year. The growth is forecast to slow further to 1%. Japans national sales tax is will be raised to 8% in April and further to 10% in 2015 without the government's fiscal consolidation plan.
2. TPP or Trans Pacific Partnership
Within the first few months of 2014, Shizouka Capital Wealth Management expects an agreement on the 3 year old TPP or Trans Pacific Partnership talks that have been spearheaded by Japan and the U.S. The talks have been stagnating for a while now and ended 2 weeks ago in Singapore without any deal being struck. According to the Japan Times, Prime Minister Abe was determined to conclude the TPP talks without making any easy concessions. The talks have been delayed due to differences over tariffs among other issues. With the TPP, the Japanese economy is expected to grow by 2.25% by 2025. For the talks to yield fruits, the Japanese government has to be willing to reduce the measures it has put in place to protect farmers. If the government is not willing to do so, then expect nothing from the talks.
3. Energy
Abe is pushing for the restarting of the 50 usable reactors that generate 30% of Japans energy and plans to increase the production to 40% unlike prior to the Fukushima nuclear disaster in 2011 that led to their closure. Since 1970, Japan has never been completely without nuclear energy, and the trade deficit has skyrocketed because of two reasons, a weaker Yen and energy importation. The Nuclear Regulation Authority that is supposed to inspect said that it was unsure whether the inspection will be complete in November. Japan is the largest importer of liquefied natural gas and is seeking cooperation with India to cut down on importation costs.
4. Reforms
Implementation of reports will be critical in 2014 to determine whether Japan will be able to transform the stimulus recovery momentum into sustainable long term growth. The 142 page strategy that the Japanese government rolled out does not address pressing issues like tax reforms and labor-market that most people expected would be clearly addresses. Abe plans to encourage more women to join Japans shrinking and aging workforce so that they make up 30% by 2025. The main reason is because the Japanese women make up 49% of graduates and 45% of those that qualify for employment. What is surprising is that they make up less than 1% of the CEO's. Abe believes that women can provide the solution to Japans workforce problems that continue to threaten the economic growth even further. The Japanese government is currently working on a bill that aims to set up National Strategic Special zones that will provide deregulation and tax incentives. Other major reforms that will positively impact on the Japanese markets and economy are to be undertaken in the agricultural sector, energy sector, fisheries industry and forestry.
5. Politics
There is limited political risk in 2014 if Abe's government and Abenomics can succeed in boosting growth. But minus the growth, the situation could be completely different. In fact, the Japanese government will be able to regain its stability after having a half a dozen prime ministers within six years. Both the upper and lower houses are controlled by the Liberal Democratic Party or LDP, the ruling party, while the Democratic Party of Japan, which offers the largest opposition, is like a toothless bulldog politically. In case the lower house is not dissolved early enough, there will be no national elections until the upper house election in summer 2016.
6. Bank of Japan
In the last meeting of the year, the Bank of Japan concluded that the inflation sharply increased, just like predicted by the BoJ's in 2013. The growth is expected to be felt in the run up to next year's sales tax increase. Currently the board has no urgency of releasing additional easing. It will be expected to do in the third quarter of 2014.
7. Markets outlook
Shizouka Capital Wealth Management predicts that the Yen will continue performing poorly against the dollar to 110 by the end of the year, as the Fed tightens and BoJ's policy remains expansive. The on-going monetary stimulus is anticipated to keep the Japanese government bonds anchored at 0.75%. And that is not all; the on-going recovery coupled with a weaker exchange rate is without doubt expected to lift the stock market. Shizouka Capital Wealth Management forecast end 2014 for the Nikkei to be 16,250.
Source: Michael Lane Global Co-Head of the Investment Management Division
About: Shizukoa Capital Wealth Management
Founded in 2006 with headquarters in Tokyo, Japan. The company is engaged in wealth management services such as securities, the buying and selling of corporate debt, handling mergers and acquisitions, private and fixed income.
