Japan: Is Abe’s fiscal stimulus helicopter money in disguise?

Last week, markets around the world awaited an update from the Bank of Japan (BoJ) on the next step of its economic stimulus program – possibly some form of the long-anticipated helicopter money. The BoJ governor, Haruhiko Kuroda, disappointed.

This week, the Japanese prime minister Shinzo Abe took the lead instead. He announced a US$45 billion fiscal package, which will include $150 payments to 22 million people on low incomes.

Importantly, in my view, this stimulus has been tactically aimed at the people most likely to spend money rather than save it. What is interesting is that the payments look suspiciously like they are testing the waters of ‘helicopter money’.

The government will fund this stimulus by issuing new bonds, almost all of which will be purchased by the BoJ. However, I will be watching closely to see if Kuroda then writes off any of the governement debt he has bought. If he does, this would effectively be helicopter money by the back door.

With Abe having won a super-majority last month, he is in a very strong position and constitutional change is finally on the agenda. The government needs asset prices to rise and wealth to increase, and it will continue to support the economy and markets.

Investing in Japan can be very volatile and the easy money was made at the start of Abenomics, but this could still be good news for equities.

Three reasons to be positive

1. Improving corporate governance. This has been at the heart of Abenomics. Companies are becoming much more engaged with shareholders and the rise in corporate profits and free cash flows has resulted in dividend growth. Corporate share buybacks are also very high.
2. Low unemployment. Unemployment has fallen from 4.3% to 3% in the past three years and there are now more jobs than applicants. This is leading to wage rises, which is positive. Women are also returning to work (a big problem in Japan), which is further boosting household incomes, and any childcare subsidies that could be included in the fiscal spend would increase this trend.
3. Growing tourism. Until about 10 years ago, Japan didn’t even have a tourism board! One was created in 2003 with the aim of drawing in 10 million visitors a year by 2010. In 2012 Abe doubled this target and, at the same time, made visa applications much easier. This target was achieved very quickly and increased further.

Three reasons to be cautious

1. Debt. Japan is already one of the most indebted countries in the world and increased government spending will only make this worse. With Japan’s low growth economy, ageing demographics and minimal immigration levels, it is hard to see how this might be paid off. However, with the cost of borrowing so low the interest payments won’t bankrupt the economy any time soon.
2. Poor capital allocation. The danger of having so much ‘free money’ floating around is that it results in poor capital allocation. We’ve seen this in Japan in the past and, more recently, in China. It will be important that the spend is made on the right projects and people.
3. A strong yen. One of the main challenges when it comes to boosting sustainable economic growth in Japan is that its corporates, and the fortunes of its economy, are heavily dependent on the yen weakening to boost exports. Another thing that you really need to be cognizant of in Japan is the way currency hedging can affect returns. Rather than adding an extra layer of protection, it is more akin to going in with a ‘double or nothing’ approach.