The Cooper Research Group's Dr. Michael Bailey releases his paper 'Are the 'Three Arrows' the key to Japan's economic recovery?'

1888PressRelease - Dr. Michael Bailey of The Cooper Research Group has released a detailed report upon the current economic climate in Japan and what the future holds for the island nation. The report is available by contacting The Cooper Research Group. An excerpt of the foreword of the article is contained below.
Dr. Michael Bailey, Senior Portfolio Manager at The Cooper Research Group, has released a report this week detailing the current state of the Japanese economy. The report analyses the socio-economic conditions and the practices of financial and government organizations which led to the decline of the country's financial powerhouse status. 

The paper then goes on to describe how the past two decades are affecting the modern Japanese business world and how the current generation of leaders are striving to restore Japan's former glory. The primary focus of the report is to discuss and assess Prime Minister Shinzo Abe's 'Three Arrows' approach to recovery.

Here is a short excerpt from the foreword;

"Shinzo Abe, Japan's prime minister, is at the helm of a movement to tackle the island nation's exhausted economy. The movement, being referred to as Abenomics, is an effort by government, industry and the populace to re-establish the nation as a dominant force in Asian and Global economics. 

So, what exactly is Abenomics and how can it aid Japan's economic recovery?

Abenomics is a trifecta consisting of structural reform, quantitative easing and fiscal stimulus. The structure was implemented by Mr. Abe shortly after being elected to serve a second term as prime minister in 2012. 

As part of the plan, the Bank of Japan has implemented a massive buy back of Japanese Government Bonds. During 2013, this had the effect of driving prices higher for most of the year.

One of Japan's largest banks, Sumitomo Mitsui Financial Group, clearly saw the benefits of the buy back as they have sold over half of their JGB holdings.

As of March 2013, SMFG's portfolio of JGBs was valued at Y21.5tn (approx. US$210bn). By December 2013 the portfolio had diminished to Y9.6tn (approx. US$93.96bn) and the group's loan balance had risen by approximately 4 per cent to Y68tn (approx. US$665.59bn).

The group stated that a rise in demand for syndicated lending was partly responsible for the increase in loans. Another factor is the decline of the Yen's value, which has the effect of increasing the value of overseas assets.

SMFG's primary banking unit, Sumitomo Mitsui Banking Corporation, was considered by many analysts to be the instigator of the mass vendition of JGBs following the announcement of monetary easing changes by the BoJ. 

At the same time, SMBC acted to acquire positions in Japanese stocks, securing themselves gains of Y525bn (approx. US$5.14bn) from March to December. This was in line with SMFG's reputation for making swift and resolute movements within their chosen markets.

The group's strategy has served them well, which has been noted by their peers. Many institutions including Mizuho Bank and Mitsubishi UFJ Financial Group have followed suit and reduced their JGB holdings by up to 40 per cent in recent months.

During 2013 the banks collectively held around 15 per cent of their assets as JGBs. In 2012 that figure was closer to 20 per cent and a decade before, in 2002, the total was around 9 per cent.

One of the main objectives of the programme, for the BoJ, is to increase the amount of lending on the bank's books. The bank would like to see better parity between loans and JGBs as they attempt to shift to a state of inflation from the deflation of recent years.

Now, at this point most people would ask, in an economy which has deflated and lost a significant portion of its prestige over the last decade, surely consumers are more cautious of leverage? Demand for loans must be something the banks are struggling to preserve amid the continued conservatism?

These are questions which may seem to have an obvious answer, but the facts differ from expectation. Over the past year, the amount of loans has increased every month, in December alone, total lending increased by 2.6 per cent.

I think that over the coming months the 'Three Arrows' approach to economic recovery will yield interesting results on many levels. There seems to be positive sentiment coming from analysts the world over but as we all know, what we expect to happen does not always run in parallel to the actuality of events. 

Finally, the economic recovery of an entire nation is not an affair to be taken lightly. The restoration of Japan's imperial might on an economic level may take years or even decades to achieve fruition. In the meantime however, I think Abenomics will be a useful strategy to coax the country out of its languid state."

For a copy of the full report, please contact The Cooper Research Group.

About the author;

Dr. Michael Bailey
Senior Portfolio Manager
The Cooper Research Group