Salient to Investors:

Richard Koo at Nomura Research Institute said:

  • Abenomics is finally addressing Japan’s fundamental economic problem: getting households and businesses to borrow. In this balance-sheet recession, consumers preferred to aggressively pay down debt instead of spending following the burst of the asset price bubble in the early 1990s.
  • Companies and individuals are still wary of taking on debt. The trauma that keeps companies from borrowing can be overcome with measures like tax breaks for corporate investment, a part of Abenomics.
  • Government stimulus to make up for a lack of private-sector demand is good, but plans to lower the corporate tax rate in tandem with other tax incentives is not, because it would reward all profitable firms, not just those that are investing.
  • Higher wages is something that should happen naturally when the economy improves.
  • Monetary easing did produce results including an 80% rise in stocks to their peak in May, and a 20% drop in the yen against the dollar, but what happened was the result of foreigners buying Japanese stocks, not renewed optimism by Japanese investors.
  • Money printing is useless if people do not use the cash, so easing will not stop price declines, or deflation, which is caused by a lack of borrowing and spending. Relying on more easing could even be a liability, so the BoJ should not ride its luck too far.
  • The worst-case scenario would be a bold move by the BoJ that causes government bond holders to believe it will reach its 2% inflation target and unload bonds – the subsequent yield spike would make it impossible to stimulate more and leave banks with big losses on their balance sheets before the economy really recovers.

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