Japan has unveiled its growth forecast for the fiscal year starting in April, saying the economy is on track to expand 2.5% thanks to fresh stimulus and a recovery in key overseas markets.
Prime Minister Shinzo Abe’s cabinet approved the forecast on Monday morning. The government is trying its very best to convince everyone that its monetray stimulus will lead to economic growth.
But can it succeed? The chart below shows that 2% growth was last achieved back in 1996!
The latest weakening of the JPY could definitely help, but it would need to remain undervalued for some time before its effects were felt in the real economy.
The chart below shows the JPY’s purchasing power parity vs. the USD.
As can be seen, when Japanese GDP was last above 2% the Yen had been undervalued against the USD for some time. The JPY is reasonably close to fair value currently and would need to be nearer vs the USD at current PPP to have any meaningful effect on the economy.
While inflationary expectations have consistently risen since the credit crisis in 2008, the chart below showing the 7 year breakeven rate in Japan (a measure of inflationary expectations for the next seven years) shows that little has changed since Mr. Abe took office. i.e. no one is yet taking his claims very seriously.
(Source of charts: Bloomberg)
But the tide has started to turn. Tokyo’s new forecast will be used to produce a fresh budget with Abe’s cabinet set to endorse a Y92.6 trillion in spending on Tuesday, Japanese media reported.
The JPY’s rapid decline has left it exposed to a mean reversion in the short term and may well reach the low 80′s in the weeks ahead (at current implied volatiltiy on the USD/JPY short term Yen calls could provide attractive asymmetry should a wider market sell-off take hold). But longer term the Yen will continue to fall substantially and Mr. Abe will succeed in raising the economy – initially – before inflation finally gets out of control, bringin Japan’s endgame ever closer.