Japanese economy

In December 2012 Mr Abe launched an ambitious growth strategy, now known as "Abenomics".
 
His aim was to revive Japan's economy and pull it from 20 years of deflation and set out on the right course for growth. Billions were pumped into the economy, with the bank of Japan printing billions of yen of new money, and using it to purchase governments bonds.
 
It went further and pushed the value of the yen down (which made Japanese exports cheaper)  and also encouraged investors out of bonds and into stocks. It looked like it was working and by mid-2013 Japan's economy was back on track.
 
Earlier this year, however, the prime minister took a gamble and increased the Japanese equivalent of VAT from 5% to 8%, for the first time in 20 years.*
 
The rise in the stock markets was only benefiting the minority of rich people. The BBC news reported that 80% of Japanese people do not hold stocks. This, coupled with the stagnant income and tax increase, maent that the majority stopped spending.
 
Gross Domestic Product (GDP) fell to an annualised 1.6% from July to September, compared with forecasts of a 2.1% rise. That followed a revised 7.3% contraction in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami.*
 
The snap election, planned for December, is to consolidate Abe's power and to seek a mandate to delay a further increase in taxes (expected to rise to 10% in 2015).
 
The economy shrank 0.4% in the third quarter from the second, and in reaction the dollar went above 117 Japanese yen before settling back at 115.69 at the beginning of the week. The benchmark Nikkei 225 index, meanwhile, closed down almost 3% to 16973.80, constituting its biggest one-day drop since August.*
 
With doubts about policy continuity, confidence in the government and general market nervousness, this could be negative for stocks. This next month is going to be interesting in Japan's economy.

Ballie Gifford Japanese, GLG Japan CoreAlpha, JOHCM Japan and Legg Mason Japan Equity are currently all on our buy list and feature in our Selection, with JOHCM appearing in the Core Selection. To view FundCalibre's Elite Rated funds, click here.

Harry Driscoll, Senior Research Analyst at Chelsea, thinks that the impact of the consumption tax was worse than expected and, whilst the recession is obviously not a good thing, the government is likely to resort to yet more expansive policies to get the economy going again. However, Japan is a volatile sector and only for those with a high risk tolerance, and those investing for the long term.

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Harry's views are his own and in no way constitute financial advice.

Sources:
*BBC news, 17th November 2014