Week in FX Asia – Is Abenomics Working? Exports and GDP Offer Insights

Abenomics was praised this week for providing some momentum to the Japanese economy. Two diverging economic indicators supported and attacked the effectiveness of the Prime Minister Shinzo Abe economic plan.

Japan exports rose 16.5 percent in October from a year ago. The currency has devaluated close to 20% this year after the start of Abenomics in March. The japanese economy has only partially benefitted from the lower currency as the stock market and exports have risen.

The flipside of that is that Japan is importing energy and food at a higher rate, which in fact have turned the country famous trade surplus into a deficit. Imports in the same period have risen 19 percent.

Gross Domestic Product in the third quarter was stronger than expected at 1.9%. Compared to the previous quarter gain of 3.8% it was a disappointment. Shinzo Abe focused his efforts on inflation. Japan has been caught in a deflationary environment for over two decades. Importing inflation via a falling currency with energy and food prices denominated in foreign currencies have boosted the CPI.

The first part of the Abe plan seems to be working. Boosted by the Bank of Japan the monetary policy has driven down the price of the currency and helped inflation rise. The other two parts of the plan have failed to gain traction. Wages need to go higher in order to keep up with inflation or consumer won’t spend. Structural reforms need to be added to unlock the labour and direct investment market.

The GDP growth experienced this year will have some challenges going forward if Japanese corporations don’t start spending more aided by reform changes in the labour market. Corporates continue to enjoy the benefits of a weak yen, but as in other G7 economies they are not reinvesting or hiring. Given the state of Japanese demographics it will also be interesting to see how seniors and retired persons take to this new term “inflation” when their income remains the same.

China’s Plenum Disappoints With Lack of Reform Details

This week the Chinese central government released the communique from the Third Plenum. The meeting from the central committee of the Communist Party was highly anticipated due to the precedent set by previous reform centric meetings. This time around the markets would end up disappointed as the final statement was full of overarching themes, but little in a way of how to accomplish them.

The main goals for China are positive. Matters of national security, creating an open market system, urban and rural development, reducing income disparity, globalization, anti-corruption and ecological aspirations are part of the goals the Chinese government wishes to accomplish. The fact that they remain little more than bullet points without specific reform plans reduced the effectiveness of the Third Plenum.

WEEK AHEAD

* EUR German ZEW Survey (Economic Sentiment)
* USD Advance Retail Sales
* USD Consumer Price Index
* USD Fed Releases FOMC Minutes
* JPY Bank of Japan Rate Decision
* CAD Consumer Price Index

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza