Japan: Yet More Abenomics in the Short Term but changes in the longer term?

Following our recent trip to Japan, we believe that we can expect an expansion of the BoJ’s QE and some form of supplementary budget before the year end. Both actions will probably be limited in terms of their scale and the authorities have indicated they wouldn’t want a sharp move in the currency, unless conditions in Asia deteriorate further. More importantly, we also note that the authorities are finally beginning to understand the longer term failings and contradictions inherent in the current form Abenomics, although they have few solutions to these issues at present. Given the lack of answers, we expect the economy’s medium term growth profile to remain weak or simply static therefore any increase in wage inflation will be detrimental to corporate profits. The authorities are committed to achieving higher levels of equity prices but these are only achievable if foreign investors remain in a “risk on” attitude and believe in Abe, rather than adopting skepticism like the Japanese domestic investors. Given events in China, it’s not guaranteed that foreign investors will remain active in the Japanese equity market.