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Goodbye, Abenomics, Hello… Suganomics?

After two official terms and nine years in office, Shinzo Abe is stepping down as Prime Minister of Japan. He is replaced by 71-year-old Yoshihide Suga, formally the Chief Cabinet Secretary but informally, Abe's right-hand man. The question becomes, will Suga try and reinvigorate Japan's Economy using new methods, or will it be another term of Abenomics, without the Abe?

Yoshihide Suga

Who is Yoshihide Suga?

Born as a farmer's son, Suga has been touted as a "behind the scenes" deal maker, highly demanding and not afraid to side-line individuals who do not perform or are not aligned with his thinking. Suga pushed his administrative reforms through Japan's often strong bureaucracy, sometimes using heavy hand tactics. This contrasts with Shinzo Abe, who was a son of a political dynasty, who was groomed to be in office from a young age.

What will his effect be the Japanese Economy?

Being Abe's right-hand man, its not surprising that political analysts predict little change to how the Japanese Economy is run. Kazuto Suzuki, a vice-dean and professor of International Politics at Hokkaido University, stated that "Suga is expected to be an "Abe Substitute," which helps us better understand to what the future holds with Suga at the helm. Furthermore, Etushi Tanifuji, a political science professor at Waseda University, stated that "Suga does not have a grand vision for Japan and is more of a problem solver, which worked for him as chief Cabinet Secretary but could be problematic as Prime Minister." Etushi also states that Suga is not the type of politician to have an "ideology" that "they act with.. as their guiding light" like other politicians do.

If that's the case, will it be another term negative rates and QE?

Possibly. CNN states that he was an essential ally to Abe's efforts enacting his series of economic policies – famously known as "Abenomics." The question arises whether we will see Suga deviate away Abenomics in pursuit of "Suganomics," whatever that may be – or will we see Abenomics 2.0?  Suga has not released any official policies that he promises to enact, primarily because he did not really have to win any voters as he was voted in by his party. However, we can try to analyse what will happen if there is a continuation in "Abenomics" in this post Coronavirus world.

Abenomics in a nutshell

Abenomics consists of three parts, or three "arrows" – aggressive monetary policy, fiscal stimulus, and policy reform. Abenomics was an attempt to reinvigorate Japan's Economy from a slump after a real estate and stock market burst in the early 1990s, leading to two decades of no nominal growth in the Economy.

Chart shows Japan's GDP. You can see the period between 1990-2012, before Abe's term, saw Japan exhibit no nominal growth

In general, Abenomics was successful in deterring deflation. However, it has not been able to spur inflation back up. Throw in the Coronavirus pandemic, and that goal is all but unachievable.

The current issue with Abenomics is that it struggled to spur inflation during a period of expansion in the Economy. With the Coronavirus forcing central banks and government to prop their respective economies back up, Japan doesn't have much monetary room left to give due to most of it being spent on Abenomics.

Abenomics + Coronavirus has put Japan between a rock and a hard place. Propping up the Economy will essentially spur a period of Abenomics on steroids. However, that only brings Japan back to a Pre-Coronavirus situation – which was not the best place to be in.

We can only hope that Suga comes in and attempts to spur Japan's Economy by implementing contrarian policies. However, Suga's role may merely be a formality rather than a symbol of a brighter future.

Anish Lal, did some amazing analysis on the USD/JPY and the potential moves it may make during Suga's term. You can watch it here. 

Prime Minister of Japan, Shinzo Abe resigns

Prime Minister of Japan, Shinzo Abe is set resign to after worsening health conditions.

The Japanese Yen sold off against the US Dollar on the news

Shinzo Abe, 65 years old, has been battling Ulcerative Colitis, a chronic digestive condition that also forced him to step down as Prime Minister in 2006-2007. During the announcement, the Japanese TOPIX pulled back with the Japanese Yen strengthening against the U.S. dollar by 0.5%.

Abe + economics = Abenomics

When Abe took the role of Prime Minister, he quickly started economic reforms, which promptly coined the term “Abenomics” by economists. His economics was an attempt to help pull the country out of the GDP slump Japan were in. Before Abe was nominated in 2012, Japan's nominal GDP was the same in 1991. Deflation was also on the rise due to the increase in the aging population not willing to spend money. After a year he was elected, the stock market rose 55% alongside an approval rating of 70% at the time.

Abenomics focused on looser monetary policy, fiscal stimulus, and structural reform – most famously, implementing negative interest rates alongside quantitative easing. Immediate effects were seen, with a weakening in the Japanese Yen boosting exports and an increase in the stock market alongside a decrease in unemployment. Between 2012 and 2016, the Japanese Yen depreciated against the U.S. dollar by 50%.

It is uncertain who will take Abe’s spot. Shigeru Ishiba, the former defense minister, is regarded as the best pick from voters as he has backed economic policies more populist that Abe’s when Japan is seeing a rise in a populist movement. Other potential candidates include Finance Minister and Deputy Prime Minister Taro Aso, and Chief Cabinet Secretary Yoshihide Suga can take over Abe’s role.

With the Coronavirus creeping back up in Japan, Shinzo Abe’s resignation comes at a time where political insatiability will come as a burden to a full recovery of an already declining economy from the Pandemic.

PBoC, Inflation and Jobless Claims - Week ahead

The markets continue to grapple with the immediate effects of the Coronavirus. The second wave in pockets of the world has forced cities to take active measures to control the virus. Melbourne, Australia has gone into a secondary lockdown while Florida and Los Angeles see cases surge, with the Mayor of Los Angeles stating that the city is “on the brink” and a Democratic representative from Florida reports the outbreak is “totally out of control.” Here is your week ahead

Monday, 20 July – Peoples Bank of China Interest Rate decision

PBoC's Interest Rate

China’s Central Bank, the Peoples Bank of China has been wary of cutting interest rates, even during the peak of the pandemic. Ma Jun, a PBOC adviser, stated in early April, “The PBOC doesn’t use its bullets all at once. China has plenty of room in monetary policy.” The PBOC has kept interest rates at 3.85%, after dropping it 30 basis points from 4.05% in April. However, forecasts and estimates expect the PBoC to keep rates as is at 3.85% this week ahead.

Tuesday, 21 July – Inflation rate YoY Bank of Japan

With 660 new cases of the Coronavirus yesterday, Japan has struggled to keep ahead of the virus after the world praised it for its lighter approach to restrictions. However, that approach, as seen similarly from Australia, has not bode well for the country. Japan has seen triple-digit daily increases for the whole month of July. This has caused consumption and spending to decrease dramatically. Analysts predict an inflation rate of 0.1%; however, there is a high chance that this may be pushed to the downside, which may put downward pressure on the JPY.

 Tuesday, 21 July – Reserve Bank of Australia minutes

Australia is continuing to grapple with the effects of the Coronavirus, with Melbourne being put back into lockdown and the state of Victoria imposing mandatory mask restrictions. With RBA minutes earlier in the year having a tone of optimism, likely, that tone will not continue here. The second lockdown is a massive blow to the country, socially and economically. The Trans-Tasman bubble between New Zealand and Australia has been delayed, with economic activity in the state of Victoria plummeting. We may see Aussie weakness against its New Zealand counterpart as Australia reels back their reopening.

 Thursday 21st July – Canada Consumer Price Index (CPI)

Canada continues to post double-digit daily Coronavirus cases as they, too, implemented a looser lockdown restriction like Japan and Australia.  We saw a drop in the CPI from March to April as citizens decreased their spending. We saw a slight increase in the Month of May, however, analysts expect to stabilize around 137 for the month of June.

Thursday 23 July, US Initial Jobless Claims

US Initial Jobless claims. Source: Bloomberg

With Initial Jobless Claims posting the smallest decline since March last week, the US jobs market is showing a slight rebound. However, we are all aware of the current situation with the Coronavirus cases in the US. Florida and Los Angeles are posting daily record numbers every week, while President Donald Trump focuses on reopening the economy and the US-China trade deals. I expect this number to slowly creep up as the full effects the second wave of the Coronavirus becomes evident. Analysts predict Jobless Claims to drop to 1.29m from 1.3m previously.

We have seen this mindset in the market, which discounts negative news and rallies on positive news. This is partially due to liquidity propping up many markets. Investors and traders must take this into account when placing trades.

Trade safe!

Interest rates, OPEC, Employment - Week ahead

Many “this week ahead” articles start off referencing the Coronavirus and how it is still front and center of many news and data headlines. However, we all know that, and therefore I felt that I should start this article with something more positive. A federal court of appeal has ruled against Trump and his proposed legislation to allow hunters to kill Yellowstone grizzly bears, stating that they were illegal. Yellowstone Grizzly bears are now officially protected by the Endangered Species Act once again. Here is your week ahead.

Yellowstone Grizzly Bear and its cubs

All dates are in NZDT.

Tuesday, 14th July– UK GDP YOY

As Coronavirus cases approach 300,000 and deaths 45,000, the UK remains in level three since 19th June. At level 4, social distancing measures continues but is short of the most severe level 5, which requires citizens to impose strict lockdown. With citizens roaming around, there has been a spike in Coronavirus cases, forcing multiple pubs to close again. The UK has seen a resurgence in shopping, seeing online and in-person retailers boom with consumer confidence being the strongest it has been since the lockdown. However, with Brexit being in play amidst the Coronavirus, the UK has significant headwinds to overcome before they get firmly on the road to recovery. This is on the back of the UK expected to hit Debt to GDP levels at 100%. Previous UK GDP YOY plummeted to -24.5%

Wednesday 15th July – OPEC Meeting

With oil prices double from their May lows, the cartel has done well, stabilizing prices by inducing deep cuts. At the detriment of US Shale producers, Oil prices have been fluctuating between $40 and $42 for WTI and Brent, respectively, on the back of 9.7 million barrels per day. However, as demand slowly picks up, all eyes are on Wednesday, meeting on whether the cartel decides to ease up cuts to 7.7 million barrels per day. This is a giant exercise of game theory, and it will be a challenge in balancing profitable oil prices vs. attaining market share.

Wednesday 15th July – Bank of Japan Interest Rate decision

Japan has reported just over 21,500 Coronavirus cases and only under 1,000 deaths. With a debt to GDP ratio of 235%, Bank of Japan Governor Haruhiko Kuroda sees interest rates remaining low for the foreseeable future. He stated, “whether it’s the fiscal year 2021 or 2022, I do feel we’re a long way from a situation where we can raise rates.” This is on the bank of the BoJ, increasing their support up to $1 Trillion. Analysts predict interest rates to stay at -0.1% this week ahead.

Thursday 16th July – Australia’s Employment and Unemployment rate

With Melbourne re-entering a six lockdown after the city reporting 191 new Coronavirus cases, criticism on how Australia is handling post lockdown Coronavirus is heightening. With the state of Victoria contributing 24% of Australia’s GDP in 2019, a second lockdown may be detrimental to Australia’s economy and recovery. IBISWorld has stated that “the overall recovery of the Australian Economy is expected to be significantly hindered by the second lockdown.” Analyst predict a job gain of 112,500 and an increase in the unemployment rate to 7.4%, from 7.1%.

Thursday 16th July – Bank of Canada Interest rate decision

Coronavirus cases stand at 108,000, with 8,783 in Canada. With one of the only countries not imposing a mandatory lockdown, Canada has fared relatively better than its border country, the United States. With Bank of Canada Governor Tiff Macklem ruling out negative rates, eyes are on the BoC as analysts predict them being one of the only Central Banks to raise interest rates. Analysts forecast a 50% chance of a rate hike in 2022. However, analysts predict the BoC to keep prices at 0.25% on Thursday this week ahead.

Thursday, 16th July - ECB Interest Rates

As European countries such as Italy and Spain slowly opening their borders to other European countries, the Central bank is in no rush to increase interest rates like their Canadian counterparts. They state that the “Coronavirus crisis is having serious humanitarian and economic consequences” and a “decline in economic activity of almost 9% in the Euro Area in 2020, and around 7% in Germany.” They also state that the economic effects will reach “far beyond the current year.” Analysts predict the Central Bank to keep rates at 0% this week ahead.

Saturday, 18th July – Euro Meeting on Common Recovery Plan

With a proposed €750 Billion recovery package funded by extensive debt, poorer European Countries are hoping to get a lifeline from richer countries as the Coronavirus ravages the continent both physically and economically. This €750b recovery package is on top of a proposed cut to the continents budge to €1.07 Trillion from 1.1 Trillion.

Key earnings are set to be released this week, with banks being the headline

In such turbulent times, investors and traders need to be aware of key news events this week ahead to enter and exit investments/trades at reasonable levels.