The LDP has regained power in Japan and implemented new economic policies called "Abenomics" to stimulate growth. These policies include aggressive monetary easing by the Bank of Japan, increased government spending including a 10-year infrastructure program, and a weaker yen to boost exports. Some signs of an economic recovery in Japan are emerging, such as a rebounding GDP and stock market. However, the impact of these policies and whether Japan can truly emerge from its long stagnation remains uncertain, as simply repeating past mistakes will not work and more is needed to improve its trade deficit.

1. Is Japan on the Cusp of
Revival?
Signs of Life in the Land of the Rising Sun

2. LDP's Back in Power
● LDP's new supra-majority in the Diet's Lower House ostensibly
means the end of political grid-lock. With Komeito coalition partners,
they now have a supra-majority (325 of a total 480 seats), and can ram
through budget and spending bills as well as override Upper House
opposition.
● But DPJ still controls the Upper House, and the LDP needs to gain a
majority in the Uppwer House elections in July 2013 to demonstrate it
has a clear voter mandate.
● While a poor LDP showing in the July 2013 Upper House election
could mean yet another change in Prime Ministers, looks like the LDP
is back in power to stay.

3. Abe-nomics:
Investors Liking What They Hear
Abenomics
● Bank of Japan 2% or higher inflation target
● More aggressive BoJ debt monetization
● 10-Year JPY200 trillion program for infrastructure spending
● Nuclear energy role in Japan's electric power supply
● A structurally weak JPY, to at least JPY90/USD.
● Immediate JPY10 trillion supplementary budget to bridge budget
process gap caused by December 16 election.
● Talk of fund to purchase foreign bonds

4. Simply Repeating Past Mistakes
Won't Work
● From beginning of Heisei Malaise to 2012, past drastic BoJ liquidity
injections (expanded monetary base) have failed to increase broader
money supply (M2).
● Central government spending on "industry" (roads to nowhere, etc.)
is the most wasteful. Govt. needs to let local cities spend the money
and focus investment on agriculture and land conservation, where
historical multipliers are over 2 and 1 respectively.

5. Did Abe Just Push JPY Off Mt. Fuji?
Source: Bank of Japan

6. Still News:
Is the Trade Deficit Now Structural?
● Exporter breakeven rate is JPY85/USD. Above JPY90/USD, exporter
competitiveness begins to recover, especially against rivals South Korea
and China.
● If LDP restores as least some nuclear electricity production capacity, this
will greatly help to reduce imported energy volume, imported energy drag
on trade balance.
● Meanwhile, import costs in JPY will rise as currency weakens. Thus
greater export volume, reduced import volume than currency move is
needed to improve balance of trade.

7. Overseas Investment Returns Still
Supporting Overall BoP Surplus
Source: Trading Economics

8. No Nuclear and Weak China are Main
Reasons for Trade Deterioration
Source: Trading Economics

9. Exporter Breakeven JPY/USD is 85, But
Real Effective Rate More Important
Source: Cabinet Office, BoJ Tankan

10. Japan GDP Already Recovering
Source: Trading Economics

11. Impact of Infrastructure Spending
● How and who spends the money is crucial to effectiveness of
planned 10-year infrastructural spending.
● According to IMF study (WP/10/10), most effective spending
multipliers are, Agriculture (2.04), Land Conservation (1.15),
Livelihood (local roads, educational facilities, public sewage, 0.35).
● Multiplier of money spent by local cities substantially more effective
(at 0.78) than central government expenditures (0.26).
● Central government spending on "industry" (main highways, harbors,
infrastructure) most wasteful, i.e., more of the same old LDP won't
work.

12. More Aggressive BoJ:
Will More Actually Work?
Source: Nomura Research Institute, Bank of Japan

13. Upside Potential
JPY/USD and Nikkei 225

14. JPY Back to Pre-Disaster Levels is
Doable and Not Debt Threatening
Source: Yahoo.com

15. Nikkei Yet to Establish Complete
Breakout
Source: Yahoo.com