Union International: Shinzo Abe refreshes his mandate at the polls but Abenomics risks a catastrophic collapse of the yen.
Union International has told client s that although Japan’s Prime Minister, Shinzo Abe has refreshed his mandate to press forward with his controversial strategy to revitalize his country’s economy, Abenomics, the name given to the aggressive quantitative easing policy being implemented by the Bank of Japan risks causing a catastrophic failure of the Japanese yen.
“The stated aim of this policy has been to create inflation in an economy blighted by deflation for two decades and while it has certainly weakened the yen, the introduction of an increased sales tax earlier this year has dampened consumer spending to the point where the economy has entered a technical recession,” said Solomon Roth, chief economist at Union International. “Mr. Abe sought a fresh mandate to press on and intensify these policies and to postpone a further increase in the sales tax that many see as crucial to dealing with the country’s unfunded public sector liabilities,” he explained.
Mr. Abe easily won the snap election and Union International believes the Bank of Japan will unleash another increase in the amount of money it prints to purchase government debt and other assets in the open market. “This kind of thing is very popular with investors who lick their lips at the prospect of unlimited liquidity boosting the prices of assets like stocks and bonds but the truth is that, at some point, the market is going to ask what the endgame is. When that happens, the yen could plunge to 200 to the dollar overnight and leave an awful lot of Japanese nursing wiped out savings and contending with runaway inflation,” concluded Roth.
Despite the warning, Union International says it continues to advocate investment in Japanese equities citing upside growth potential as additional stimulus finds its way into prices.
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