In recent years, the Japanese economy has experienced significant hardships, generated largely by the aftermath of the hurricane and tsunami that hit the country in 2011. But newly adapted stimulus programs (the much-discussed programs of Abenomics) have boosted economic growth rates since that period. As a result, annual GDP is expected to rise to 1.8% for 2014, and these improvements are expected to have a supportive on the performances seen in surrounding economies in the Asia-Pacific region.
These expectations are based largely on the growing prospects for larger investment flows and bullish transmission effects in Asia-Pacific trade agreements.
But other factors are at work, as well. “The fiscal and monetary stimulus measures that make up the reforms seen in Abenomics,” said John Gordon at NordFX, “will be one of the central growth drivers for Japan in 2014.” The Bank of Japan (BoJ) is widely expected to continue on its current path of quantitative easing policies as a means for corrective decades of deflation, and push consumer price gains back into the 2% region. One of the additional effects of these policies can be seen in the Japanese yen, which has depreciated by more than 25% against the US dollar since the end of 2012. But what is more important is the fact that this helps boost export competitiveness in Japanese companies.
The near-term fate of the Asia-Pacific region will depend largely on developments in Japan. But this does not mean the region is without its fair share of risks, as well. The Japanese economy still faces significant structural headwinds, as the high level of government debt (relative to annual GDP) will likely force the government to increase sales taxes from 5% to 8% toward the middle of this year. This will put limitations on consumer demand at a time when ageing demographics have already created a significant drag on the potential growth rates in Japan’s over the long-term. When we look at Japan’s relatively slow rate of long-term economic growth alongside the rapid currency depreciation, the likely result is that we will see significant transformations in the structural trade relationship that exists in conjunction with the Asia-Pacific region.
The Association of Southeast Asian Nations (ASEAN) economies have been relatively resilient, despite the economic difficulties that have been seen in the last two years. These stable performances have been aided by more substantial investment flows and improved domestic consumption -- with notable examples to be found in Indonesia, Thailand, the Philippines, and Malaysia. But, looking ahead to the remainder of 2014, exports are likely to play an enhanced role in terms of its positions as a central growth engine, with domestic demand moderating. This essentially means that the frontier ASEAN economies (especially in areas like Vietnam) will play a much more interconnected role with its Japanese counterpart. So, it will continue to be important to monitor Japanese economic data in order to get a sense of how the Asia-Pacific region will progress for the remainder of this year.