“The faith people had in Abenomics a year ago has clearly waned,” says Christopher Probyn, chief economist at State Street Global Advisors.  After a period of reasonable growth in 2013 and a very good first quarter of 2014, Japan’s economy fell apart in the second quarter.  The downturn is attributed to the increase of the country’s consumption tax from 5% to 8%, as part of Prime Minister Shinzo Abe’s economic reforms.

 

The third quarter results were also poor, and although there are signs of the Japanese economy regaining some momentum, Probyn forecasts its growth at a modest 1% in 2015.

 

“[Japan’s] inflation has not continued to accelerate,” he says, with disappointment.  Even though Abe’s policies have been able to affect the exchange rate of the yen significantly, the inflation barely budged.  “The Bank of Japan may need to do more,” he adds.

 

Miyuki Kashima, head of Japanese equity investment at BNY Mellon Asset Management Japan, sounds more upbeat.  “The focus on short term news seems to cloud the positive effects of Abenomics, which actually continued to affect the overall economy,” she says.

 

Deflation has been reversed, unemployment has fallen to 3.5% in October 2014, bankruptcies are at their lowest since 1991, office vacancies in Tokyo have been declining and the increase in the average summer bonuses was highest in the last 20 years. “This reminds us of the importance of looking at fundamentals from a long-term perspective,” says Kishima.

 

Valuation of Japanese equities has been lagging behind the recovery of corporate earnings since 2008.  Kishima sees this as an opportunity for investors, as the market has yet to factor in the economy’s potential.   Experts expect corporate earnings per share grow by 10% in 2015, although some have started revising their estimates upwards.

 

Japan’s recovery will hinge on corporations abandoning their propensity to hoard funds and stash them away in government bonds, according to Simon Cox, investment strategist at BNY Mellon Investment Management Asia-Pacific.   This has led to a unique situation when even though the country’s debt amounts to more than 200% of its GDP,  it’s inexpensive to service, as the rates remain very low.

 

With inflation picking up, companies are expected to find better use for their persistent surpluses, thus reducing the demand on bonds and contributing to reinvigoration of the country’s economy.  Bond yields will likely go up, but “it would be a sign of vitality rather than cause for alarm,” adds Cox.

 

With Japanese corporations assuming an increasingly bigger role of borrower and investor, the governments’ deficits will be “less sustainable, but also less necessary,” he says.