Is Abenomics a threat to emerging markets?


In December’s Viewpoint, we highlighted a number of risks to our baseline forecast, one of which was a scenario where Abenomics ‘fails’. In particular, we believe that the VAT hike due in the second quarter of 2014 could tip the economy back into recession. This would necessitate even more aggressive action by the Bank of Japan (BoJ), which would step up asset purchases to further weaken the Japanese yen (JPY), thus weakening the JPY against the US dollar (USD) to 130 – a much greater depreciation than in our baseline scenario. We said that this would have a deflationary impact through the effect on trade flows. Assuming that Japanese companies use the fall in the JPY to cut prices (rather than just boost profits through higher export revenues), those who compete with Japanese companies will feel a squeeze on their market share. In this Talking Point article we take a closer look at which economies would be worst affected by this.

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