New Delhi [India], November 2 : The concept of "Japanification" has garnered attention in multiple Asian countries, particularly India, amidst declining birth rates and a noticeable deceleration in economic growth.
According to a report by S&P Global, this term refers to economies characterized by sluggish growth and low inflation despite adopting accommodative monetary policies and fiscal stimulus.
However, when dissecting what Japanification truly represents, it reveals some unexpected and advantageous economic realities in Asia, particularly India.
While these economies may appear to have temporarily stalled, it's imperative to redefine what Japanification truly signifies.
In essence, Japanification should be closely linked to the current economic landscape of Japan, offering valuable insights into the nation's real-world experience.
Japan's economy is marked by modest economic growth and relatively subdued inflation compared to its developed counterparts. Nevertheless, there's more to Japanification than meets the eye.
Japan's monetary policy is notably accommodative, with the current policy rate set by the central bank standing at a negative 0.1 per cent.
In practical terms, this implies that borrowers are effectively paid to take loans, even before factoring in inflation.
In India, analysts predict that corporations may face challenges in enhancing their creditworthiness, signalling a mixed bag of news.
While creditworthiness has been steadily improving since 2021, with little room for further enhancement, the domestic economies in Asia possess the strength to support many corporations. Financial positions remain robust in numerous cases.
However, S&P Global Ratings predicts a marginal increase of 10 basis points in the policy rate this year, with another 10 basis points expected next year.
While this remains remarkably low by US or European standards, Japan's inflation is also significantly more subdued, registering at around 3.2 per cent for 2023.
Next year's inflation forecast is 2.0 per cent, with subsequent years anticipating even lower levels. Additionally, Japan boasts an unemployment rate of just 2.6 per cent, and labour force participation is on the rise.
For the average Japanese citizen, minimal unemployment and slight inflation bring their own set of advantages.
Yet, the economic landscape is not without its nuances. The most recent Purchasing Managers' Index data from Japan reveals an end to an eight-month streak of private sector growth that commenced in January.
Manufacturing output has declined, but this is coupled with a reduction in the cost pressures affecting the manufacturing and service sectors. Consumer services, buoyed by robust tourism numbers, are on the rise.
The domestic economy retains the strength to support many Japanese corporations, and financial positions remain robust in numerous cases.
However, several risks, including geopolitical tensions, rising energy prices, or a downturn in the US, Europe, and China, have the potential to curtail the creditworthiness of Japanese corporations.
As Japanese interest rates climb, even if modestly, the elevated cost of capital will inevitably impact corporate profits.
For banks, the repercussions vary. Those reliant on lending rates for income stand to gain more profit, while investment-oriented banks may face short-term challenges.
According to S&P Global Market Intelligence, five Japanese banks have witnessed significant declines in their liquidity coverage ratios, a measure of a bank's health, representing high-quality liquid assets as a percentage of average net cash outflows over a 30-day period.
The overall portrait painted is that of an economy that may grow slowly but sustains robust domestic consumption, low unemployment, and subdued inflation.
The overall portrait painted is that of economies that may grow slowly but sustain robust domestic consumption, low unemployment, and subdued inflation.
Japanification, as it is unfolding in Asia, reveals a more nuanced and surprisingly beneficial economic scenario.
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