Investors’ verdict may be too harsh

The enthusiasm with which Abenomics was first greeted seems to have given way to a more sober assessment in recent months. While the US stock market has scaled new heights, the Nikkei is down around 10% since the start of the year. But investors’ verdict may be too harsh. The economy will surely contract this quarter as households restrain spending in response to the consumption tax hike. Sluggish wage growth doesn’t bode well for consumer spending either. However, Japan’s large corporations derive an ever larger share of their earnings from activities abroad and, if the yen continues to weaken as we expect, their profits should continue to improve. Corporate tax cuts and other structural reforms are on the backburner for now, but would bolster profits, too.