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Special Topic: The impact of Abenomics on New Zealand - one year in

It has been just over a year since Japanese Prime Minister Shinzo Abe launched the three-pronged economic plan dubbed 'Abenomics' aimed at reviving the Japanese economy from almost 20 years of sluggish growth. The plan has monetary, fiscal and structural elements - the so-called three 'arrows' - aimed at ending the deflationary cycle, returning the public finances to a sustainable footing, and boosting the economy's potential rate of growth.

International opinion remains divided as to how successful these three arrows will prove, particularly at addressing the deep-rooted structural imbalances in the Japanese economy. While not a full assessment of the impact of Abenomics on the New Zealand economy, this special topic takes a look at the initial impacts so far on New Zealand's bilateral trade with Japan.

Abenomics offers potential long-term benefits for New Zealand exporters

The impact of Abenomics on New Zealand's trade with Japan will be felt through a variety of channels, both direct and indirect, and positive and negative, and will also differ between the short and the long term. Clearly, a rejuvenated Japanese economy has the potential to provide long-term benefits for New Zealand exporters. Japan has slipped down the ranks of New Zealand's top export markets over the past two decades, being surpassed by the US and, more recently, China (Figure 7). Nonetheless, it remains New Zealand's fourth largest goods export market, ahead of Korea and the UK, and is an important source market for overseas visitors too.

Figure 7 - New Zealand top export destinations
Figure 7 - New Zealand top export destinations.
Sources: Statistics New Zealand, the Treasury

As the world's third largest economy, a more prosperous Japan would provide a welcome backdrop for regional and global economic growth too. To the extent that a stronger Japan enables faster growth in the Emerging Asia region, Abenomics has the potential to deliver additional indirect benefits for New Zealand exporters. In this regard, the International Monetary Fund has noted that an increase in Japanese foreign direct investment and bank lending to many Asian countries over the past year or so has helped to counteract some of the pressures that arose in the region from speculation of tapering in the US.

One year in, however, it is the short-term, knock-on effect on the yen from Abenomics' first arrow - the massive monetary expansion by the Bank of Japan aimed at achieving its new goal of 2% inflation - that has been the most visible. The yen has plunged by over 20% on a trade-weighted basis since Mr. Abe came to office in December 2012, and has fallen to a similar extent against the New Zealand dollar (NZD).

Weaker yen taking its toll on goods exports...

There is, of course, no simple answer as to how exchange rate movements affect the real economy and there are a range of trade-offs to consider.[1] On the negative side, the sharp increase in the bilateral exchange rate against the yen appears to have taken a toll on New Zealand's goods exports to Japan. In the year ended November 2013, exports to Japan fell by 12.7% ($400m) compared with the previous year, led by falls in exports of wood, fruit, and mineral fuels, although factors other than the exchange rate may have had an effect too. Either way, New Zealand's goods trade surplus with Japan, which has been a feature since mid-2009, has largely been eroded over the past year or so.

...as Japanese visitors tighten their belts

The weaker yen also appears to be constraining spending by Japanese visitors to New Zealand. Admittedly, the number of short-term visitor arrivals from Japan increased by around 7% in the year ended November 2013 from the previous year, having broadly stabilised after a dip around the time of the tsunami in 2011. However, according to the latest available data from the Ministry of Business, Innovation and Employment's International Visitor Survey, total spending by Japanese visitors fell by 13% ($30m) in the year ended September 2013.

As recently as 2011, Japanese visitors to New Zealand spent more per day than visitors of any other nationality. However, in the year ended September 2013, Japanese visitors' daily spending ranked only fourth, behind visitors from China, Australia and the US, respectively (Figure 8). Overall, spending by Japanese visitors is likely to remain subdued over the coming years as the lagged impacts of the weaker yen feed through.

Figure 8 - Daily spend by visitors to New Zealand
Figure 8 - Daily spend by visitors to New Zealand.
Source: MBIE, Statistics New Zealand, the Treasury

But there are some offsets...

On the flipside, of course, the higher NZD exchange rate against the yen also makes yen-denominated imports from Japan cheaper. Around half of the goods that New Zealanders import from Japan are capital or intermediate goods (with the remainder dominated by imports of cars, discussed shortly). Given the ongoing Canterbury rebuild, the higher exchange rate against the yen, as with the elevated trade-weighted exchange rate index (TWI) in general, increases the quantity of goods that New Zealanders can buy with a given amount of NZD.

The higher exchange rate also makes it cheaper for New Zealanders to visit Japan, although this benefit is limited by the fact that nearly four times as many Japanese visitors visit New Zealand each year as go the other way.

...particularly with regard to car imports

Perhaps the largest beneficiary from the sharp rise in the NZD against the yen, however, has been car importers and, in turn, consumers. With no car exports to constrain, the usual two-sided and offsetting considerations associated with a high exchange rate mentioned above do not apply to cars. In this partial sense it is in New Zealand's interests to have as high a car-related TWI as possible. Figure 9 shows a car-weighted exchange rate index (car-TWI) for New Zealand, constructed by the Treasury based on data from the New Zealand Transport Agency on the origins of car imports over time. With over 80% of cars registered in New Zealand currently originating from Japan, the index is dominated by the yen cross-rate.[2] Accordingly, while the headline TWI has increased by around 6% since late 2012, the car-weighted index has surged by more than 33% over the same period.

Figure 9 - Measures of the exchange rate
Figure 9 - Measures of the exchange rate.
Sources: RBNZ, NZTA, the Treasury

Apart from three notable instances when emissions rules for imported cars were tightened, the average price of a car imported into New Zealand is closely (inversely) related to changes in the car-TWI (Figure 10). The average price of an imported car fell by $1,500 (8.1%) in NZD terms over the year ended November 2013.

Figure 10 - Cost of car imports vs. car-TWI
Figure 10 - Cost of car imports vs. car-TWI.
Sources: RBNZ, NZTA, the Treasury

This coincided with a surge in car registrations over the course of the year - particularly of cars previously registered overseas, which accounted for over three-quarters of the increase in registrations since the end of 2012 (Figure 11).

Figure 11 - Car registrations
Figure 11 - Car registrations.
Sources: NZTA, the Treasury

All told, in the year ended November 2013, New Zealanders imported 20% more cars than in the previous year, but the value of such imports increased by just 10%. It is not accurate to describe this as a saving, as New Zealanders on the whole still spent more on car imports than in the previous year. However, all else equal and in the absence of the higher car-TWI, we estimate that the import bill for the same quantity of car imports would have been some $300 million higher than was actually paid.

Moreover, the higher car-TWI is also likely to afford a range of welfare benefits not readily visible in the nominal trade statistics. For example, as a result of the higher car-TWI, a given outlay of NZD could now potentially be able to buy a newer, safer and more economical car than previously would have been the case.

Conclusion

Assessing the impact to date of Abenomics on New Zealand's trade with Japan essentially boils down to evaluating the short-term impacts of the sizeable appreciation of the NZD against the yen. This is not an easy or scientific task. The stronger NZD appears to have reduced Japanese demand for New Zealand’s goods and services exports, but there are a number of offsetting impacts to consider too – particularly given Japan’s position as the main supplier of cars to New Zealand. On balance, we estimate that the positive and negative impacts for the economy as a whole broadly balanced each other out over the past year or so. However, there will have been winners (mainly consumers) and losers (exporters).

Over the longer term, a rejuvenated Japanese economy would increase Japanese demand for imports and offer potential lasting benefits for New Zealand's exporters. They would stand to benefit directly through Japan's position as New Zealand's fourth largest export market, and also indirectly through potential knock-on effects on the Emerging Asia region.

For now, though, it is too early to deem the Abenomics experiment a success and there remain a number of large challenges to overcome - particularly with regard to delivering growth-enhancing structural reforms. Only time will tell whether Abenomics will help to get the Japanese economy back on track, or whether it will prove another false dawn for the Land of the Rising Sun.

Notes

  • [1]This is one of the main conclusions of a Treasury Working Paper released in December 2013 and available on the Treasury website. See: Cassino and Oxley, How Does the Exchange Rate Affect the Real Economy? A Literature Survey, New Zealand Treasury Working Paper 13/26.
  • [2]At present, total car registrations in New Zealand are split roughly equally between cars registered here for the first time and cars that were previously registered overseas. Around two-thirds of the former, and almost all of the latter, originate from Japan.
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