Most Japanese investors have embraced prime minister Shinzo Abe’s determination to drive down the currency and embark on a new round of fiscal stimulus. Since Mr Abe’s election, the Topix Japanese stock index has risen 22 per cent and the yen has weakened dramatically. Now Haruhiko Kuroda, a career bureaucrat at the Ministry of Finance newly appointed to the Bank of Japan, will preside over a more aggressive round of quantitative easing.

Others, though, are more sceptical, believing these policies will lead to rising rates without offsetting benefits, given the lack of structural reform, adverse demographics, low productivity and the competitive threat from neighbours in China and Korea.

For years if not decades, to go short on the Japanese yen and the Japanese government bond market was known as the graveyard trade as losses swelled. Now thanks to the brave, though hardly new, world of “Abenomics”, the short yen trade is making money and Japan bears are extending their bearish bets to corporate Japan.

Their positions show both how much is at stake in what the government is trying to do and why many money managers and economists are pessimistic about the likelihood that the new government will be able to put the country on a higher and more enduring growth trajectory. That is because the government’s agenda consists largely of quick fixes that failed to work in the past and are even more dangerous today after decades of low or negative growth. (And Japan today is once more in recession after three quarters of negative growth.)

On some levels a cheap yen does contribute to the earnings of Japanese exporters. But the boost is in some measure artificial. Better to make more attractive products and have pricing power. And in any case, a weak yen is far from a pure blessing. Japan continues to depend on imports of raw materials. It is more reliant on imported energy than it was before the Fukushima disaster since nuclear power has been sharply curtailed. Both the trade account and the current account will come under greater pressure.

Moreover, if the yen continues to weaken as the government wishes, foreign investors will demand more returns to compensate for the risk on the currency side. They are a small part of the investment into the market, but changes always start at the margin. Rising interest rates will be a problem both for the government and for Japan’s overleveraged companies – the target of these unconvinced investors.

The government’s spending policies are also likely to prove ill-conceived. In the past, the government’s stimulative policies had a zero multiplier effect, reflecting as they did the demands of vested interests, especially in the construction industry. This led to Japan’s famous concrete-lined rivers and impressive bridges spanning small streams in the mountains. Indeed, in the past such policies had a reverse effect because consumers felt obliged to save even more in anticipation of rising taxes to pay for the unwanted works.

It would have been far better to build nursing homes than roads, given Japan’s ageing population. Such facilities would also help nurture Japan’s under-developed service sector and reduce the incentive to save for retirement. But that might require immigration – one of many structural reforms that are not even on the agenda.

Moreover, even if Abenomics does succeed in inducing higher inflation as a result of the weakening yen, the chances are that wages will not keep pace because they never do. Weak domestic demand then becomes even weaker.

For all these reasons, some hedge fund managers on the other side of the Pacific are now taking negative positions on precisely the Old Japan corporate names that should be the big beneficiaries of the Abe administration’s policies. They are, for example, buying protection in the credit default swap market on a host of companies in the paper, shipping and steel sectors, not because they expect these companies to default but because the cost of protection seems low compared with the risk of declining business.

If the credit spreads widen, as seems likely to these investors, they will make money. Some steel companies have more leverage than ArcelorMittal – and are more exposed to China. Paper companies are finally seeing demand drop as Japanese use their devices rather than faxed maps to find their way to unfamiliar addresses.

Moreover, even many Japanese worry about what happens if these policies prove fleeting or unproductive, given Mr Abe’s rightwing nationalistic views. Since the Meiji era almost 150 years ago, some bankers point out that Japan has only ever recovered from recession through war, preferably other people’s wars, such as the Korean war in the 1950s. If rearmament stocks start to rally, Japan’s fortunes might rise in the short term but be even more at risk long term.

henny.sender@ft.com

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