Dubai: Japan, the world’s third largest economy, is evenly poised to take the maximum advantage of a steep decline in oil prices if Shinzo Abe wins next year’s elections.
Japan could witness a rebound in demand in 2015 if Abe pushes through wage hikes early next year, a move that can spur the economy and increase disposable incomes of consumers amid a near 30 per cent drop in prices of crude oil since June. Brent hit a five-year low below $68 (Dh250) a barrel on Monday after averaging around $110 a barrel in 2011 to 2013.
“Among all the major consumers, Japan is the dark horse. If Abe can win the elections convincingly and immediately deliver on wage increase to workers, it could push Japan up in the new year much more than the American economy. All that Japan needs now is a dose of wage increase,” Arjuna Mahendran, chief investment officer with Emirates NBD Wealth Management, told Gulf News.
Japanese Prime Minister Shinzo Abe in November called a snap election to seek a mandate for his decision to delay a sales tax increase, widely seen as a referendum on his efforts to revitalise the economy.
In October, the Bank of Japan injected 80 trillion yen yearly into the financial system, mainly through the purchase of government bonds, in a bid to ward off the threat of deflation, a far cry from the United States, which is planning to curb its bond-buying programme.
“Bank of Japan has monetised about 6 trillion yen in the last QE [quantitative easing] that took place in October. So the stage is set for a nice rebound in demand. What it needs is a bit of wage increase, which will come after the elections,” Mahendran said.
In October, Japan’s crude oil imports increased 3.9 per cent from a year earlier to 102.65 million barrels, marking the first rise in eight months.
US, India as beneficiaries
The US will be the biggest beneficiary at this point. Domestic prices have been low, and now they are even lower because of the slump in international prices. Crude offtake will rebound because domestic demand has been running fairly strongly and employment creation has been positive now for a year, said Mahendran.
US GDP (gross domestic product) rose more than expected in the third quarter to September, helping push the US budget deficit down to the lowest level since 2008, marking the sharpest turnaround in the government’s fiscal position in at least 46 years.
“The prices of gasoline has fallen from $3.50 to $2.60 a gallon, and that’s why we can see a higher chunk in spending on other goods,” Mahendran said.
“Lower prices are also having a positive impact on India where demand will continue to rise over the coming years. The recent price collapse will go a long way to significantly improve its current account balance while supporting growth and keeping inflation under control,” Ole S Hansen, head of commodity strategy at Saxo Bank, told Gulf News.
India is currently the world’s third biggest importer of crude oil and it accounts for almost one-third of its imports. Lower crude prices would also help the country in trimming its record trade deficit, which led to a record weakness in the rupee in 2013.
