If Japan's ambitious plan to pull its beleaguered economy out of a deflationary rut falls flat this year, it won't be the only country that feels the pain, economists at asset management firm Schroders have said.
Although the first two arrows of 'Abenomics' have had some success in creating inflation and economic growth, naysayers have cast doubt over whether Prime Minister Shinzo Abe can pull off the third arrow of his plan - structural reform. Thus, they are fearful that the upcoming consumption tax hike in April could damage Japan's economic recovery beyond repair.
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According to Craig Botham, emerging markets economist at asset management firm Schroders, if Abenomics does fail, emerging markets will be left vulnerable.
"We highlighted a number of risks to our baseline forecast [for emerging markets], one of which was a scenario where Abenomics fails," said Botham.
"In the event that yen depreciation does step into overdrive, the most likely impact seems to be on Asian emerging markets' exports to Japan, particularly in the absence of another round of emerging market currency exchange depreciation," he added, referring to the selloff the region suffered in mid-2013 amid concerns the Federal Reserve would taper its asset purchase program.
In the firm's most extreme downside scenario, if the tax hike pushes the economy back into recession, the Bank of Japan will be forced to step up its asset purchase program, further weakening the yen to a level of around 130 to the dollar.