The financial media and investors were waiting tonight for Prime Minister Abe’s latest announcement on the extreme economic sport known as Abenomics. But his new installment dashed hopes, and after a short-lived rally, the Nikkei is down over 3%. But after the wild ride since May 22, when the Japanese index plunged 7.3%, a 3% decline is coming to look almost like normal daily volatility. (Well, now that it’s down nearly 4%, it might be a beast of a different color).
The initial salvo took place last fall when Abe announced aggressive fiscal spending. In April, the Japanese central bank committed to hitting a 2% inflation target, which pushed the yen lower and put the Nikkei, which had already appreciated 50% from its lows, on a new upward trajectory.
But to restort to that old Yankee saying, it’s not clear you can get there, meaning to a decent level of growth, from here, which for Japan is a country with terrible demographics and a backdrop of weak global growth. Japan blew its chance early in its crisis by not fixing its banks. Policymakers did keep the economy from keeling over via deficit spending and weakening the yen, which was tolerated abroad because the island nation successfully portrayed itself as a basket case. So even though the domestic economy fared badly, that was buffered by Japan retaining its status as an export powerhouse. But in 1997, when officials tired of years of building bridges to nowhere, they tried cutting spending, which promptly led to a second phase of financial crisis, when several long-term credit banks and the third biggest securities firm failed.
One school of thought believes that Abenomics is long overdue. As Ambrose Evans-Pritchard wrote in January:
This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who “brilliantly rescued” his country from the Great Depression.
Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran “Keynesian” budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.
He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity…
Few dispute that Japan escaped from slump and pioneered the world’s most successful policy mix — in strictly economic terms — from 1932 to 1936. The trick was to act with overpowering force and combine all forms of stimulus, each leavening the other.
Monetarists say Japan’s great mistake over the last 20 years has been to launch one spending spree after another without monetary backing, like sending infantry over the top deprived of artillery support. The result has been to push net public debt to 145pc of GDP this year (gross debt is 245pc) without reaching “escape velocity”.
But there are some problems with looking at this example. The big one is that by abandoning the gold standard, Japan was contributing to the tear-down of the economic order of its day. Now the early repudiators, which included England, recovered from the Depression faster than the hold-outs. Moreover, one of the keys to the success of the 1930s recovery program was the trashing of the currency, which fell 60% against the dollar.
In other words, Japan was able to act unilaterally back then. Now G-20 members are attuned to the dangers of beggar-thy-neighbor currency and trade policies. Weirdly, Japan allowed China to push the yen into the nosebleed territory of 80 to the dollar and keep it there. Now, even though a fall to 100 is a large move, the yen was in the 110 to 140 v. the greenback range from the mid-1990s to the unwind of the carry trade during the crisis. So while the fall is helpful, it’s not even to the level of the 1990s, and that was insufficient to spur an export-driven recovery.
And Japan’s trade partners are already saber-rattling. South Korea and Germany are already unhappy with the fall of the yen, although South Korea’s trade figures aren’t yet showing enough damage to give it the moral high ground.
The Japanese have claimed that Abenomics has been intended to stimulate domestic demand, that the fall in the currency is just an unfortunate side effect. Remember that Japan is also the land where trade officials said with straight faces that they needed to restrict American beef imports because Japanese colons couldn’t digest it. But even thought there is probably a fair bit of truth in officials’ claims about their objectives, the shock and awe campaign hasn’t yet delivered the goods. And the worst is that market reactions are if anything at odds with policy aims. Normura analyst Richard Koo (via his new report excerpted in Clusterstock) explained that interest rates have started rising, not because rising demand has started to produce inflation, but because the central bank talk and actions have increased inflation expectations among investors. Koo also underscored that a late May survey showed that only 22% of the Japanese public saw any signs of improvement in the wake of Abenomics. Ouch.
So while the BoJ can push asset prices around, it’s not clear it can do as much as it thinks for the real economy. And they of all people should recognize that. Remember it was the Bank of Japan that decided to inflate asset prices in the late 1980s to create a wealth effect in the hopes of stimulating more consumer spending. We know how that movie ended.
Or to put it another way, while central banks can choke off growth by increasing interest rates, the converse, putting money on sale, isn’t going to stimulate demand when conditions are weak. We are seeing again and again that the liquidity goes into financial assets and other types of speculation.
But Abe’s announcements tonight were supposedly directed at helping the real economy grow. Why did they fall short? I’d like to get a reaction from readers of the Japanese press, since you can frequently drive a truck between what is reported in Japan versus commentary on Japan in the Western media. The financial press here is harping about the lack of labor market reforms, a standard neoliberal trope. This account comes from the Wall Street Journal:
But the long-awaited growth strategy—crafted to supplement the bold fiscal and monetary stimulus that has jolted global markets—dodges some of the tough decisions that many economists say are needed to fix the root causes of Japan’s prolonged slump. It includes only modest measures to make it easier for industrial giants to shrink payrolls widely seen as too swollen for current demand, and avoids any provisions to ease layoffs, which are all but impossible in Japan.
Mr. Abe’s proposals “are not enough for Japan to achieve sustained economic growth and overcome deflation,” said Hisashi Yamada, chief economist at the Japan Research Institute. “Without labor-market reform, Japan will hit a wall with growth.”
Huh? Japan has had a system of “freeters” or non-permanent workers, including at large companies, and I’ve heard from executives at top Japanese companies that there is already considerable concern about the impact on Japanese society, since these freeters lack the strong connection to a community that is deemed important in that society. And on a mundane level, freeters lack a sufficiently stable income to start their own households or get married. Moreover, it isn’t the big companies that are usually depicted as where the overmanning takes place in Japan. The big problem children are the fragmented retail sector and and the numerous small suppliers to large companies (although the latter have likely had their ranks considerably thinned over the lost decades).
And in terms of recovery, what would allowing big companies to cut jobs now accomplish? Abenomics is intended to boost demand. The neoliberal wet dream of crushing labor to boost corporate profits is contrary to that. The Journal cites “government statistics” that indicate that Japanese companies (presumably across the economy) have 4.6 million workers more than they need. With Japan having a labor force of roughly 67 million, the Journal is arguing that increasing the unemployment level by an additional 7% would be pro-growth. You cannot make stuff like this up.
And even with money super cheap for two decades, Japanese companies haven’t been eager to invest, so it isn’t as if increasing their profits would change that dynamic. (As an aside, Japanese see keeping employment levels high, or at least decent, as key to social stability. Japanese executives and managers, contrary to Western practice, have compressed the gap between entry level and senior level pay, which was never high to begin with, in order to save jobs).
What could help Japan is more demographic growth, as in more immigrants. But the Japanese don’t tolerate that at all well (they’ll be actively hostile to gaijin who go where they aren’t supposed to be), and you’ll notice that’s nowhere to be found on the reform list.
Now some of the market disappointment may be due to unrealistic expectations combined with Japanese vagueness (Japanese is a language in which it is possible to give entire speeches and say nothing). Some critical details weren’t spelled out, such as how big the “targeted corporate tax cuts” would be. But even the ideas that seem to have been fleshed out sound more like tinkering than the promised bold strokes:
The package is broken into three “pillars:” improving the productivity of private industry, making the labor market more efficient and inclusive, and developing new markets through fostering new industries and adding more overseas markets.
Making the case for new policies to revive Japan’s stagnant industrial sector, officials noted that capital investment has been negative for many years, and that the average age of equipment has risen sharply since the early 1990s.
The plan includes new tax breaks to encourage capital investment and the shedding of aging machines. It will propose altering tax law to make it easier for companies to merge and close or sell inefficient business lines.
Another problem has been rising energy costs, following the near-complete shutdown of the nuclear-power industry after the 2011 Fukushima nuclear disaster.
In addition to moving to restart more reactors, the government aims to overhaul the power-supply market for the first time in 60 years, opening the electricity market to competition by allowing any power producer to use transmission networks to distribute electricity to retail users. It would make it easier for the nine regional monopolies to enter each other’s markets. Transmission and distribution functions at the regional monopolies would be separated to make sure other suppliers could gain fair access to the transmission networks.
The package includes changes in the agriculture sector while opening it to more competition from imports. The new measures are aimed at expanding sales to ¥120 trillion in 2020 from ¥100 trillion currently, raising the number of young farmers to 400,000 in 10 years from 200,000 now and increasing agriculture-related exports to ¥1 trillion annually by 2020 from ¥450 billion. The government will encourage efficient large-scale farming and promote “authentic Japanese cuisine” overseas.
As one old Japan hand remarked before the overnight announcement, Abenomics so far sounds too much like what has gone before to turn him to persuade him that Japan would finally turn the corner. And Koo’s report describes why the rise in the Nikkei may have been a big headfake. Japanese investors initially stood aside, and the rally early on was driven by hedgies who thought shorting the yen was a better trade than betting against the euro (remember the Nikkei has long traded in opposition to the yen, so going long the Nikkei is expressing the same view). Japanese investors later joined the stock market rally as a momentum play.
So perhaps the continuing Japanese stock market correction is simply the punters coming to a more realistic grasp of Abenomics, that it will take some time to prove whether it can deliver the goods. And the US and Chinese growth having weakened in the intervening months is a serious headwind. Wish the Japanese luck. They need it.