March 3, 2013 7:31 pm
Japan: Hey, big spender
Shinzo Abe has ambitious plans to shake Tokyo out of its economic torpor but his expansionary agenda carries risks
.
Japan is back.” That was the simple but – given the country’s trouble-strewn recent history – audacious message that Shinzo Abe carried with him to Washington last month for his first meeting with Barack Obama, the US president. “Japan is not, and will never be, a tier-two country,” the new prime minister declared – in case anyone was unclear about the direction in which it had been wandering.
Not so long ago, a Japanese leader would have risked mockery with such assertions. The list of Japan’s failings has grown familiar: a stock market that peaked 23 years ago; the developed world’s heaviest national debt; once-feared technology companies that have been eclipsed by rivals from California to South Korea; a shrinking population; and a deflation-wracked economy. Even before the tsunami and Fukushima nuclear crisis that struck in 2011, imposing trillions of yen in rebuilding costs and forcing up the resource-poor country’s energy bills, such problems had convinced many that Japan was a has-been at best and a Greek-style disaster-in-waiting at worst.
.
.
When Mr Abe’s Liberal Democratic party won election on December 16, Japan was in the midst of its fifth recession in 15 years. That is half a recession per prime minister. The country has cycled through 10 leaders in that time – or 11, if you double-count Mr Abe, who crashed out of the job in 2007. Japanese have come up with a name for their paralysed political system, which has seemed unable to reverse the country’s slow-motion decline: kimerarenai seiji – politics that cannot decide.
Yet something has been stirring since Mr Abe returned to power. Even before his declamation in Washington, financial markets had been shouting “Japan is back” for several months. A campaign promise to aid export-dependent manufacturers by bringing down the value of the yen became self-fulfilling: traders, expecting an assault on the currency, have knocked 15 per cent off its exchange rate against the dollar since November.
That, in turn, has ignited the stock market. The Nikkei 225 has soared by a third to its highest level since 2008 (though still only a bit more than a third of its all-time high). Last week Mr Abe added to the rally by picking Haruhiko Kuroda, an advocate of aggressive and unorthodox monetary policy, to be the next governor of the Bank of Japan.
“It’s like one of those boxing matches where someone who’s been a punching bag for eight rounds says ‘wait a minute, I’m going to get in this thing’,” says David Baran, an asset manager in Japan who is co-chief executive of Symphony Financial Partners. He describes “a real sense of electricity” at recent investor conferences in Tokyo.
On paper, Mr Abe looked unlikely to generate this kind of excitement. The scion of a rightwing political dynasty, his first term as prime minister lasted just a year and was remembered for a string of scandals – he lost three agriculture ministers to corruption allegations. Economics barely figured, to the annoyance of voters, who tossed his party from the upper house of parliament. When he quit, he blamed a debilitating bowel disease.
This time, Mr Abe appears to have learnt from his mistakes. His focus has been firmly on the economy, which has been battered by the global financial crisis and a relentless appreciation of the yen. “Abenomics”, as his expansionary agenda is known, has lifted his poll ratings to about 70 per cent, significantly higher than when he took office.
So far, it has been all about creating and distributing money. Mr Abe has ordered one of the largest fiscal stimulus packages in a country with a history of them – more than Y10tn ($107bn) of new debt-funded spending – and strong-armed the BoJ into taking additional measures to end nearly 20 years of consumer-price declines.
In January, under its departing governor Masaaki Shirakawa, the central bank set a 2 per cent inflation target and promised to keep flooding the financial system with cash, by buying government debt and other assets, until it was achieved.
It is the monetary push that has particularly excited markets. The BoJ has kept interest rates low for longer than other central banks, and was a pioneer of unorthodox techniques such as bond-buying. But it has looked timid since the financial crisis took hold, as the US Federal Reserve and European Central Bank took the same ideas and applied them more aggressively, expanding their balance sheets much faster than the BoJ.
“For 20 years, the BoJ has told the government, ‘you show us structural reforms, then we’ll show you the money’,” says Martin Schulz, a senior research fellow at the Fujitsu Research Institute, a think-tank. “Now it’s being forced to show the money first.”
Mr Kuroda is likely to show even more. A consistent critic of BoJ “failure”, he is best known as the man who, as the finance ministry’s top foreign-exchange official in the early 2000s, engineered massive yen-selling interventions that weakened the currency. The effort was a monetary tool as much as a device to aid Japanese exporters. Once, in 2002, Mr Kuroda rattled markets with a speech arguing that Japan could use “massive currency intervention” to reverse deflation by making imports so expensive that they pushed up domestic prices.
Much has changed in the intervening decade, and Japan has, with rare exceptions, moved away from the overt market manipulation of Mr Kuroda’s finance ministry days. Still, in interviews before he was officially nominated on Thursday, Mr Kuroda said he believed there was “substantial room” for further monetary easing and suggested the BoJ could buy a wider range of assets than it has targeted so far.
This would soak the markets with still more easy money and, indirectly, further weaken the yen.
Mr Kuroda must still be confirmed by parliament, but Mr Abe is expected to win enough support from opposition groups to push him through, including in the upper house where the LDP is still without a majority. Both he and Kikuo Iwata, an academic who is one of his two deputy governors-in-waiting, have said the 2 per cent inflation target could be met in about two years.
If Abenomics works, it will happen in several ways. The cheaper yen will lift profits at exporters, who account for about 15 per cent of Japan’s overall economic output but fully half of its recent growth, according to studies.
Easier money will find its way to businesses, which will increase investment instead of hoarding cash, as many do now. The expectation that prices – and by extension companies’ revenues – will rise will add still more incentive to spend, creating a virtuous cycle of revival. Meanwhile, the government will remove regulatory and other hurdles to raise Japan’s underlying potential for growth.
There are a number of ways that this could go wrong and create bigger problems in the world’s third-largest economy. “Beating deflation” has become a widely accepted goal, but the reality of rising prices could come as a shock to consumers, especially if wages fail to keep pace. In a sign that Mr Abe is worried about this, he has visited members of the Keidanren big-business lobby to try and persuade them to increase workers’ pay.
This assumes that prices will, in fact, rise. Mr Shirakawa has argued that looser monetary policy alone will not do the trick in a structurally weak economy such as Japan’s. Some economists agree.
Masamichi Adachi, at JPMorgan, says Japan’s “output gap” – the difference between what Japan produces and what it could produce if the economy was running at full capacity, an important predictor of inflation – more than doubled between the first and fourth quarters of last year, to 3.1 per cent of potential gross domestic product. “Inflation will not come soon,” he says.
There is also the risk of unintended consequences. Deflation may be a bad thing but it has become the fulcrum of a sort of economic balancing act in Japan: the low interest rates used to fight it allow the government to borrow cheaply, so it can cover the huge tax-revenue shortfalls that are a result of the weak economy. If investors come to think that Abenomics will create more inflation and deficits than growth, long-term interest rates could rise. That would wreck the value of commercial banks’ huge holdings of government bonds and, eventually, push up the cost of servicing Japan’s public debt, now equal to more than two years’ GDP.
“Japan is in a stable equilibrium, though it is one where the eventual result is decline,” says Mr Schulz at Fujitsu. He supports Mr Abe’s agenda but says: “To break out of it is extremely risky.”
One area where Mr Abe must still act is structural reform – the “third arrow” of Abenomics, after fiscal and monetary expansion. He made a start in Washington by all but promising to join negotiations over the Trans-Pacific Partnership, a proposed Pacific-rim free-trade zone. The decision, over which his party had long waffled, may bode well for other initiatives favoured by business groups, from deregulating agriculture and medical services to cutting Japan’s relatively high corporate taxes.
A widespread view in Japan is that the true nature of Mr Abe’s agenda will not be known until this summer, after elections for parliament’s upper house. If Mr Abe can maintain anything like his current level of popularity, he is likely to win back his party’s majority and consolidate his power.
Supporters say this would allow him to push ahead even more forcefully on economic reforms, but there are worries that a second election win would transform him back into the nationalist culture-warrior of 2006-07. He has expressed a desire to take back past official apologies for Japan’s wartime conduct in Asia, and to strip its constitution of its anti-war provisions. Such moves would inflame China, with which Japan is locked in a tense stand-off over islands in the East China Sea, as well as Korea.
They could also undermine his support at home, where polls show the Liberal Democrats are well to the right of most voters: almost all LDP lawmakers favour changing the constitution, for instance, versus half of the general population. “If he can carry the upper house election,” says one government official who works closely with Mr Abe, “I think these issues will get the spotlight again.”
Copyright The Financial Times Limited 2013.
0 comments:
Publicar un comentario