Abenomics Races Against the Clock
Are Shinzo Abe’s days as Japan’s prime minister numbered?
Many will dismiss this question as premature or naive -- perhaps both. The architect of “Abenomics” boasts a higher approval rating than any of the eight previous Japanese prime ministers. Abe’s Liberal Democratic Party is heading to a big victory in next month’s upper-house election. Supporters are convinced he will use that mandate to end Japan’s 20-year deflationary funk with boldness, creativity and panache.
There’s just one problem with their thesis: The batteries that have powered support for Abe’s revival plan -- surging stocks -- are running out. Given how quickly the Japanese electorate tends to sour on politicians, the prime minister and his most ardent fans should be worried.
Six months into Abe’s shock-therapy experiment of massive monetary and fiscal stimulus as well as sweeping structural reforms, Japan faces record trade deficits, extreme volatility in the bond market and rising energy and food costs as a weaker yen makes imports more expensive. The capital-spending and household-wage increases that are needed to halt deflation have yet to materialize.
Punters could ignore all this data when Japanese stocks were locked into an upward trajectory. Abe’s hope was that the equity boom would spark a positive domino effect. Optimistic companies would hire more and fatten paychecks. Households would open their newly flush wallets. Increased output would swell government coffers and help pay down Japan’s massive debt. Buoyant corporate profits would draw ever more investors into markets and keep the whole virtuous cycle going until gross domestic product soared.
Pulling a Koizumi
In effect, Abe hoped to pull a Koizumi on the political establishment. Former Prime Minister Junichiro Koizumi was able to outmaneuver Japan’s parliament and bureaucracy, privatize the vast postal-savings system, and cut public-works spending by appealing directly to the public and investors. That’s why Abenomics began with the Bank of Japan doubling the monetary base, bolstering consumer confidence.
Already, though, the strategy is beginning to fray, as evidenced by recent stock swoons. Huge gains in the Nikkei 225 Stock Average and broader Topix Index bought Abe time to articulate how he planned to deregulate the economy, liberalize trade, cut corporate-tax rates and encourage entrepreneurship. He has failed to do so, and his lack of a clear blueprint is now eroding any goodwill he had earned in the markets.
As with Koizumi, Abe will need several years to see through his reforms. Yet the median tenure of the last 10 Japanese prime ministers is only 419 days. If public trust slides along with markets, the odds of Abe sticking around will drop, too. Even if he hangs on, his chances of ramming big changes past Tokyo’s vested interests decrease.
Yes, it may be too soon to judge. But it hardly seems promising that consumer-goods makers and retailers aren’t buying into Abenomics. Executives from Asahi Breweries Ltd. to clothier Fast Retailing Co. to skin-care-products maker Shiseido Co. (4911) have no plans to raise prices.
What about Japan’s fickle populace? Polls show Abe’s previously bulletproof support is starting to crack. The approval rating for his Cabinet dropped 2.8 points to 57.4 percent, according to a Jiji Press poll conducted from June 7 to June 10 (even before a series of big drops in the market last week). It’s the second straight month of declines. Other polls show the Cabinet’s standing has also begun to slide with stocks. For all the supposed excitement about Abe’s saving Japan, only 44 percent of respondents to a recent Yomiuri newspaper poll said they would vote for the LDP next month.
Bag of Goods
Stock gyrations are merely a symptom of what ails Abenomics. Voters, like foreign investors, are sensing they have been sold an all-too-familiar bag of goods. Abe’s team appears to be making things up as it goes along, promising additional tweaks after every zig and zag in markets. Instead of offering strategic thinking that breeds confidence, Abe & Co. are following markets that they should be leading. Creating a bubble in expectations, along with a bubble in stocks, is no way to heal the world’s third-biggest economy.
Abe must get a handle on these violent market swings, and now. Otherwise, mass disillusionment may drive him out of office -- and Japan’s big opportunity for change with him.
(William Pesek is a Bloomberg View columnist.)
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