Abe's to Blame for Nikkei Boom and Bust
It's a remarkable attempt at disassociation: Japan's chief cabinet secretary assuring markets that Shinzo Abe's policies can't be blamed for a deepening stock slump. It's also a cynical one.
The only reason the Nikkei 225 Stock Average soared 57 percent last year was that Prime Minister Abe promised the world he would revitalize a no-longer-competitive economy, defeat deflation and figure out how to the keep the world's fastest-aging and most-indebted nation from becoming the next Greece. Then, Abe green-lighted the Bank of Japan to unleash history's greatest monetary bonanza to show that times were changing.
The result was completely predictable: booming equities, fresh life in the real estate markets and Abe's face on magazine covers, with headlines screaming Japan was back. Then around May 2013, five months into Abe's premiership, markets asked to see Abe's restructuring plan. Please be patient, he replied. Again, in September, markets asked for a peek. Please wait, Abe said. In January, when Abe gave the keynote at Davos, bulls figured this would be the moment the guts of Abenomics were unveiled. Nope.
Now, patience is running thin (as of Tuesday, the Nikkei was down 14 percent from its Dec. 30 peak). Abe's failure to flesh out even just one of the many epochal reforms he's promised has exposed last year's stock surge as a bubble. That's why the Nikkei is leading declines among developed markets. Abe promised everything and failed to deliver much of anything. So perhaps Chief Cabinet Secretary Yoshihide Suga deserves a pass: He's just doing his job, trying to erase Abe's fingerprints from a massive disappointment trade. But the world knows better.
Abe can still steer his bubble into the realm of rational exuberance, but there's not a second to waste. He needs detail how he will alter tax policies to encourage more startups, and stop coddling the dinosaurs of Japan Inc. with a weaker yen. Abe must spell out specifically how he plans to improve Japan's dismal productivity rankings, empower an unemployed female workforce, wrest sectors from farming to power away from vested interests, incentivize companies to raise salaries and households to spend more and convince the world he's more concerned with ending deflation than provoking China.
This last point hasn't gotten enough attention. The mindset behind Abe's flop at Davos suggests his talk of big change is just that. Really, what better audience would there have been to reenergize the so-called third arrow of his three-pronged reform program than at the World Economic Forum? Abe could have given a point-by-point breakdown of the policy changes to come. Instead, he wandered, bizarrely, into the weeds of World War I, comparing Germany and the United Kingdom in 1914 and China and Japan now.
If only Abe would spend as much time tweaking a stifling regulatory environment as he has altering textbooks to weed out anything that doesn't fit with his view of a "beautiful Japan." If only he worked as hard at ending the nuclear crisis at Fukushima as he is trying to restart reactors around the nation. If only Abe spent a fraction of the time he does jetting off to Cote d'Ivoire, Ethiopia, India, Mozambique, Oman and elsewhere hunkering down with his economic-strategy team. If only Abe's government expended less energy having its way with an already docile Japanese media, including national broadcaster NHK, and more making his reform case. If only Abenomics really did have three parts and wasn't just a monetary enterprise.
The latter may be the main reason investor patience is running thin. Abe's three-arrow program is a reference to the tale of a 16th century samurai warlord, Motonari Mori, who tried to teach his sons unity by showing them a single arrow could be snapped easily, while three together were hard to break.
The first arrow, unleashed in March by Bank of Japan Governor Haruhiko Kuroda, was admittedly bold. But I've always had a sneaking suspicion that Abenomics is a one-arrow program. Abe, it seems to me, thought Kuroda's yen tsunami would float all economic boats as rising stocks gave companies confidence to hike wages and consumers incentive to spend more. It's not working as planned: Executives are hoarding profits from a weaker yen; households are bracing for a rise in the sales tax to 8 percent in April from 5 percent; and the Federal Reserve is pulling liquidity out of global markets as fast the BOJ can add it.
Abe claims fiscal stimulus makes up the second arrow, but Japan has been building unnecessary roads, bridges, ports and white-elephant art museums for decades now. What's new about that? Those public-works projects might make a difference if they were aimed at revitalizing the earthquake-ravaged and largely-forgotten Tohoku region -- but they're not. The most important arrow, the third, looks like a political con at this point. Economists complain it's still in the quiver. What if Abe's political will to upend Japan Inc. never existed?
Last year's jump in asset prices simply isn't sustainable unless the restructuring steps Abe pledged in December 2012 materialize. So, yes, Prime Minister, the Nikkei's recent plunge is your doing. The question now is, what will you do about it?
(William Pesek is a Bloomberg View columnist. Follow him on Twitter at @williampesek.)
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