Abe’s Resurgent Japan Hurt by Lack of Business SpendingToru Fujioka
As Japan’s cherry trees bloomed and the stock market soared, Kohetsu Watanabe flew to a blossom-viewing party in Tokyo hosted by Prime Minister Shinzo Abe to tell the premier personally how bad things really are.
When the head of machine-parts maker Daikyo Seiki Co. shook hands with Abe at the 12,000-guest event in Shinjuku Gyoen park, he says he begged the premier to help small- and medium-sized companies that make up 70 percent of Japan’s industry.
“Stocks and the yen may have come back, but the state of the real economy is very different,” said Watanabe, 49, who has no plans to raise wages for his 17 employees and hasn’t paid a bonus since 2008. “It’s impossible for me to be optimistic.”
His company in Akita, northern Japan, highlights the hurdle Abe faces in his quest to end 15 years of deflation and reinstate Japan as a pillar of the global economy. The first two “arrows” of so-called Abenomics, fiscal and monetary stimulus, have caused shares to rise and the yen to slump. While that helps exporters, it means more expensive imported materials and energy for Watanabe. With sales taxes set to rise in April, Abe’s third arrow -- restructuring rules to help businesses -- probably will take too long or be too watered down to prevent a drop in domestic demand next year.
“Japan is beginning to feel the pain of a weak yen without prospects for solid wage growth,” said Tetsufumi Yamakawa, head of Japan research at Barclays Plc. in Tokyo and a former central-bank official. “Japan can’t keep injecting fiscal and monetary stimulus. If Abe fails to boost economic growth with innovative measures, the dependence on monetary easing will end up distorting the economy.”
With executives such as Watanabe waiting for earnings to improve before raising salaries, that pain may last beyond next year as the government faces opposition to dismantling decades-old policies, such as labor laws that make it difficult to fire workers. The Bank of Japan, forecast to maintain plans for expanded monetary easing at a meeting ending tomorrow, is targeting 2 percent inflation in two years after more than 10 years of entrenched deflation.
“Arrows one and two are giving Japan’s economy a tailwind for now,” said Stephen Jen, managing partner at SLJ Macro Partners LLP in London and former head of currency strategy at Morgan Stanley. “But Japan still faces powerful structural headwinds, and whether arrow three makes an uptick sustainable depends on Abe getting supply-side reforms right.”
Abe himself has said the third arrow is vital. The analogy refers to 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.
“I can’t yet say this is more than a sign of a turnaround,” Abe said May 17 in Tokyo about economic expansion fueled partly by rising consumer spending. “I will do everything in my power to turn this movement into strong growth.”
Failure to foster domestic demand also would try the patience of Japan’s Group of Seven trading partners who endorsed Abe’s expansion policy even as a 15 percent slump in the yen this year has made Japanese exports more profitable. Toyota Motor Corp., the world’s biggest automaker, forecast a 42 percent increase in net income for the 12 months ending March 2014 to a six-year high thanks to the effect of the weaker yen.
Shares of Japanese businesses listed in Tokyo that derive more than half their revenue from foreign markets have risen an average 31 percent this year, compared with 21 percent for those with mostly domestic sales, according to data compiled by Bloomberg. The gap probably will be reinforced by the rise in sales tax to 8 percent next April from 5 percent, and to 10 percent in 2015.
In his May 17 speech, Abe said he wants to boost private investment to 70 trillion yen ($683 billion) a year -- the level before the 2008 financial crisis -- through deregulation, taxes, spending and equipment-leasing deals. He aims to triple infrastructure exports to about 30 trillion yen by 2020.
The speech was the latest preview of his third-arrow strategy. Previously, he’s talked about opening the power market to more competition and restarting nuclear plants, supporting targeted industries such as biotechnology and joining the Trans-Pacific Partnership free-trade talks with the U.S. and 10 other Pacific Rim countries. Abe’s administration has said it will publish his full plan next month.
The measures announced so far don’t go far enough, according to Izumi Devalier, an economist at HSBC Holdings Plc in Hong Kong, who says major restructuring is needed in agriculture, health care and labor laws.
“The Cabinet appears to be shying away from deregulation, opting instead to use subsidies and usual government-support programs,” Devalier wrote in a May 14 research note.
“If Japan doesn’t manage to implement a powerful package of structural reforms to release sustainable domestic demand, Abe’s policies become yet another attempt to export their way out of the vast problems of the domestic economy,” said Kenneth Courtis, founder of Tokyo-based advisory company Next Capital Partners and former Asia vice chairman at Goldman Sachs Group Inc. “To release domestic demand that would stimulate long-term growth, Japan will have to melt the vast regulatory barriers which clog the economy, open the gates to substantial immigration and privatize sectors still in government hands.”
Abe created an Industrial Competitiveness Council in January to devise strategies for his third arrow. The council has a list of 37 topics so far, including low-tax special economic zones and a Japanese version of the U.S. National Institutes of Health medical-research center, according to an outline released by the group on May 14.
His growth efforts will be “disappointing” if they don’t tackle labor laws, the social-security system and energy policy, said Naoki Iizuka, a Citigroup Inc. economist in Tokyo.
Japan’s energy costs are projected to more than double to 8.8 trillion yen in the year through March 2014, compared with the year ended March 2011, the month of the nuclear disaster at Fukushima, according to a May 2 report by the Tokyo-based Japan Research Institute Ltd. Abe has said he wants to restart the nation’s reactors, which were idled after the disaster, forcing the country to import more oil, gas and coal.
“Abe probably doesn’t want to talk about any painful reforms before the elections in July,” Iizuka said. “It’s not clear if Japan can sustain solid growth with the planned sales-tax hike when fiscal spending is going to fall steeply like a fiscal cliff next year.”
For now, stimulus measures from the first two arrows and rising sentiment fueled by stock-market gains are driving a surge in economic growth. The government announced a 10 trillion-yen economic package in January, and the Bank of Japan last month pledged to double bond holdings within two years.
Gross domestic product last quarter rose an annualized 3.5 percent, the biggest gain in a year, the Cabinet Office said on May 16. Private consumption, which makes up 60 percent of the economy, contributed 2.3 percentage points to the increase, as a 48 percent surge in the benchmark Nikkei 225 Stock Average since Dec. 31 has boosted consumer sentiment.
The expansion may prompt the Bank of Japan to upgrade its assessment of the economy after its monetary-policy meeting this week, people familiar with the central bank’s discussions said.
“The key from here is whether Abe can unveil a strong growth strategy,” Iizuka said. “If he succeeds, that will boost business investment to support growth.” Corporate spending last quarter was the lowest since the second quarter of 2011, subtracting 0.3 percentage point from GDP.
“Capital spending will become an issue,” so it’s important to create an environment to boost business investment, Economy Minister Akira Amari said yesterday.
A revival in Japan would help reinvigorate a weakening global recovery. The U.S. economy is projected to expand at an annualized rate of 1.6 percent this quarter compared with 2.5 percent in January-March as federal budget cuts take hold, while China’s growth slowed in the first three months to 7.7 percent from a year earlier, and the 17-nation euro area extended its recession to a record sixth quarter.
In the meantime, Abe’s measures have forced trading partners to deal with the weaker yen, which makes Japanese goods cheaper. The yen is the fastest-falling major currency tracked by Bloomberg News this year, making it the top of the agenda at this year’s G-7 and G-20 meetings.
The South Korean won has risen 14 percent against the yen this year, even as it fell 4.2 percent versus the dollar. That makes it harder for Korean exporters such as Samsung Electronics Co. and Hyundai Motor Co. to compete against Japanese rivals.
Japan’s easing has had a “big impact” on South Korea’s economy, Bank of Korea Governor Kim Choong Soo said on May 9 after the bank unexpectedly cut its benchmark rate. Japan’s monetary policy “may further intensify concerns of all sides about competitive currency devaluation,” the People’s Bank of China said in its quarterly report the same day.
At home, Abe’s challenge is to get companies to invest while keeping consumer spending going, even after sales taxes rise next year and government stimulus wanes. Japan’s room for further largesse is limited as the government promised G-20 partners it will try to contain a national debt that the International Monetary Fund projects will reach 245 percent of the economy this year, larger than Greece’s 180 percent.
That means Abe must overcome opposition from lobby groups such as farmers and ministries concerned their budgets will be cut, in order to prevent his growth strategy from being diluted.
“Deep reforms are in danger of being shelved due to push back from bureaucrats, unions and even pockets of Abe’s own party,” said Devalier at HSBC. Only “bold deregulation can revive ‘animal spirits’ and ensure that Japan can keep up with the competition.”
One challenge will be opening the wallets of the so-called enlightened generation, who grew up with deflation and recessions and learned to save rather than buy things they don’t need, said Toru Suehiro, a market economist at Mizuho Securities Co. in Tokyo. Spending by people in their 20s has dropped 9 percent from 15 years ago, according to Mizuho Securities.
“I hope inflation is going to do some good, but I can’t get rid of a feeling of anxiety for the future,” said Ryo Kato, 24, who said some of his friends had to apply at about 50 companies before finding a job. “I honestly don’t think my wage will increase, so it’s better to save some money.”
Japanese household assets were 1,547 trillion yen at the end of 2012; 854 trillion yen were in deposits or cash, according to a Bank of Japan report in March.
Much of this money is in the hands of the nation’s growing army of retirees, whose pensions may suffer from inflation. The cost of Japan’s social-security programs grew to 110 trillion yen in the year ended March, more than double the amount in 1990, according to the welfare ministry.
Kimi Yamamoto, 75, watches the news three times a day in her Osaka apartment, concerned about what will happen to her savings.
“I can deal with pretty much everything after experiencing the war period, but I have a lot to worry about now, from price increases and the higher sales tax to the possible reduction in my pension,” said Yamamoto, whose husband died eight years ago. “Japan’s revival is going to take a very long time.”