Bank of Japan's Money Can't Match China's Engine
As Shinzo Abe looks for new growth engines to reinvigorate Japan, he's ignoring the most obvious one.
On Friday, Japan's stock markets zoomed upward on news that the Bank of Japan is ramping up its massive quantitative-easing program, boosting holdings of government bonds to an annual pace of about $725 billion and purchasing riskier assets. Soon afterward came leaks that Japan's $1.2 trillion Government Pension Investment Fund would dramatically rebalance its portfolio, reducing holdings of Japanese bonds and raising the share of Japanese and foreign stocks to 25 percent apiece. The one-two punch cheered punters, many of whom had begun to be disillusioned with the pace and results of Abenomics.
Whether Friday's moves will be enough to boost inflation, now at its slowest pace in half a year, and revive Japan Inc. is another question. As analysts and pundits (including me) have grown weary of saying, only bolder structural reforms can put the Japanese economy on a path to truly sustainable growth. And even if one has more faith in Abe's so-called third-arrow fixes, the fact remains that the prime minister is studiously ignoring the biggest economic engine of all: China.
That's Stephen Roach's thesis: "As the main driver of Chinese growth shifts from external to domestic demand, who could benefit more than Japanese exporters?" the former Morgan Stanley economist wrote in an op-ed earlier this week.
Yes, growth on the mainland is slowing. But there are signs that the long-awaited rebalancing from investment to consumption is beginning to take place. "China is already Japan's largest export market, leaving it ideally situated to capture additional market share in the coming surge of Chinese demand for consumer products and services," Roach added. "Japan cannot afford to squander these opportunities."
Yet Abe has done just that. In 22 months in office, Japan's prime minister has alienated the country's biggest customer by giving free rein to his nationalistic leanings. Nor has he done much to make Japan less dependent on China, by deregulating the economy or pushing forward free-trade agreements like the Trans-Pacific Partnership. Abe may be the most-traveled Japanese leader ever -- with 49 countries under his belt since December 2012 -- but his administration has little to show for all the globetrotting.
An upcoming trip to Beijing for November's Asia-Pacific Economic Cooperation summit presents a perfect opportunity to mend relations. China has been playing coy on Abe's bid for a tete-a-tete with President Xi Jinping. According to the state-run Xinhua news service, the onus "is first and last on Abe" to improve relations. In China's view, Abe must stop "whitewashing Japan's militarist past" and abstain from visiting Yasukuni, the controversial shrine to Japan's war dead, including 14 Class-A war criminals. Beijing also wants Abe to admit that there's a dispute over a set of offshore islands, currently administered by Japan.
China's position is a bit disingenuous. Xi has proven quite adept at whipping up anti-Japanese sentiment when it suits his needs. China is inciting hostility around Asia with its ever-expanding South China Sea land grab, and its military buildup is fueling an Asian arms race.
But Abe would be wise to extend a sincere olive branch. He should make a key concession or two so that Japan gets more than a photo op out of the Nov. 10-11 APEC summit. Yasukuni is a good place to start. This week, a politically powerful group representing families of soldiers killed in World War II recommended that the souls of the Class-A war criminals, including Hideki Tojo, be banished from the Tokyo shrine. That way, Abe and future prime ministers can honor the 2.5 million other war dead without enraging China and South Korea. By saying publicly that he supports the families' request, Abe could begin paving the way for detente in North Asia.
It's easy to see why Abe's government wants to boost the stock market. Only if Japanese feel richer will they start spending again, driving up prices and perhaps counteracting the effect of another sales tax rise scheduled for next year. Friday's moves, however, are another sugar high with little hope of producing sustainable growth in the long run. While China says the diplomatic onus is on Abe, the risk is that today's actions take pressure off him to loosen labor markets, encourage greater innovation and prod companies to be more accountable to shareholders and hire more female executives.
It's a gamble. And even if it works, as Nobel laureate Paul Krugman said in Tokyo today, that doesn't change the fact that Europe is falling again and U.S. growth is undershooting its potential. As the West underperforms, the obvious alternative is China. For Japan, the mainland is too good an opportunity to ignore.
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