Japan Exports Its Way to Irrelevance
There's a difference between bad economic news and the devastating variety that Japan received Monday. Prime Minister Shinzo Abe might have been able to weather the second-quarter data showing a drop in Japanese consumption and a 1.6 percent decline in annualized growth. But it's not clear his government can recover from the latest news about sputtering exports, which fell 4.4 percent from the previous quarter.
An export boom, after all, was the main thing Abenomics, the prime minister's much-heralded revival program, had going for it. The yen's 35 percent drop since late 2012 made Japanese goods cheaper, companies more profitable and Nikkei stocks more attractive. But China is spoiling the broader strategy. The economy of Japan's biggest customer is slowing precipitously, which has imperiled earnings outlooks for Toyota, Sony, and trading houses like Mitsui.
But Abe needs to recognize, as China already has, that this is only the latest sign of a broader reality: Asia's old export model of economic growth no longer works.
China's devaluation last week raised fears of a return of the currency wars that devastated Asia in the late 1990s. That's a reach, considering that exports are playing less and less of a role in China. McKinsey, for example, found that as far back as 2010, net exports were contributing only between 10 percent and 20 percent of Chinese gross domestic product. The services sector is growing in size and influence to rebalance the economy -- not fast enough, perhaps, but change is nevertheless afoot.
If any major country has been relying too much on exports it's Japan. As yet another recession beckons, the Bank of Japan will likely respond with yet more easing to extend the yen's declines and save giant exporters.
No matter how cheap the yen gets, though, China will still be slowing. All the stimulus BOJ Governor Haruhiko Kuroda can muster won't change the worsening trajectory of the region's most-populous nation. That's why Abe needs to take a page from Beijing and focus more on creating new industries at home.
Tokyo seldom acknowledges it can learn anything from Beijing. Japan wrote the book on exporting your way to prosperity, one followed to great effect from South Korea to Vietnam, and eventually even China. But recent years have seen the student (China) surpass the teacher in moving past that simplistic growth strategy.
Abenomics, meanwhile, has proven to be a time machine endeavoring to return Japan to the export boom times of 1985. But even with additional BOJ stimulus, says Diana Choyleva of Lombard Street Research, exports don't offer Japan a path to sustainable growth. Europe is still limping, the U.S. consumer isn't the reliable growth engine it was a decade ago, and China's relatively modest devaluation (about 3.5 percent in total) still means the yen's value will rise on a trade-weighted basis.
Japan's only available solution is to encourage more job growth from the ground up. But the country's weak-yen policy has proven to be more effective at ensuring job protection from the top down. The government had hoped that a devalued yen would boost corporate profits, giving executives the confidence to raise wages and giving households an incentive to spend more. Executives, however, have been taking a trust-but-verify stance. Before fattening paychecks, they want Abe to implement structural reforms to make the economy more competitive and end deflation. In a sense, Abenomics is engaged in a high-stakes staring contest with corporate Japan.
If Abe realized this, he would act focus on supporting small and midsize companies and encouraging startup activity. A new survey by Dentsu Communication Institute shows about 30 percent of Japanese aged 18 to 29 have no interest in being salarymen and salarywomen like their parents.
Rather than support the Japan Inc. giants that prefer new generations of lifelong workers, Abe could use tax incentives and government-funded venture capital funds to encourage young people to form their own companies and invent products that have a chance of spearheading new industries. Tossing corporate welfare at Sony and Sharp for the past several years hasn't spurred them to come up with a viable answer to Apple's iPhone or Samsung's Galaxy line of smartphones. Instead, it's been Chinese upstarts Xiaomi and Huawei that have become global players in that sector.
That's not to suggest China sets the best economic example in all respects -- far from it. Beijing has recently put the country's economic credibility at risk by manipulating the stock market, while Chinese companies have consistently avoided all manner of basic transparency.
Nevertheless, by focusing its attention on kicking its export addiction, China has valuable lessons to teach Japan. For all of Abe's big talk of deregulation, the odds are still stacked against Japan's would-be entrepreneurs. And as long as Abe's government sticks with a decades-old export model, that's unlikely to change.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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