With Japan’s Finance Minister Taro Aso fighting for his political life, the “yen bears” face their own existential reckoning.
Aso faces questions about his role in a cronyism scandal also ensnaring Prime Minister Shinzo Abe and wife Akie. All deny a role on a sweetheart land deal sold at 14% of its value to an Osaka school company.
But as opposition forces call for Aso’s resignation, “yen bulls” are in the ascendancy. The rationale: Aso’s departure may imperil the effectiveness of weak-yen policy at the core of Abenomics.
The yen’s 6% rally this year is a clear and present danger to hopes that Japan Inc. would finally give workers a raise. That, it’s hoped, would trigger a virtuous cycle of increased consumption to defeat deflation.
In many ways, though, Abenomics is aimed at one company: Toyota Motor Corp.
Toyota: A microcosm of Japan Inc’s problems
Top-down Japan loves role models and precedents. None matter more than the nation’s biggest, most profitable and most globally fabled corporate giant. It’s not an exaggeration to say that the success of Tokyo’s nearly six-year-old reflation scheme rests on Akio Toyoda’s shoulders. If the grandson of Toyota’s founder opened his wallet, fattening paychecks, pressure would mount for other cash-rich conglomerates to follow his lead.
Toyota is a microcosm of the problem. Over the last five years, earnings have risen about 53%. As spring wage negotiations approach, no corporate name is more in-focus as major manufacturers duel with labor unions.
It’s not fair, of course, to blame one 61-year-old chieftain for the fact that real wages fell 0.2% in 2017 despite epic monetary easing and fiscal pump priming. The fault lies upstream, with the prime minister’s team. Five-plus years on, the shock therapy Abe promised to loosen labor markets, increase innovation, cut red tape and unleash a risk-taking vibe that’s long eluded Asia’s No. 2 economy has, simply put, failed to sufficiently impress Japan Inc.
Executives on the frontlines understand better than bureaucrats that the longest expansion since the 1980s is largely an external phenomenon. That will happen amid a synchronized global recovery of the kind unfolding today. Here’s something else likely to happen as the yen rises: stingy executives may be even less inclined to boost wages.
Abe did his thing: Will CEOs do theirs?
What we have in Japan today is a staring match. Abe’s team believes that between the Bank of Japan and government spending packages, it has done its part and it’s time CEOs did theirs. Executives, meantime, are waiting for the so-called “third arrow” – Abeonomics’ move to deregulate a rigid corporate system.
Abenomics has three “arrows” meant to be fired at deflationary forces. The first, monetary easing, was fired in 2013 and in several additional steps since then. The second arrow, fiscal loosening, is represented by Olympic 2020 construction. But the third and most important – structural change – has been scattershot, at best. At worst, the most viral upgrades remain in the quiver.
Again, in top-down Japan, many of these revolutions need to come from government policymakers. That includes moves to end the productivity-killing practice of seniority-based raises and promotions, allowing for more flexible work schedules, tax tweaks to encourage a startup boom, empowering female workers and importing more foreign talent.
However, timidity reigns. Tokyo, sad to say, can’t even muster the courage to ban smoking at the summer Olympics two-plus years from now. Abenomics is still no match for vested interests.
Toyota and other major companies might want to lead for a change. Sharing the wealth Abenomics bequeathed Japan Inc. would give households more cash to buy its products. That, in turn, would give chieftains greater pricing power, kicking off a cycle of even greater profits. The strategy worked for Japan before, and it could work again. Toyota could help start the process.