Japan’s business confidence is getting trumped – Donald Trumped, that is. It all looked so different 503 days ago when Prime Minister Shinzo Abe scurried to Trump Tower.
There Abe was, nine days after Trump’s shock election win in November 2016, pledging Tokyo’s allegiance. Abe’s gamble that day was seen as an eminently safe one. The transactional Trump White House would be humbled by the gesture and give Abe’s Japan preferential treatment in matters of trade, defense and geopolitics.
The Bank of Japan’s latest “tankan” survey shows the folly of that bet.
Sentiment among big manufacturers weakened for the first time in two years, according to the BOJ’s quarterly report. The data period – the three months to March – makes clear a rising yen and escalating trade tensions are zapping confidence. That’s a big problem for Abenomics. This, after all, is supposed to be the year Japan Inc. finally gave workers a notable raise. In 2017, real wages fell 0.2%.
Now, thanks partly to Abe’s pal in the White House, executives might be even less inclined to share profits with staff. They might not open investment wallets in ways that increase domestic competitiveness and economic dynamism.
However, Trump doesn’t deserve all the blame. Before the “America First” leader was sworn in on Jan. 20, 2017, Abe had 1,486 days to administer his much-advertised shock therapy. He slow-walked moves to deregulate industry, cut bureaucracy, loosen labor markets, boost innovation and empower women. Significant progress in any of these areas might have positioned Japan better for the Trump threat.
The biggest changes to Japan’s export-heavy model were a 30% yen plunge and a few tweaks to corporate governance. The first is disappearing before our eyes, thanks largely to the Trump effect. On Jan. 24, Washington declared the 23-year-old strong-dollar policy officially dead. The yen is up almost 6% in the first few months of 2018 alone, leaving Japan Inc. as disoriented as it’s ever been in the Abenomics era.
Strong yen is not trickling down
The second is not all it seems. It is great, as Joyce Poon of Gavekal Research points out, that 27% of Topix index companies can boast that at least one third of their board are independent directors, up from only 6% in 2014. Also, she says, “a sharper focus on delivering shareholder value has helped drive an increase in profitability that is expected to see returns on equity for Topix companies exceed 10% in the fiscal year.”
That is great for Japan’s 1% – those with sizable stock holdings. Ditto for big landowners as the BOJ’s largess supports real-estate values. For the other 99%, not so much, as wages lag far behind gains in asset values. Herein lies the biggest flaw in Japan’s second-longest postwar expansion: the benefits are not trickling down very far.
What might this mean for the BOJ? Less latitude to withdraw from markets than traders currently realize.
For years, monetary economists craved more insights and directives from major central banks. One wonders, though, if BOJ Governor Haruhiko Kuroda should revert to the days of old and talk less.
Kuroda talks, markets move
No, the monetary authority of the third-biggest economy should not become opaquer. But Kuroda is not only talking too much these days, but in circles – and in ways that may deaden the potency of his policies.
In parliament on Tuesday, Kuroda said the BOJ is considering how to eventually begin wrapping up history’s biggest easing campaign. Predictably, markets jumped to attention, figuring BOJ “tapering” is imminent. What traders should’ve done in response to Kuroda’s “we’re conducting various discussions” comment was to look backward.
Remember? Kuroda’s three predecessors had these same conversations, ad nauseum, over the last 15-plus years. One of them, Toshihiko Fukui, even managed to scrap quantitative-easing in 2003. Yet by 2008, QE returned under Fukui’s successor Masaaki Shirakawa. Beginning in 2013, of course, Kuroda took the BOJ’s balance sheet into uncharted territory.
So, yeah. BOJ officials fantasize about an eventual return to monetary normalcy, just like their myriad predecessors. This new brainstorming effort, the one Kuroda mentioned Tuesday, would be more intriguing if not for the yen’s rally and a coming trade war – compliments of a White House that Abe thought was on Tokyo’s side.