Japan’s Shinzo Abe must be wondering if a third term as prime minister was the great idea it seemed back in September. What a difference 68 days make.
On September 20, Abe was riding high after garnering 70% of votes within the ruling Liberal Democratic Party. It put the proud son of a 1980s foreign minister and grandson of a 1960s premier on the path to become Japan’s longest-serving leader.
Then reality hit. Abe’s dream of revising Japan’s pacifist Constitution is looking like a reach. And his biggest claim to success — Abenomics — is increasingly on the ropes as Donald Trump’s trade war slams growth. This gets at an added problem: the extent to which Abe’s close relationship with the mercurial US president is now a liability.
Next came a headline-grabbing scandal at Nissan, the latest Japan Inc. icon to stumble amid dodgy corporate governance practices. Another big problem for Abe, considering that raising corporate Japan’s game was supposedly a key Abenomics achievement. Well, not so much.
If all this isn’t bad enough, 2019 is looking like an even worse year for Abe’s economy.
Trump the wildcard again
The first big sign of trouble was a 1.2% contraction in the third quarter on an annualized basis. The Nikkei 225 Stock Average’s losses, another key source of Abenomics street cred, just erased its gains for the year. This month, the Bank of Japan effectively gave up on its 2% inflation target amid a steady deterioration in business confidence.
Now comes news that manufacturing activity is on the verge of contraction. The Flash Markit/Nikkei Japan Manufacturing Purchasing Managers’ Index fell to a seasonally adjusted 51.8 in November from 52.9 in October. A reading below 50 means the all-important export engine has gone into reverse.
That augurs poorly for a fourth-quarter rebound. Abe’s team has signaled as much with leaks about fresh fiscal stimulus heading into the new year.
The wildcard is Trump’s trade war. Might dinner with China’s Xi Jinping on Saturday in Buenos Aires end in a ceasefire? Odds are, Trump will still intensify his brawl with Beijing. Odds are high, too, that he’ll make good on threats to slap 25% taxes on imports of cars and auto parts, devastating Asia’s supply chains.
The giant layoffs General Motors just announced are sure to have Trump looking for someone to blame. That puts Toyota, Honda and a Nissan already reeling from Carlos Ghosn’s arrest in harm’s way.
Abe’s team has tried its hand at tutoring Trump on trade realities. Time and time again, for example, Finance Minister Taro Aso and Economy Minister Hiroshige Seko explained that Japanese companies make way more vehicles in the US than they send there. In 2017, Japan Inc. assembled 3.8 million vehicles in US factories. Still, GM’s woes need a scapegoat. Japan will do.
Abenomics needs a reboot
But then Japan Inc. is rotting from the inside, too, as evidenced by the Ghosn drama. Since grabbing the wheel in December 2012, Abe worked to pull corporate Japan kicking and screaming into the globalized world. Though Japanese chieftains long excelled at tapping overseas markets, domestic management practices have been slow to modernize.
Abe introduced a UK-style stewardship code, encouraged shareholders to speak out and championed greater returns on equity. Thanks to those tweaks and a 30% yen depreciation, Nikkei stocks soared and corporate profits swelled.
Yet a steady drumbeat of scandals proves Abenomics needs a bigger boat if it’s going to tame Japan Inc.’s idiosyncrasies. Controversies involving KYB, Kobe Steel, Olympus, Sharp, Takata, Tokyo Electric Power, Toray Industries, Toshiba and others show too much of Old Japan remains. Falsified emissions data at Mazda, Subaru, Suzuki, Yamaha and Ghosn’s Nissan further dented Japan’s reputation for quality.
Ghosn’s downfall last week generated more than its fair share of schadenfreude. Many locals long grated at Japan’s most celebrated chieftain being a globe-trotting Brazilian-born, Lebanese-raised Frenchman. In other ways, that only heightened the drama. Observers liked to think that Nissan in the hands of a man known as “Le Cost Cutter” was an exemplar of accountability and shareholder value. Hardly. We’re learning that along with allegedly fudging his income, Ghosn may have used the company to effectively launder private losses.
The drip, drip, drip of disclosures is tarnishing Abe’s reputation as a reformer. It also might have him wishing he’d resisted the urge to tackle another term as leader.
Considering what lies ahead for his economy in 2019, the third one probably won’t be a charm.