For all the focus on Jerome Powell in Washington, the most-watched central banker in 2019 may be the Federal Reserve chairman’s counterpart in Tokyo.
The last 12 months turned out very differently than Haruhiko Kuroda expected. The Bank of Japan head came into 2018 determined to exit history’s most aggressive monetary-easing experiment. Starting in April 2013, his BOJ began hoarding more than half of all outstanding government debt, more than 75% of exchange-traded funds and every financial asset policymakers could think of.
External turmoil quickly changed Kuroda’s calculus. The trade war, for example, set back furious efforts to generate 2% inflation. So did a failure by Japan Inc to fatten paychecks.
By the end of 2018, the BOJ’s balance sheet hit $4.9 trillion, topping Japan’s annual gross domestic product. And yet hoarding assets worth more than five times Apple’s market capitalization – and 25 times Toyota Motor’s – didn’t defeat the “deflationary mindset” Kuroda pledged to change.
Enter 2019, when Kuroda faces a globally-significant choice: go further down the stimulus rabbit hole or begin tapering.
Clearly, Prime Minister Shinzo Abe hopes the BOJ chooses door No. 1. The 2.5% contraction in third-quarter growth showed how vulnerable Japan is to the headwinds Donald Trump is generating. Any move by the BOJ to throttle back on asset purchases could send the yen higher, slamming a Nikkei Stock Average that ended 2018 sharply in the red.
Even before US President Trump’s tariffs, the BOJ’s largess was getting limited traction. Generalized wages have barely budged since Abe took power in December 2012. That cost Japan the virtuous cycle of higher income, increased spending and inflationary pressures that Abenomics promised. And it cost Kuroda whatever window he had to begin withdrawing from markets.
There’s a good argument that the BOJ is trapped. Having extended its tentacles so deeply into so many asset classes, any move toward normalization might panic markets. The BOJ’s dilemma arguably speaks to where Abenomics is six years on.
The past year was ruinous for the “Japan-is-back” story Abe sold global investors since 2012.
The speed with which Trump’s trade war derailed Japan’s economy is proof enough of that. Had Abe done more to restructure Japan, not just talk about it, it would not be stumbling into 2019 amid talk of new stimulus and the return of the “concrete economics.” Abe’s mentor, Junichiro Koizumi, thought he had killed Tokyo’s obsession with pouring cement everywhere it can find to boost growth a decade and a half ago. Perhaps not.
The Shakespearean drama at Nissan Motor is another damning metric in a year Japan Inc might have preferred to skip altogether.
Nissan needs a miracle
Five weeks ago, around the time Nissan savior Carlos Ghosn was getting used to a sparse Tokyo detention cell, it seemed entirely possible to save the three-way Renault-Nissan-Mitsubishi alliance. Not anymore. It will take a miracle at this point to keep this vital global concern a going one.
With the alliance on life support, its high time Abe’s Liberal Democratic Party internalized its own culpability for the dreadful headlines Japan had in 2018. They include plunging stocks, slowing growth, inflation still a long way off from the targeted 2%, tepid wages and corporate malfeasance galore.
The optics of a globally-respected CEO subjected to indefinite custody is denting the Japan brand with each re-arrest. But so is the lack of traction Abenomics got, particularly in the year everything was finally supposed to come together.
In December 2012, Abe took office promising a supply-side Big Bang. His three-pronged plan involved aggressive monetary easing, fiscal spending and structural reform. The first two phases were rolled out to decent effect, helping produce the longest expansion since the 1980s.
But the extent to which Abe slow-walked the third and most important phase is now painfully on display. His much-heralded push to strengthen corporate practices skidded off the road with not one, but too Nissan controversies. The first: Nissan found fudging emissions data along with Mazda, Subaru, Suzuki, Yamaha and others.
The second – Ghosn’s headline-grabbing arrest – reminded investors that Japan Inc still answers to no one, no matter how much Abe claims he’s revamped corporate practices – not so much.
Japan’s legal system found itself in the news globally. Its opacity, obsession with confessions over trials and ability to hold a world-famous CEO without access to lawyers further tarnished the Japan brand. So did the undeniable smell of a palace coup at the Yokohama-based carmaker against a gaijin chieftain.
Corporate scandals, political dysfunction
The Nissan mess reminded global investors, too, how retrograde politics stand in the way of Japan raising its economic game.
The last year has been a banner one for political dysfunction. Elected officials largely looked the other way as a bull market in corporate scandals dented the Japan brand anew.
From quality-control failures at Kobe Steel to accounting shenanigans at Toshiba to Takata’s deadly airbags to fresh scrutiny of Olympus’s books, 2018 offered myriad of examples of how Old Japan stands in the way of the new one Abe craves. Lawmakers failed to demand answers from Nissan and other corporate offenders. As China invests in 2025, Japan’s leaders acted like it’s still 1985.
Abe’s bromance with US President Trump had Tokyo in a whirl as Washington’s tariffs and bluster backfired on Japan’s economy. The 2.5% contraction in third-quarter growth could be an omen of things to come for 2019. Exports slowed, while fixed-asset investment, retail sales and inflation are all losing altitude.
Had Abe’s party acted faster to encourage innovation, enliven startup activity, cut red tape, empower women and make executives more accountable, Japan might not be on the verge of another recession. But then Abe’s focus in recent years has been on revising the pacifist World War II constitution to allow Tokyo to field a conventional military, not economic retooling.
To be fair, the LDP managed to multitask here and there. Abe did sign a free-trade deal with the European Union and stayed in the Trans-Pacific Partnership after Trump left the enterprise. Tokyo also took some significant steps by year-end to open the door a bit wider to foreign talent.
Abe’s diplomatic outreach had him traveling early and often through Southeast Asia, where Tokyo hopes to curtail China’s influence. Yet efforts to negotiate with Vladimir Putin’s Russia over territorial disputes dating back to World War II amounted to little. Tokyo’s relations with Seoul devolved markedly, particularly after South Korea’s Supreme Court ordered Japanese companies to pay compensation to wartime Korean laborers.
The real headache, though, was Abe’s bet on the Trump White House. No world leader invested more political capital in befriending Trump. Trump, unfortunately, has shown zero interest in Tokyo’s priorities from trade to North Korea to climate change.
That means Japan is ending 2018 facing more economic headwinds than it started. Even so, much of the Tokyo establishment spent the last 12 months abdicating its job to the Bank of Japan.
The trade war took Kuroda’s hopes to normalize monetary policy off the table. The specter of a change in the BOJ asset mix sent the yen and bond yields sharply higher earlier in the year.
Now the chatter is shifting to fresh fiscal stimulus efforts and for additional BOJ easing. A very far cry from the solid economic year Abe’s Japan-is-back narrative envisioned.
Might 2019 be kinder to Abe’s Japan? Not with Trump’s sliding political fortunes likely to result in even bigger provocations.
The year ahead will be a solemn one for Japan’s 126 million people as beloved Emperor Akihito abdicates in April – his eldest son Prince Naruhito will assume the throne. Yet external events are likely to dominate.
With Special Counsel Robert Mueller’s investigation closing in and fresh scandals emerging, the odds of Trump lashing out abroad are rising. That could mean new tariffs that push Chinese growth well below 6% and even threats of military conflict. Possible targets as Trump wags the proverbial dog are North Korea and Iran.
Abe also is running out of excuses to delay bilateral trade talks with the zero-sum-game American leader. Those talks are fraught with peril given Abe’s massive investment in close Trump ties. Trump, remember, has threatened 25% taxes on car and auto part imports and a no-currency manipulation agreement. Either outcome would set Abenomics back, never mind both.
Rough as 2018 was for Abe’s Japan, it could end up being the calm before the Trumpian storm to come.