Bad things happen in threes, the old saying goes. And then some, if you’re Japanese Prime Minister Shinzo Abe.
The first blow was the surprisingly deep 6.3% plunge in annualized fourth-quarter growth from the previous quarter. Japan’s biggest contraction since 2014 shows how much damage the trade war and last year’s sales-tax increase are wreaking on Asia’s No. 2 economy. The fall was far steeper and faster than a median market forecast, which anticipated a 3.7% drop, and it marked the first decline in five quarters.
The second blow was a sharp drop in public support for Abe’s Cabinet to 41%. That 8.3-point decline from January in a Kyodo News poll matters because history shows Japanese leaders tend to have negligible legislative success when their approval gets so far below the 50% mark.
All this hints at ominous development No. 3: how the sudden arrival of lame-duck status augers poorly for Japan’s economic prospects as 2020 darkens, and as new headwinds bear down, not least of all a coronavirus outbreak slamming tourism and business confidence.
The Bank of Japan long ago hung up its monetary spurs. Sure, Governor Haruhiko Kuroda and his team claim ad nauseum they “won’t hesitate” to save the day should the economy require it. But then the BOJ has been saying as much since 2016, the last time it surprised markets in any meaningful way. Since then, Kuroda & Co. have done loads of talking about rising inflation to come, but almost zero doing.
That goes, too, for Abe’s structural reform team. While Abe can claim some victories on the corporate governance front, those tweaks were no match for the shenanigans at Nissan Motor, Toshiba and other Japan Inc. icons. Nor has Team Abe devised a way to get CEOs to share profits from a weaker yen with workers.
Abe put some free-trade wins on the scoreboard. He stayed in the Trans-Pacific Partnership after the US reneged on a trade deal of its own creation. In 2019, Tokyo signed a giant trade deal with the European Union and placated US President Donald Trump with a bilateral pact.
Yet lower trade barriers are dis-inflationary, running directly counter to Abe’s reflation campaign. Dismantling barriers is the right thing for Japan, of course. It’s equally important, though, that Abe’s team raise Japan’s competitive game domestically.
But since 2012, Abe’s government has done nothing substantial to reduce bureaucracy, loosen labor markets, increase productivity, support a startup boom, narrow the gender pay gap or ease immigration curbs boldly enough to offset the fastest-aging population among industrialized powers.
The news of the last 24 hours makes all these challenges that much harder. If Abe failed to marshal reforms through a change-adverse establishment when support rates were above 60%, how much political courage might he have now?
Virus vs visitors
Abe’s lame-duck troubles dovetail with a potential pandemic that’s putting Japan in an unkind global spotlight. This year was supposed to be Abe’s big moment in the sun as Tokyo hosts the Summer Olympics in July and August. It also was tipped as the year Abe would finally secure the votes to amend Japan’s pacifist post-war constitution.
Now, questions swirl about whether Tokyo 2020 could possibly proceed as planned. Others concern Tokyo’s unsteady handling of the Diamond Princess cruise ship docked in Yokohama. The ship shackled Japan with the dubious honor of most Wuhan virus cases outside the Chinese mainland. Tokyo’s decision to quarantine the 3,700 people on board – and the slow process of testing passengers – is drew global criticism.
Yet the about-face in fourth-quarter gross domestic product does not account for coronavirus fallout. Or the accelerating plunge in tourist arrivals from China and the rest of Asia. Abe’s hopes of wooing 40 million journeyers this year is already awash. In 2019, Chinese accounted for 40% of total tourism consumption in Japan, and the figure for 2020 is dwindling exponentially.
Liquidity time, again
Abe is sure to pull the fiscal stimulus lever anew. The $121-billion spending plan Abe unveiled in December is already proving insufficient. Even with his approval numbers plumbing the low 40s, parliament is sure to unleash a new round of spending to combat a formal recession over the next two quarters.
Easier said than done, as economists including Taro Saito of NLI Research Institute warn there’s a “pretty good chance” growth will remain in the red in the current quarter, as consumption declines and airport arrival halls go quiet.
Even if it’s possible to revive growth in short order – and it’s a sizable “if” – Abe lacks the political capital to shake up the status quo in ways necessary to raise Japan’s economic game.
If Abe had acted with greater determination and urgency to internationalize the economy, Japan wouldn’t have been so vulnerable to Trump’s China tariffs. Rather than wean Japan off its over-reliance on giant exporters, Abe’s policies solidified their place at the very core of Japan Inc.’s growth drivers.
Hence, the dearth of tech unicorns stampeding out of a nation that once defined the electronics game. Or the near absence of splashy corporate takeover attempts from abroad on Abe’s watch. For all Abe’s “womenomics” spin, Japan is now 23 rungs lower on the World Economic Forum’s gender-equality index on his watch – 121st place versus 98 when he took office.
The costs of stimulus over structural reform will accumulate in 2020. Last year, China, Japan’s biggest customer, grew at the slowest pace in 30 years. Expect even less dynamism from China as coronavirus fallout collides with Trump’s re-election campaign. Any effort to delight his base is almost certain to involve new taxes on mainland goods or curbs on specific companies.
Abe also faces “phase two” trade talks with Trump. If the mercantilist in the White House deems Tokyo insufficiently compliant, auto tariffs are almost certain to materialize to decimate supply chains and Japan Inc.’s year. On Monday, Moody’s Investors Service warned that “2020 being a US presidential election year, uncertainty over US trade policy will likely stay elevated.”
All this would be uncertainty enough without falling GDP and sliding support rates limiting Abe’s latitude to get serious about structural upgrades. So much for Abe’s hopes of turning 2020 into a winning year for both the economy and his legacy. It’s getting battered, one weak quarter at a time.