‘Abenomics’ a wave that may break?

Stock, yen rates look good but blank-check spending can backfire



The stock market is roaring, the yen has plunged and the government is jumping into a string of long-delayed trade talks, prompting some to ask a question not heard in years: is Japan back?

Prime Minister Shinzo Abe, basking in approval ratings topping 70 percent, marks his 100th day in office Thursday, and some observers are lauding what they call an impressive start.

The conservative ideologue has largely shelved his mantra of tough diplomacy amid the territorial disputes with China and South Korea, instead focusing on how to make good on a campaign pledge to stoke growth in the deflation-plagued economy.

The country has been riding high under a leader who appears willing to challenge the paralysis endemic to Japan’s revolving-door political system — in place since Abe’s first one-year run as prime minister ended in 2007 amid health problems and plunging popularity.

“He has changed the mood in this country. People are optimistic, hopeful for the future for the first time in a very long time,” said Gerald Curtis, a political science professor at Columbia University.

But some are already questioning whether “Abenomics” — a mix of big government spending and aggressive central bank easing — is all show, a prescription that will saddle Japan with more debt.

Years of tepid growth have left a national debt more than twice the size of the economy, the worst in the industrialized world, while the rapidly aging society threatens to exacerbate the problem.

For now, investors appear to be shrugging off the mountain of challenges.

The Nikkei 225 stock average has shot up nearly 20 percent in the first quarter to sit above 12,000 as the yen tumbles, largely due to speculation that Abe’s hand-picked team at the Bank of Japan will print money.

All eyes are on a two-day BOJ meeting starting Wednesday as new Gov. Haruhiko Kuroda says he will follow through on a pledge to launch more aggressive easing that could weaken the yen further and help exporters.

Brokerage CLSA’s annual conference in Tokyo this year saw a big jump in the number of senior U.S. and European investment managers attending as players turn their focus to long-forgotten Japan.

Nevertheless, “a common question is ‘has anything changed apart from the yen?’ ” said Morten Paulsen, who heads research in CLSA’s Japanese equities division.

Japanese companies have tried to slash costs to counter the strong yen — which makes them less competitive overseas and shrinks the value of foreign income — but “structurally, nothing has changed,” Paulsen said.

“Even if it’s just the yen, it’s still quite meaningful although Japanese managers are being very cautious. They’re not breaking out the champagne.”

Domestic investors have reason for caution too, having seen the Nikkei peak at almost 39,000 in the last days of 1989 before the asset bubble popped, sending the index and a powerhouse economy plunging over the next two decades.

“I have benefited from Abenomics,” said 47-year-old investor Eiji Shibuya. “But it’s too early to say the Japanese economy is back.”

Observers point to structural challenges, such as the lack of women in the workforce that the government has gone nowhere near addressing.

But there is movement in some areas — the Cabinet this week approved a plan to open up the power sector to more competition.

Meanwhile, Abe has forged ahead on the trade front, entering talks on the Trans-Pacific Partnership free-trade pact with the U.S., as well as with the European Union and neighbors China and South Korea, despite testy diplomatic relations.

Trade deals, which have been put off for years, would help both Japanese exporters and consumers, who pay high prices especially for agricultural products, analysts say.

“There is an ‘it’s now or never’ kind of feeling,” said Ivan Tselichtchev, an economics professor at Niigata University of Management.

The deals, however, will put Abe on a collision course with the powerful farming lobby, among others, while the U.S. auto industry is vehemently opposed to giving Japanese rivals greater access to the U.S. market.

Key to Abe’s success or failure is the Upper House election this summer, which could solidify his power base, analysts say.

But the election might also let Abe return to his nationalistic agenda and avoid politically unpopular reforms, said Ryutaro Kono, an economist at BNP Paribas, who added that Abe for now just needs to keep “the economy humming with the monetization strategy.”

Columbia University’s Curtis said Abe’s postelection moves are critical to determining if his administration is unique or more of the same.

After that “we will know whether Abenomics is for real or if it has simply dug Japan’s fiscal deficit hole deeper,” he said.

  • Saidani

    The Nikkei 225 is not the economy nor does it reflect anything but the actions (or, rather, potential actions) of the BoJ. Traders are benefiting from Abenomics but those benefits are not filtering down into the domestic economy nor, for that matter, the exporters to the extent expected (promised).

    As for free trade, given all of the non-trade provisions in the TPP, it is hardly worth signing that for a .66% increase in GDP (to be sure, an optimistic estimate by the government).

    Japan’s centrally-planned economy is dependent on continuous growth which Japan has not seen for two decades. Abenomics is based on the “hope” that it will kick-start growth without any evidence that such a scheme will work beyond the short-term. But now it seems doubtful that it will even provide enough short-term growth for Abe to take the upper house election. Meanwhile, the only thing that is growing is the debt.

  • “Domestic investors have reason for caution too, having seen the Nikkei peak at almost 39,000 in the last days of 1989 before the asset bubble popped.”

    Indeed, the market going up does not necessarily show economic improvement, it may just as well be a roar as the bust begins.

    Inflating the currency doesn’t create more production, it just inflates the numbers on paper.

    The only way to actually improve the situation is for Abe and the state to get out of the way, so the actual way for economic health can be paved: production.

  • PX

    This generation may not feel the pain but be sure that your kids and grandkids will be paying a huge tax bill in the future to cover this debt. The debt has to be paid back somehow, and with shrinking/aging population, not looking good for the future generations.

    • phu

      Definitely true, but the tax bill from these initiatives will be the least of the next generations’ problems. The economy is on such a downward trajectory thanks to Japan’s other problems (its aging society being one of if not the worst) that this is likely to be a drop in the bucket, if there’s a bucket left.

  • MarkX

    What I really don’t understand is the level of optimism that the average Japanese seem to feel right now. There are countless stories about people spending more, going to Disneyland and USJ, having bigger and more expensive Hanami parties, but where is all this extra money coming from. Nothing has changed! Some companies have said they will pay higher bonuses this summer, but nobody has received that money yet. I doubt that all of these people are playing the stock market, and reaping benefits from the Nikkei’s rise. So what is it?

    • 151E

      It’s only really hard to understand if you buy into the economic fallacy that people are fully rational agents. People are not fully rationally – we’re intellectually lazy, and most of our decisions are not made after rigorous analysis. That’s fine for much of daily life where we can coast along on mental autopilot, but it is not good when faced with complex problems like economic projections.

      People are optimistic because (1) most of us are genetically predisposed towards optimism (it’s evolutionarily advantageous, with big rewards for risk seeking behaviour), (2) superficial indicators like the Nikkei and news reports telling us how optimistic everyone is feed an availability bias making it seem there is good reason to be optimistic, and (3) it’s spring and the weather is getting better, and people naturally conflate feeling better with being optimistic.