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2016: the year of looking beyond Japan’s Abenomics

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Barron's Asia

The most important concept for new arrivals to Japan to grasp is “honne” and “tatemae.” These words refer to the often vast gulf between a person’s true beliefs (their honne) and the politically-correct ones that they espouse publicly (their tatemae). And they offer a timely explanation for why Shinzo Abe’s revival program is largely a dud three years on.

Prime Minister Abe surged into office on Dec. 26, 2012, promising to upend a sclerotic economic system. His three-stage plan of monetary easing, fiscal stimulus and deregulation would end deflation, boost wages and engender confidence in the future. That, at least, was the politically correct line. With the benefit of hindsight, it’s clear Abe’s true intension all along was national security: securing the right to deploy troops abroad, silencing the media and whistleblowers and cementing a nuclear-power-centered future at odds with public opinion.

Students of Thomas Frank’s 2004 book “What’s the Matter With Kansas?” knows the drill. The historian’s look at how U.S. conservatives use bait-and-switch tactics to fool the middle class into voting against their interests could easily be applied to Abe’s Japan. His bold Japan-is-back rhetoric and Nikkei-boosting theatrics distract the masses so Abe can push his right-wing agenda by stealth.

But new years are all about clean slates. And as 2016 begins, what are the odds Abe will finally get serious about the restructuring he’s been pledging for 1,098 days now? Only Abe can say for sure, but it’s ominous that his chief cabinet secretary is jawboning the Bank of Japan to do more. Just days after the BOJ refused to expand its main stimulus target, Yoshihide Suga told Bloomberg News: “I think they still have policies they can pursue. I am not at all pessimistic about this.”

In the winks, nods and secret handshakes that pervade central banking, that’s code for “ease soon and don’t be stingy!” And it suggests Abe’s team will continue to rely more on a weak yen than steps to stimulate innovation, loosen labor markets, lower trade barriers and empower the female workforce.

Even foreign policy had a honne/tatemae moment in the waning days of 2015. On the same day Abe struck a deal with South Korea on World War II sex slaves — an apology and modest reparations — his wife visited Tokyo’s controversial Yasukuni Shrine, which honors Class A war criminals along with Japan’s war dead. A sign to right-wingers that Abe still has their back?

Abe has three big economic challenges in 2016: implementing structural reforms, avoiding a major yen rally and convincing investors they weren’t wrong to flock to Japan in recent years. His government is already addressing all three rhetorically — Suga’s comments are a case in point. But as his fourth year begins, Abe must put some big reform wins on the board.

The government can start by jawboning companies benefiting from a weak yen to boost wages and domestic investments. Its focus on corporate tax cuts is a distraction, at best. Why not, instead, penalize companies sitting on some $2 trillion of cash they could deploy to help Abenomics? How about cutting red tape and offering tax holidays to entrepreneurs launching startups? Abe could toss incentives at the Toyotas of Japan building plants in Mexico and China instead of domestically. It may be wise, too, to shelve plans for a 2017 sales tax hike since the economy hasn’t recovered from the one in 2014.

The most recent batch of data are decidedly sobering: both retail sales and industrial production were down 1 percent in November. And China’s economic trajectory is darkening by the day. It’s as clear of an indication as any that Japan needs as much help from the supply side of the ledger as the demand side. Abe’s coalition enjoys healthy majorities in both houses of the Diet and opposition parties are in disarray. He could easily take all these steps and more in short order. Question is, will he?

The currency, meanwhile, faces increasing upward pressure. Morgan Stanley calls 2016 the year of the yen as the BOJ loses deflation-beating credibility, predicting it will strengthen to 115 against the dollar from about 120 now. That would slam export giants and slow the flow of tourists flooding Japan in recent years.

As this column has argued before, there are as many cons as pros to the yen’s roughly 30 percent drop since 2012. It’s hurting import-dependent businesses and means the scattered inflation upticks Japan is getting are the bad kind — cost push rather than demand pull. Still, a lower yen is the only barrier between Asia’s second-biggest economy and recession. It is, for better or worse, a necessary stabilizer until Abe can add new vigor to the economy.

No. 3 on the to-do list — maintaining investor confidence — will become increasingly more difficult. After three largely squandered years, Abe faces a well-deserved trust deficit in markets even after the Nikkei’s 8.7 percent rise this past year. That’s not to say investment banks are bearish. Goldman Sachs is betting in a 20 percent surge in 2016 to 22,700 as consumer spending increases. Yet that’s a big reach if Abenomics doesn’t get executives to share the wealth.

Even where base pay increased marginally last year — 0.1 percent in September and October, for instance — gains were canceled out elsewhere. Summer bonuses were 2.8 percent lower than in 2014. Also, more and more companies are maximizing profits by moving huge swaths of the labor forces to part-time contracts to trim wages and benefits. That’s fine if Japan’s small-to-midsize company sector were thriving and picking up the slack. But it’s not. This informalization of the labor force is hitting women especially hard — another honne/tatemae dynamic for Abenomics, which claims to be championing gender equality.

Nor are the BOJ’s efforts to corner the market for exchange-traded funds likely to work. On Dec. 18, the central bank said it would buy another $2.5 billion of ETFs, focusing on companies that invest “proactively in physical and human capital.” The move won’t do any more to incentivize Japan Inc. than Abe’s modest — and largely voluntary — steps to tightening corporate government. What’s needed is genuine confidence that the economy will be significantly more vibrant in five years than it is today.

That means narrowing the huge gap between what Abe claims he’ll do with the economy and what he actually is.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com

  • Richard Solomon

    Kudos to Mr. Pesek for calling Abe out on his failure(s) to take concerted action on the economy. The BOJ can only do so much via monetary policy. Kudos, too, for noting that Abe could use tax incentives to get corporations to change their ways. This piece does not gomfar enough in that regard, however. Abe could lower taxes for those companies that do things like raise wages 5% or more, hire men and women into permanent full-time jobs, promote substantially more women into exec positions, provide more daycare slots for working mothers, award men and women more time off for family caretaking needs, etc. It is clear that ‘jawboning’ these companies into changing their ways will not work. Abe needs to hit them in their wallets. If tax breaks don’t work he can institute tax penalties/higher taxes on those which don’t do more to increase the disposable income of workers, etc. That will hopefully get their attention!

    • soudeska

      The thing is, I’m pretty sure Abe doesn’t want wages raised 5%, more full-time permanent workers, and more female executives. Low-wage precarious workers are easier to manipulate, and a woman’s place is in the kitchen, is what I’m sure he’s thinking.