Business / Economy

Abenomics hits new hurdle as Trump win roils outlook

by Henry Hoenig

Bloomberg

Donald Trump’s stunning election victory may complicate Prime Minister Shinzo Abe’s efforts to revive Japan’s economy, underscoring the vulnerability of Abenomics to fluctuations in the yen and export profits.

Trump’s win all but doomed the Trans-Pacific Partnership trade agreement, which could have boosted Japanese manufacturers. Abe was counting on the pact as a catalyst for long-promised structural reforms in protected sectors of the economy. The premier swiftly scheduled a trip next week to meet with the president-elect in New York on Nov. 17.

“The U.S. turning inward and turning protectionist is quite a blow to the Japanese economy — I think Mr. Abe wants to talk to Mr. Trump to continue good economic relations and free trade between the two countries,” Eisuke Sakakibara, a former head of currency policy at the Finance Ministry, said in an interview with Bloomberg Television.

Moves in the yen also continue to pose risks. Further strength in the currency would erode the profits of Japanese exporters and make it more difficult for the Bank of Japan to create inflation. Fears of a hard landing in China and the U.K.’s Brexit vote sent investors fleeing risk assets earlier this year, with many seeking the perceived safety of the yen. The currency surged again during Asian trade on Wednesday, as investors reacted to Trump’s win, though the dollar rebounded sharply overnight. Analysts are scrambling to reassess the outlook for currencies.

“Abenomics has come to a different stage at this moment,” Sakakibara said, after it relied on aggressive monetary stimulus that had driven down the yen. The administration “needs to use some fiscal sort of measures to stimulate the economy, in addition to past easing of monetary policy,” he said.

The election result also adds to uncertainty on the chances of the Bank of Japan implementing further monetary easing in coming months as markets try to recalibrate the likelihood of an interest rate increase by the U.S. Federal Reserve in December. Expectations of a Fed hike had strengthened the dollar recently.

Any changes by the BOJ come with risks, given the unpopularity of its negative policy rate, and the difficulties it would face if it chose to increase asset purchases.

Difficulties facing the central bank could also force the Abe government to increase fiscal stimulus, even as it seeks to contain swelling debt.

Trump himself may boost U.S. fiscal stimulus, in time pressuring the Fed to raise rates, which could be part of an alternative scenario for Japan in which the dollar strengthens versus the yen, offering Abe some much needed respite.

The dollar rebounded against the yen during U.S. trading hours, reaching its strongest level since July, as the “risk-off” fear that gripped markets as the U.S. election results came in subsided. The yen still remains about 14 percent higher than it was at the start of 2016.

Masatsugu Asakawa, who oversees currency policy as the vice minister of finance, said as the election result came through that officials in Tokyo were poised to take action if what he termed “harsh” and “speculative” market moves continued.

Yet Trump’s victory may also make it more difficult for Japan to intervene. The yen’s strength and Japanese talk of intervention has already been a source of tension between Tokyo and Obama administration officials this year. Trump has taken a more aggressive stance, criticizing Japan and China for what he termed currency manipulation that puts U.S. companies at a disadvantage.

“Japan will have no choice but to intervene if the yen goes up to 95 or 90 rapidly but Trump makes it more difficult to convince U.S. authorities about the need for action,” said Daiju Aoki, economist at UBS Group AG. “The same goes for the BOJ.”

Some economists cautioned that Congress could provide a check on Trump. Maiko Noguchi, economist at Daiwa Securities Group Inc. and a former BOJ official, said the market turmoil seen on Wednesday may be short-lived. “Trump said radical and controversial things during the campaign, but I don’t think he can make them come true after becoming president,” she said.

A Trump presidency also likely means the death, at least in its current form, of the Trans-Pacific Partnership, which Abe has touted as an important element of his economic plan. Trump has pledged to renegotiate existing U.S. trade deals and compared TPP — a multilateral deal that has been signed by member nations but not enacted — to rape.

Japan’s Lower House was poised to vote on legislation to implement the TPP later Thursday.

“Renegotiation of TPP is inevitable now,” said Yasunari Ueno, the chief market economist at Mizuho Securities Co. in Tokyo. “Americans made this choice. Beyond that, uncertainty is blanketing the global frameworks. You wonder about the relationship between Trump and Russia and the relationship between Trump and China. You also wonder if the costs of the U.S.-Japan alliance will be reexamined.”

For now, downside risks are on the rise, and that will add to the difficulties for policymakers in Japan, who have already seen their policies “stretched,” said Betty Rui Wang, northeast Asian economist at Standard Chartered Bank in Hong Kong.

“If they still stick with the current policy framework, rolling out more fiscal stimulus from the government side, and continue the current monetary policy framework, I would think they are probably short of good measures,” she said.