Japan’s slowing-China problem may seem startlingly new, but it’s really 30 years in the making.
Of all troubles Prime Minister Shinzo Abe thought he’d have with China, another recession wasn’t on the list. Quarrels over history, disputed islands and influence in Asia are suddenly taking a back seat to Tokyo’s vulnerabilities as China drags Japan into its second recession in three years. As China hits a wall, Japan is up against one of its own creation — dating back to 1985.
That was the year, more or less, when the myth of Japanese invulnerability took root. When the then-Group of Five nations asked Tokyo in September 1985 to let the yen soar in global markets, Prime Minister Yasuhiro Nakasone figured why not — Japan was unstoppable. Tokyo believed it had found the Holy Grail of prosperity, while its companies were changing the world with the Walkman, video games and high-reliability cars. Decades after it all went wrong, Tokyo is desperately trying to reclaim that moment.
That, not China, is in a nutshell why “Abenomics” is sputtering. As this column has argued before, Abe’s revival program is treating the symptoms of Japan’s malaise, not the underlying causes. By focusing on the symptoms alone, Abenomics has actually increased the nation’s exposure to a China that could soon experience its own Japan-like reckoning.
The core of Abenomics, after all, is a 30 percent currency devaluation geared toward an industrial system that no longer exists. The weak-yen model that worked so well in the 1980s is flopping because services have long since trumped manufacturing. It also does little for a high-cost, aging and unproductive workforce at a time when younger and cheaper competitors are morphing into manufacturing hubs. Instead of boosting wages and investing more in new industries — as Abe had hoped — companies enjoying a weaker yen are cutting back.
Corporate spending, which fell 1 percent in the third quarter, just had its first back-to-back drops since the 2011 Great East Japan Earthquake and nuclear crisis. Honda, Mazda and Nissan are all scaling back expenditures. And over the last year, Toyota’s biggest investments have been on new factories in China and Mexico.
Toyota is emblematic of Japan Inc.’s doubts about Abenomics. In public forums, CEO Akio Toyoda has been an enthusiastic cheerleader. Executive actions speak louder, though. Earlier this year, Toyota announced a paltry ¥4,000 pay raise for the company’s 63,000 union workers. It’s hard to exaggerate how big a blow it was to Abenomics. Japan Inc. loves a precedent and none would resonate more than Toyota opening its wallet and giving the recovery a vote of confidence. Yet Japan’s pre-eminent corporate name, one sitting on an $18 billion weak-yen windfall, shared less than four days of profit with employees.
The 0.2 percent drop in retail sales in September demonstrates why the Bank of Japan keeps putting off its 2 percent inflation target. And it has me fantasizing about an alternative route Abe might have taken in 2012 — a more imaginative move to boost the yen. It would’ve dovetailed with Japan’s increased need to import energy (the 2011 quake prompted the nation to idle all nuclear reactors); boosted the purchasing power of CEOs looking to acquire interests in growing overseas markets; cheered consumer confidence; and pressured underperforming companies. To see how this last point holds Japan back, consider Germany. When the euro — or the Deutsche mark of old — was strong, German CEOs didn’t bellyache about exchange rates, but adapted and became more competitive.
The answer, of course, is to get on with the structural reforms that Abe has pledged for three years. He made a losing bet that the BOJ alone could revive Japan. CEOs are calling Abe’s bluff, making wage hikes and investments contingent upon supply-side steps to loosen labor markets, encourage entrepreneurship and cut red tape across industries.
China’s slowdown makes that unlikely. If Abe lacked the political will to get radical when China was growing 8 percent, what makes anyone think he’ll regain his reformist mojo when his main trading partner is growing 6 percent? For all Abe’s efforts to cozy to the U.S. and join the Trans-Pacific Partnership trade deal, China contributes 13 percent more to Japanese gross domestic product than America. It’s no coincidence, for example, that average monthly pay fell 2.5 percent June, the month China’s stock market began to crash.
“China,” economist Jeffrey Sachs argued in a Project Syndicate op-ed last month, “now confronts the risk of the same sequence of events” that precipitated Japan’s malaise. Yet as observers fret over the “Japan syndrome” spreading (economist Lee Jong-wha fears South Korea might catch it), it’s important to remember Japan still hasn’t beaten it.
As Richard Katz, publisher of The Oriental Economist, points out, the 0.8 percent GDP drop in the third quarter eclipses a more important point: Growth has averaged just 0.6 percent since early 2012. As China’s troubles add another headwind to the mix, Abe will rue the day he put foreign-policy pursuits ahead of the economy.
Abe boosters point to successes including Japan’s low jobless rate, steps to tighten corporate governance and this year’s 12 percent rally in the Nikkei. But the really big Abenomics achievement may be a dubious one: Increasing Japan’s reliance on China that may retrace the mistakes Japan made over the last 30 years.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com
By subscribing, you can help us get the story right.