Commentary / Japan

Japan has reasons to be scared

by Kevin Rafferty

Special To The Japan Times

If you really want proof of the folly of trusting markets as a guide to what is happening in the real economy, let alone the real world, you only have to look at the antics in Tokyo over recent days. The government announced that growth in the final quarter of 2015 fell by an annualized rate of 1.4 percent, and the yen had appreciated to 113 against the dollar in spite of Bank of Japan Gov. Haruhiko Kuroda’s best efforts. And yet, confronted with this gloom, the Tokyo stock market rose by a massive 7.2 percent in a single day.

Similar unfathomable gyrations have been happening in other major markets. In particular, the falling price of oil — which should be like sakura to spring, a harbinger of better economic times — sent Mr. Market into a scared tailspin. Such is the nervous mood that rumors of unlikely collusion between a motley group including Iran, Qatar, Russia, Saudi Arabia and Venezuela about a possible deal on supplies sent the oil price above $35 a barrel, and stock markets galloped giddily higher.

Whatever the stock markets think, the world economy is in a mess, as the OECD, the club of rich industrialized nations, admitted. It cut growth forecasts made only three months earlier, and sharply told member governments that reliance on low interest rates and money creation through quantitative easing (QE) was no longer enough for lasting recovery.

“Global growth prospects have practically flat-lined, recent data have disappointed and indicators point to slower growth in major economies, despite the boost from low oil prices and low interest rates,” said OECD Chief Economist Catherine L. Mann.

In the United States, a chorus of criticism of the Federal Reserve is growing for raising interest rates prematurely. The European Union splutters along caught by talk of “Brexit” (the U.K.’s exit) and the triple political, economic and social whammy of refugees and migrants flooding in from war-torn places from Syria to Afghanistan.

The biggest unknown is China, whose unprecedented economic rise has opened a world of plenty for millions of Chinese and for big Western and Japanese corporations benefitting from outsourcing production there. The outflow last year of more than $1 trillion indicates that many Chinese are nervous. In spite of official insistence that growth is just below 7 percent, economists who have calculated from official figures say that China’s growth today is really in the 3 to 3.5 percent range.

Among them is George Soros, whose claims that China is already on the road to a hard landing produced an angry front-page opinion article in the overseas edition of the People’s Daily, which demonstrated official nervousness. It warned billionaire Soros against going to “war on the renminbi.” The headline said: “Declaring war on China’s currency? Ha Ha.”

Soros is trying to make money, as he famously did by betting against the British pound. But he is a man with economic insight and a moral and political conscience, and it reflects badly on Beijing to mock him.

China above all others is too big to fail, but it can stumble and damage itself and the world. Officials do not help themselves by loudly protesting that all is well when there are clearly too many problems, especially with well-connected bankrupt and near-bankrupt banks that have enjoyed being at the center of a financial system with Ponzi characteristics.

President Xi Jinping’s increasing intolerance of any dissent and search for anti-Reds under every bed will not help clear thinking or brave economic decisions. Ominously, Xi is ratcheting up military tension in the seas around China, a classic nationalist play to distract attention from internal problems.

Japan and Tokyo are a special — I am tempted to say terminal — case. The economy is struggling and is beginning to encounter the storms of an aging and graying population, which will batter the country’s prospects for the next generations. The OECD predicts Japanese growth of 0.8 percent this year and 0.6 percent next year. And yet who really knows how the consumption tax hike next year will damage not only growth but the animal spirits that can drive an economy to new heights or depths.

Why did the Tokyo market rise? Because, said a chorus of pundits, the players expect that Kuroda and his chums at the central bank to ride to the rescue with more monetary easing. This is dangerous. QE, wherever it is practiced, should be labeled clearly as a deadly — potentially economy destroying — drug. In Japan, you would be imprisoned for dealing in less powerful drugs; in some countries, you would be put against a wall and shot.

It is hard not to feel sorry for Kuroda, who has been placed in an impossible position. As originally conceived, monetary policy was only one of Prime Minister Shinzo Abe’s infamous “three arrows.”

Except that Abe did not fire three arrows. He left Kuroda alone shooting the monetary arrow. QE, according to critics, is like pushing on a piece of string. In the better global economic times when he started, Kuroda managed to weaken the yen, which boosted the stock market and improved the earnings of Japanese companies. But Japanese companies have not played their part. They have salted away a record ¥247 trillion in retained earnings, resisting the pleas of Abe to increase wages or invest, which might kick-start the economy, besides raising those animal spirits that could encourage Japan to believe in its economic future.

Now, as the global economy is weakening, the BOJ’s QE won’t be as effective. Its desperate resort to negative interest rates succeeded in weakening the yen for a few days before there was a flood of money from a nervous world into the yen as a “safe haven” currency and the yen went to 112-113 against the dollar, where it has stayed, enough to pinch exports. As another sign of global headwinds, Japan’s exports fell in January for the fourth month in succession.

Yasunari Ueno, chief market economist at Mizuho Securities, told Bloomberg that prospects for Japanese exports are poor, especially as companies shift production abroad, the global economy slows and the yen strengthens. “There is no driver to support Japan’s economy,” he claimed.

Abenomics was always controversial, derided as “ahonomics” by critics. But it was abandoned soon after birth by its creator. Takuji Okubo, chief economist at Japan Macro Advisors, asserts that: “The idea behind Abenomics was sound, but it was badly executed. In theory, the policy package aimed to implement painful structural reforms while expansionary fiscal and monetary policies played the role of painkillers. In reality, no significant structural reforms were executed.”

Kuroda might deepen negative interest rates. Rates could go to minus 0.5 percent or even minus 1 percent and be possibly applied broadly, with banks charging ordinary Japanese for keeping money in the bank — a scenario that Kuroda says is improbable. But this would be the dangerous nuclear option: it might lead to the dangerous denouement of Japanese taking their money out of the banks; would foreigners still see the yen as a safe haven?

Abe might fire another stimulus arrow via more money for boondoggle construction projects, easy pickings for the big companies that fund the politicians and deeper debts for Japan. But any beneficial effects would be short-lived, as happened numerous times with spending boosts in the 1990s.

The mystery is where are Japan’s leading politicians living. Nobuteru Ishihara, newly appointed to succeed the disgraced Akira Amari as economy minister, confidently declared last week that Japan’s economic recovery is continuing. “There have been no major changes in economic fundamentals,” he declared. “No doubt the virtuous cycle of the economy is working.”

Abe himself seems to have forgotten Abenomics in his quest for Japan to be a “normal” nation with a Constitution to his personal liking. You have to ask what is the price of being normal with an economy in such a neglected mess.

Kevin Rafferty is a journalist and commentator.

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