The frown on Akio Toyoda’s face is the latest blow to the Bank of Japan’s effort to revive the economy.
It’s been all broad smiles at Toyota for the three years BOJ Gov. Haruhiko Kuroda has been at the wheel. His monetary maneuvers shaved 30 percent off the yen’s value, putting tens of billions of profits into CEO Toyoda’s hands. They even made Sony, which hasn’t had a sexy product in decades, seem serviceable. But Toyota’s warning of a 40 percent plunge in operating profit from a year ago dramatizes the BOJ’s dilemma.
While Toyota, arguably Japan’s premier company, is still profitable, the rate of deceleration is striking. Along with deepening deflation, negligible credit growth and stagnant wages, Toyota’s downshift proves Kuroda has lost all traction. And after 1,150 days at the controls, it’s time to ask if the BOJ needs a new driver.
I raise the question in light of response to my May 6 column recommending that Finance Minister Taro Aso be sacked. Few readers disagreed with my take on Aso, who’s achieved none of Prime Minister Shinzo Abe’s reform goals as another recession beckons. But one question came up often: Shouldn’t Kuroda go, too? It’s a fair one. It’s not like his BOJ made progress reaching a 2 percent inflation rate or boosting demand. The move to negative interest rates was akin to screaming “fire” in a theater crowded with antsy bankers, investors and households. My own take: No, Kuroda shouldn’t go just yet.
Admittedly, there’s a good case for new leadership. Kuroda was hired in March 2013 to do what predecessor Masaaki Shirakawa wouldn’t: flood Japan Inc.’s engines in a bid to enliven growth. The University of Chicago-trained Shirakawa spent five years on the job arguing aggressive quantitative easing would only work if paired with bold structural changes; Kuroda spent three proving Shirakawa right. While Kuroda’s campaign drove the Nikkei 225 higher and enriched hedge funds, households were left standing at the curb. He’s also cornered the bond and stock markets, raising concerns about moral hazards and bubbles. How can the BOJ ever withdraw from markets it has effectively nationalized?
Abe’s BOJ-centric road map was flawed, and predictably so. Toyota and its peers, Abe believed, would take the spoils from a weak yen and fatten paychecks, create new jobs, invest domestically and stabilize prices. When Toyota did invest, it was in factories in China and Mexico. And when Abe or Kuroda urged Japan Inc. to do its part, executives like Toyoda pushed back and said they were waiting on the pro-growth reforms Tokyo promised.
Kuroda could be forgiven for feeling misled and abandoned by Abe’s team — which is why I think Aso should go. Consider the hypocrisy factor at the upcoming May 26-27 Group of Seven meeting. There, Abe and Aso plan to put the moves on German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble to lead the charge for greater fiscal stimulus in Europe. Their likely response: Well, what about fixing Japan’s troubles with recession and deflation first? The BOJ, after all, is the only real piston firing in Tokyo.
Yet Kuroda must fight for the right to stay at the wheel. He should take any remaining gravitas out for a ride and demand that Abe’s team act. Unfortunately, Tokyo is entering another election season (Abe can’t seem to get enough of these national elections). Speculation remains that Abe is planning a double election — both the Lower and Upper houses — in July. Word is, he’ll harness this month’s Hiroshima visit by Barack Obama, the first by a sitting U.S. leader, to boost the Liberal Democratic Party’s standing. Tokyo in campaign mode, though, means it’s not in fix-impediments-to-growth mode. Expect far more attention on revising the war-renouncing Constitution than economic tinkering.
Only Kuroda has the juice to catalyze Abe. One reason the BOJ held its fire on rates last month, shocking markets, was to communicate that it’s Abe’s move. After 1,234 days in office, Abe has done very little to loosen labor markets, cut red tape, lower trade barriers, support startups, empower women and internationalize corporate governance. And the weak yen deadened incentives for companies to hone competitiveness. All it took to curb the mighty Toyota is a 10 percent yen rally.
As markets cheer Nissan buying a 34 percent stake in troubled Mitsubishi Motors, remember this: thanks to Japan Inc.’s opacity, investors have no idea how deep Mitsubishi Motors’ falsified fuel-ratings scandal runs. The drip, drip, drip of bad news from Toshiba (fudged accounting), Takata (faulty air bags) and Sharp (downplaying liabilities) shows how much work will be required to modernize corporate Japan.
Kuroda could offer a quid pro quo: in exchange for monetary support, Abe must prod his party to implement the supply-side reforms it was elected to enact 40-plus months ago. Each reform box Abe and his party check off warrants an additional BOJ step to buy up corporate, mortgage, asset-backed or local-government debt. Every verifiable reform success is greeted with more BOJ liquidity for exchange-traded funds, real estate investment trusts and perhaps even direct purchases of property and other assets.
If this sounds pointless and naive, what’s the alternative? Neither voter anger, nor foreigners fleeing the Tokyo Stock Exchange, nor dreadful data has gotten Abe’s attention. Perhaps turning off the ATM feeding Tokyo’s complacency will focus the prime minister’s mind. The rising yen — and how it’s pushing export giants like Toyota off the road — could be a powerful inducement for the ruling party to do its job.
Kuroda shouldn’t be shown the door just yet. But the clock on his QE gamble is speeding up, unlike the corporate profit outlook. Only Kuroda has the clout and leverage to prod complacent politicians to turn Japan’s frown upside down.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics. www.barronsasia.com
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