With its deflation, aging population, gargantuan debt load, extreme seismic activity and sub-zero interest rates essentially forever, Japan sure makes for a bizarre “safe haven” in times of trouble. Yet last week, as all hell broke loose in Europe, investors couldn’t buy yen fast enough.
They fled the Nikkei in droves on Friday (it plunged nearly 1,300 points) as “Brexit” became reality, but the yen surged and Japanese bond prices soared, never mind the negative yields. The idea that an economy staggering from recession to recession for 25 years, borrowing with increasing abandon and run by change-averse bureaucrats thinking it’s still 1986 speaks to the upside-down state of the world. Really, which previously rock-solid financial correlation in bond, equity, commodity or money markets still makes sense in 2016?
But the same is true of Japanese politics. Some Tokyo wags figure the Brexit chaos may give Prime Minster Shinzo Abe a fresh boost ahead of the July 10 elections. This speculation features its own down-the-rabbit-hole dynamic. After all, if Abe had done anything substantial these last 1,280 days to restructure an uncompetitive economy, Japan wouldn’t be the main casualty of European contagion. And in a more robust democracy, Abe’s Liberal Democratic Party might be sent packing 13 days from now.
Hardly, given the mess the main opposition Democratic Party has made of its electoral chances. Its hapless leader, Katsuya Okada, has been a gift to Abe’s party, failing at every turn to capitalize on dreadful economic news — or Tokyo’s deer-in-the-headlights reaction to Brexit. As the yen skyrocketed Friday, and with it the odds of another recession, visibly-shaken Finance Minister Taro Aso looked as if he were searching for a desk to hide under.
Yet the LDP’s election odds are getting a Brexit bounce, in ways that bode ill for Japan’s outlook. Yes, yes, I know. Abe will redouble efforts to deregulate the economy come July 11, the day after winning a new mandate. Trouble is, this is at least the third time he’s seeking support for reforms that don’t need it. The vast majority of Japan’s 127 million people are firmly behind faster economic growth, looser labor markets, increased innovation and fresh thinking. Abe’s election fetish is a waste of time, money and energy better spent addressing the frailties he’s been pledging to fix since December 2012.
The odds of Abe suddenly attacking economic dysfunction aren’t great. His fans point to three successes: aggressive monetary easing, joining the U.S.-led Trans-Pacific Partnership and tighter corporate governance. Yet each requires a huge asterisk. The Bank of Japan’s epic gambit hasn’t ended deflation and the yen’s rally puts Gov. Haruhiko Kuroda back to square one. TPP, even if it survives the November U.S. election, is more a geopolitical poke at China than Japanese job creator. And ask the $1.3 trillion Government Pension Investment Fund how impressed it is by Abe’s modest steps to raise the management bar. It’s suing Toshiba for losses over an accounting scandal. Takata’s chief executive still has a job as its airbags kill and maim motorists, while Mitsubishi’s fuel-economy scandal widens.
Abe’s real focus is national pride and security. For nationalists of his ilk, the economy is a prop for diverting attention from their passion to rewrite the postwar pacifist Constitution. To historians, it’s really about Kishi family restoration. Abe believes the generation of his beloved grandfather, former Prime Minister Nobusuke Kishi, is unfairly maligned by history. John Dower, author of the Pulitzer-Prize-winning “Embracing Defeat,” argues Kishi is a “war criminal” from his exploits in Manchuria. Michael Schaller titled his book on the man “America’s Favorite War Criminal.”
Unshackling Japan from its U.S.-authored Constitution was Abe’s goal the first time he was prime minister from 2006 to 2007. It’s been his driving force since 2012, too, distracting the electorate with talk of epochal economic change while working behind the scenes to avenge his grandfather’s honor. This effort is about to intensify at the economy’s expense. So far, Abe managed to “reinterpret” Article 9 of the Constitution. Now comes the all-out war to amend it formally, and it’ll leave little time for a structural Big Bang.
It’s telling, for example, that virtually 100 percent of the post-Brexit discussion is about how the BOJ will respond. Nowhere is there serious talk of Abe accelerating supply-side growth efforts. Nor does the political opposition have a clear plan to get Abenomics back on track, or an alternative with better odds of ending Japan’s malaise. In his haste to rewrite history, Abe forgets that nothing would boost Japan’s global clout today like 5 percent growth on a sustained basis.
Granted, there are valid reasons why Japan might seem a haven amid today’s chaos. They include nearly $15 trillion of household savings, an enviable current-account balance and battle-tested policy makers with decades of damage-control experience. After a quarter century of stagnation, social stability never unraveled. Crime hasn’t exploded, mass homelessness averted and huge bankruptcies generally avoided. Japan’s strength, it turns out, is the socialism embedded in its political system. Companies have long carried excess employees because the alternative — U.S.-style jobs layoffs — is seen as bad for national harmony.
That strength is now weakness, as China and other upstarts alter Asia’s competitiveness balance. The promise of Abenomics was to raise Japan’s innovative game to create new wealth and enable it to maintain its high living standards. Instead, Abe resorted to an old-school yen devaluation of the kind that might’ve worked 30 years ago. That’s why a giant economy 10,000 km away is on the very front lines of Brexit turmoil. It’s also why those betting that Abe will use his new, new, new mandate to address these vulnerabilities may want to consider a safer haven.
William Pesek is executive editor of Barron’s Asia. www.barronsasia.com
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