If any policymaker is thanking his lucky stars over Donald Trump’s victory, it’s Bank of Japan Gov. Haruhiko Kuroda.
The yen’s plunge since the U.S. president-elect shocked the world on Nov. 8 gave Abenomics a second wind. November was the worst month since 1995 for a currency that has fallen 11 percent since the last time the Bank of Japan board met. Already, surveys show a marked bump in business sentiment, raising hopes that 2017 will be a year of the kind of wage increases Prime Minister Shinzo Abe has tried to produce since 2012. Hence, the BOJ’s decision Tuesday to leave monetary policy unchanged.
There are two problems with this sudden burst of optimism. One, it ignores the fact Trump is 30 days away from taking office, and no one knows what he really plans for the U.S. economy. Two, the yen’s trajectory may convince Abe that his work to restructure Japan is done.
The first risk is impossible to assess as 2016 draws to a close. Trump’s plans for massive fiscal stimulus, trade wars and deregulation seem to change by the day, offering Abe and Kuroda little certainty about where the yen might be in 12 months. What if Trump devalues the dollar to try to beat China at its own game? The yen could just as easily end 2017 stronger at 100 to the dollar as it is weaker at 130.
The second is easier to diagnose and act on. The Nikkei 225’s powerful rally since the “Trump tantrum” hit markets makes sense in the short run. Japan does indeed feature a stable of cash-rich and arguably undervalued companies from cosmetics maker Kose to Sumitomo Mitsui Financial Group. Remember, though, that the yen’s 30 percent plunge — prior to rallying this year on the Brexit fallout — didn’t make the economy more competitive. It didn’t end deflation or encourage the Toyotas, Mitsubishis and Nintendos of the world to fatten paychecks. It didn’t increase innovation or encourage a new wave of startup activity. It didn’t prod Abe’s government to reduce Japan’s national debt, increase productivity or take concrete steps to boost the birthrate.
The weak yen did exactly the opposite. It increased the complacency that now has Japan Inc. looking over its shoulder as China closes in. It convinced Abe’s team it could move glacially to liberalize labor markets, encourage greater risk-taking, empower women, import more foreign talent, demand corporate executives adhere to international standards and lower trade barriers.
It’s telling, for example, that the yen’s 30 percent drop in recent years wasn’t met with a surge in foreign takeover attempts. The reason is decades-old defenses like cross-shareholdings between friendly companies and regulatory poison pills that repel buyers. A rare exception, Sharp’s sale to Taiwan’s Foxconn Technology this year, became a fiasco when the Osaka-based company disclosed $3 billion-plus of contingent liabilities at the 11th hour. The resulting headlines damaged the Japan Inc. brand anew.
That’s not to say Abenomics hasn’t put some wins on the board. Moves to increase the number of outside directors on corporate boards, increase return on investment and boost female labor participation are steps in the right direction, albeit obvious and modest ones. Abe also gets credit for joining a U.S.-led Trans-Pacific Partnership that Trump plans to kill. But the most important upgrades — those pertaining to competitiveness and getting companies to boost wages — have all been fobbed off on Kuroda.
Abenomics turns 4 years old on Dec. 26, and if it has proven anything it’s that Japan’s deflation isn’t a monetary phenomenon but a structural one. Because corporate executives lack confidence in Abe’s policies, they’re hoarding profits. Meanwhile, households that haven’t had a decent raise in decades hear talk of 2 percent inflation and increase savings. By promising a series of big bangs and offering a few modest pops instead, Tokyo failed to awaken its animal spirits.
That’s why the yen’s drop is a short-term positive and a long-term negative. It takes the onus off Abe to get serious about structural changes out of the gate in 2017, while shifting even more responsibility to the BOJ to keep stimulating.
Kuroda faces quite the balancing act. Already, expectations are rife for BOJ tapering. Its massive debt purchases cornered the market, impeding bond pricing dynamics and limiting the availability of JGBs for private-sector buyers. That will be a dicey proposition, though, as the Trump tantrum puts upward pressure on bond yields around the globe — Japan included.
Lucky as the BOJ may seem today, Japan’s 127 million people may be anything but as the complacency that is almost sure to flow from the yen’s drop disadvantages living standards.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics. www.barronsasia.com
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