With business and consumer confidence up and the Nikkei 225 buoyant, Tokyo is buzzing about Bank of Japan tapering. BOJ Gov. Haruhiko Kuroda’s historic gambit to corner the markets for bonds, stocks and public opinion, this argument goes, has run its course. Soon, he will follow the Federal Reserve in scrapping quantitative easing, cutting asset purchases and perhaps even pull off rate hike. The days of central banks dominating trading across investment classes is, after all, over. The yen, it follows, is sure to rise in 2017.
Then you look at Japan’s latest data dump and realize how much wishful thinking is at play here. The good news: Consumer confidence in December rose to the highest level in three years. The bad: Aggregate consumer spending is still trending lower. What gives? The BOJ faces two problems. One, its policies stabilized business conditions but have so far failed to lift confidence enough to boost spending or wages. Two, the effects of the shrinking population are beginning to overwhelm Japan’s policy tools. “Sentiment is not everything — you cannot spend it,” says Carl Weinberg, chief economist at High Frequency Economics. “Demographics matter a lot. In fact, demographics in Japan matter more than anything else.”
History may show that 2016 was a population-fallout inflection point for Japan. The United Kingdom, for example, is seeing sales momentum running ahead of real wages and incomes. In Germany, sales are growing amid flat consumer sentiment. Ditto for France. Growth in the United States is hastening even as President-elect Donald Trump claims households are miserable. The key difference between these Western powers and Japan is immigration flows and healthier demographics.
Bets that Kuroda will wind down his epic quantitative-easing program are premature. Monetary policy is the only real source of thrust in the world’s third-biggest economy. Remove that from the equation and gross domestic product shrinks, the yen surges, deflationary forces intensify, government bond yields rise and the Nikkei’s bull run ends. Bottom line, expect less BOJ tapering than analysts predict and for the yen’s slide to continue. Not an unruly move, but almost certainly to the 125 to the dollar level on which folks at Oxford Economics, Royal Bank of Scotland and elsewhere have set their sights.
That’s not to say there aren’t some encouraging trends afoot. Takeda Pharmaceutical’s $4.7 billion purchase of Ariad Pharmaceuticals is the latest sign of Japan Inc. venturing abroad for growth. The 236-year-old Osaka company already gets more than three-fifths of its revenue from outside Japan. From SoftBank to the Asahi Group to medical device maker Terumo Corp. to Nippon Life Insurance, Japanese executives are growing more globally acquisitive to offset a shrinking market at home — and wisely so.
Prime Minister Shinzo Abe also is prodding corporate Japan to raise shareholder value. He has tried to improve transparency, increase the number of outside directors and encourage stockholders to speak out. Emphasis on “tried,” though. Look no further than the circus over at Toshiba, with its drip, drip, drip of disclosures of fresh accounting misdeeds. Its stock rallied on Wednesday as Japan’s big three banks circled the wagons to back a Japan Inc. icon that might be better off being acquired — or even allowed to fail. We all know creative destruction isn’t Japan’s thing. But Toshiba is a stark reminder of how much of the old-Japan ethos Abenomics promised to change remains.
The same goes for a weak-yen habit Tokyo just can’t quit. Four years into his current leadership, Abe has achieved none of the major structural reforms in labor, industry, taxes, innovation or gender dynamics he promised. Abenomics is really just Kurodanomics, and the BOJ knows it. The proud institution doesn’t want to be blamed for ever deeper deflation any more than Kuroda wants to be the fall guy if a yen surge crashed Nikkei stocks. So, expect the BOJ to do more to stick with its super-loose money program this year than dismantle it.
The Trump White House could have Abe’s back in this pursuit. Trump’s first foreign policy obsession is taking Xi Jinping’s China down a peg or two. Even as Trump demands a firmer yuan, he may look the other way on a weaker yen (just like the Obama administration). Call it Abe’s reward for sprinting to Trump Tower in November to congratulate Trump. He also may use it to troll Xi, reminding China of Japan’s preferred status in the Trump economic orbit.
Much could transpire to alter my yen pessimism. Trump’s honeymoon giving way to market chaos or some Black Swan shock could turn the yen into a safe haven anew. Elections in France and Germany could unnerve investors, as could a major Chinese slowdown. Days after Trump’s shock win, former finance official Eisuke Sakakibara, once dubbed “Mr. Yen,” said the currency would surge to 90 to the dollar. More likely, the yen will slide toward mid-2015 levels or beyond as the BOJ leaves the punch bowl out.
William Pesek is executive editor of Barron’s Asia. www.barronsasia.com
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