For Bank of Japan Gov. Haruhiko Kuroda, this week’s BOJ meeting is a go-through-the-motions exercise. He’ll look across the table and get his colleagues’ assessments of inflation and growth before standing pat on the BOJ’s ultra-loose policies.
That’s because Kuroda is really looking some 300 km west to Toyota headquarters near Nagoya. One reason he’s eyeing Japan Inc.’s premier company is wages. Executives around Japan love a precedent, and none would impress them — and the BOJ — more than the auto giant sharing its expected $16 billion-plus profit with workers. Stinginess by Toyota and other corporate champions benefitting from his historic monetary easing is the reason Kuroda is getting so little traction.
There’s another reason why Toyota is central to Kuroda’s calculations: Donald Trump.
Last week’s Mexico fiasco didn’t go unnoticed in Tokyo, Osaka or the city of Toyota. One moment, the U.S. president’s people talked of 20 percent tariffs on Mexican imports. The next, they said never mind. What’s Asia, a region dominated by another economy with which Trump threatens a trade war, to think? China’s uncertain trajectory is worry enough for Kuroda’s team even without trade frictions. It’s been made more personal, though, by Trump adding Toyota to his Twitter-shaming blacklist.
Toyota was quick to grovel, taking a page from Prime Minister Shinzo Abe’s scramble to Trump Tower to kiss the ring. It’s investing $600 million and adding 400 jobs in Indiana (the home state of Trump’s vice president). But Toyota’s reputation for quality and value could put Japan Inc. in harm’s way this year and next. Japan doesn’t apply tariffs to U.S. cars. But Trump says it’s “unfair” that Japan does “things to us that make it impossible to sell cars in Japan, and yet, they sell cars into us and they come in like by the hundreds of thousands on the biggest ships I’ve ever seen.”
How does Tokyo address “alternative facts” such as this? Try as he may, Abe can’t convince Japan’s 126 million people to buy American cars.
Even if Trump devalued the dollar aggressively, American cars would still lose out to Volkswagens, Mini Coopers and even Fiats. Frankly, I’m a bit shocked to learn that Detroit managed to sell nearly 19,000 vehicles in Japan in 2015. I thought it’d be less.
When it dawns on Trump that Abe can’t instantly add a zero to that tally, the tweeter-in-chief will lose it. Trump’s Japan views already are stuck in time. He seemed to read Michael Crichton’s paranoid “Rising Sun” theory about Japan colonizing corporate America in the 1980s as non-fiction. Not surprisingly, investors wondering how Trump’s China policies might play out are studying past U.S.-Japan disputes. In the 1990s, then-U.S. President Bill Clinton even threatened 100 percent tariffs on about a dozen Japanese car models.
As a top currency official at the Ministry of Finance in the 1990s, Kuroda intimately understands how trade disputes can affect business sentiment. For a BOJ head angling to break the “deflationary mindset,” the Trump-tweet risk now cowing executives couldn’t come at a worst moment. In Davos earlier this month, Kuroda said Trump’s “somewhat protectionist trade policy could be a matter of concern.” None more so than for the very executives Kuroda hopes will raise Japanese wages in 2017 to boost spending and inflation.
Kuroda’s main act this week is one of balance. Even if he doesn’t add new stimulus, the BOJ must be careful not to boost the yen. The dollar’s rally since Trump’s shock Nov. 8 election is one thing Tokyo’s quantitative-easing program has going for it. The BOJ also faces market chatter about tapering its gargantuan bond-purchase program. Hinting as much risks a surge in 10-year yields that drives up the yen and unnerves already skittish bankers.
Still, the governor may have legacy on his mind, as observers speculate whether he’ll get a second term. It’s a rather premature discussion; there’s still 14 months left in his current one. So far, though, Kuroda is a long way from the 2 percent inflation rate he promised. And his route to redemption runs as much through Toyota as Tokyo.
Abenomics is idling because Japan’s biggest companies don’t trust that their fortunes will be better three-to-five years from now. And so, they’re sitting on nearly $2 trillion of cash they should be using to fatten paychecks. Nor are they investing in new businesses in Japan. Kuroda should work harder behind the scenes and also use his central banker bully pulpit to urge Abe to accelerate structural reforms.
So far, Abe has employed reverse psychology. If CEOs believe supply-side reforms are coming, Abe wagered, they’ll boost wages pre-emptively and make those upgrades unnecessary. Companies winning most from Tokyo’s cash called his bluff. Kuroda should do more to convince both Abe and executives to pick up the pace, lest fear of @realDonaldTrump has Toyota relocating its headquarters to Detroit.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com
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