the Three Arrows” of Abenomics
Abenomics, the ambitions plan of the Liberal Democratic Party to jumpstart the Japanese economy after a quarter-century of stagnation, has three “arrows”:
–increased government deficit spending, and
–bringing an end to widespread squandering of corporate resources by complaisant and inefficient managements, either through bureaucratic/administrative pressure or by repealing laws that effectively bar bad managements from being ousted and replaced.
Arrows one and two have been fired
Arrows one and two were fired very quickly, as was expected.
Japanese export-oriented industry was in favor of the first. And everyone likes to get a check in the mail from the government. Neither arrow, however, will make a lasting positive impact on Japan. Both seem to me designed to buy time for Japanese corporations to change their stripes and become more modern and more profitable. But the moves will prove disastrous in the longer term for Japan if Arrow three doesn’t hit its mark.
Third Point and Arrow #3
Enter Daniel Loeb, whose Third Point hedge fund bought a large position in Sony and began to beat the drum for change–to wit, a partial sale on the stock market of Sony’s media subsidiary.
The proposal/demand is squarely in line with standard American financial theory:
people dislike buying bundles of disparate businesses. Unbundle them and investors will pay higher prices for the component they prefer than for the entire package.
Sony the least difficult target
It’s important to note that in Sony Mr. Loeb picked a company that would arguably be the most open to new ideas. Sony is not an “establishment” company in Japan. It has no roots in the pre-WWII zaibatsu industrial conglomerates, nor in their successor keiretsu groups. Instead, it was founded by two mavericks in 1946. It’s free of much of the social pressure to maintain the status quo that bears down on the keiretsu, as well as of the tangled web of affiliated company cross-shareholdings that enmeshes, say, Panasonic.
In addition, Sony’s chairman, Kazuo Hirai, has an international background. More than that, he witnessed first-hand the destruction of Sony’s video game business at the hands of his tradition-bound predecessor there, Ken Kutaragi, through his lack of openness to new ideas.
One might have thought, too, that pressure from Mr. Loeb might serve as an excuse (gaiatsu) that Mr. Hirai could use to deflect blame from himself while still making difficult changes.
score one for the status quo
The reports I’ve read suggest that interaction between Third Point and Sony has proceeded in traditional Japanese fashion.
Mr. Loeb met with Mr. Hirai, who listened politely to his requests. Mr. Hirai may even have made affirmative noises that avoided open disagreement, but which meant “I understand what you want,” not “I agree and will act as you suggest.” An “independent” panel of experts, paid by Sony, was assembled to analyse the Loeb proposal. An appropriate period of time passed. Then Sony said thanks, but no thanks. Case closed, without giving anyone direct offense.
only one company?
Yes, we shouldn’t rush to generalize from one instance. On the other hand, the cards were about as stacked in favor of a shake-up of the status quo in this case as we’re ever likely to get in Japan. Sony’s decision to remain a conglomerate is one more reason to worry that Arrow three will never leave Mr. Abe’s quiver.
That, in turn, is cause to begin to imagine what the Japanese economy will look like in the event Abenomics is unsuccessful–and to consider what the negative repercussions might be for the rest of the world if Japan collapses in a heap.
I think that a careful review of Japan and its interaction with America during the late 70’s and early 80’s would be very helpful in respect to learning about dealing with China now. Although I would guess that China is much different from Japan, it would still be closer to Japan than the USA. I can remember when all of us were afraid of Japan Inc. (watch the movie “Gung Ho”) taking over the USA, but then Japan stumbled and had to focus internally, and then there was a resurgence at home (USA).
Just an interesting wave in history and economics…
Thanks for your comment. I think you’re right–and we’re just beginning today to see attempts by world-scale Chinese manufacturers to sell their products in the US.
I see two big cultural differences between Japan and China.
–because it lost WWII, Japanese leaders of that era felt an obligation to acquiesce to almost any request from Washington (think: “voluntary” restrictions on car exports).. Not so China..
–China seems to me much, much more willing to put young technocrats highly trained in the US, into positions of political/economic power. ,Japan, to my mind, was/is much more interested in preserving traditional society.
A great article. I always benefit from your insights into Asian economies. This specific case of Sony which you elucidate is not one which gives a lot of hope for Abe’s program. Eagerly await your take on the consequences for Japan if the third arrow never leaves the bow
Thanks. I haven’t thought much at all about what happens post-Abenomics, if, as I’m afraid it will, the program ultimately fails. That’s because, for good or ill, I don’t think it’s a near-term problem.
The most benign outcome would be that Japan continues its slow decline into economic irrelevance–only a little faster than before.
I think the relevant questions are:
–What happens to the yen?
–Do interest rates in Japan begin to rise if devaluation without economic growth creates inflation? (This would potentially create horrible problems with government finance)
–Could Japan pay for imports at the current rate? (effect on commodities prices? effect on countries with large trade surpluses with Japan?)
–Does Tokyo begin to sell its large holdings of US Treasuries?