Tag Archives: Abenomics

crunch time for Abenomics in Japan

May 27, 2014 By in Asian economic development, economics, Japanese development Tags: , , , , , , , 2 Comments

The economic program of Prime Minister Shinzo Abe to revitalize a Japanese economy that has been dormant for a quarter century has three main points, or “arrows”:

–increased deficit spending by a national government already very deeply in debt,

–loose money policy to weaken the currency, making Japanese industry more competitive while supporting the dismantling of a raft of protective practices that have debilitated a once-powerful industrial base, and

–the corporate overhaul itself–the elimination of a nexus of laws and policies that have perpetuated now-outmoded industrial practices from the 1960s-1980s, and which have  also made it virtually impossible to replace the incompetent top managements that have run many Japanese companies into the ground.

Arrows #1 and #2 have been fired successfully.

To my mind, however, Abenomics has always been about the government’s ability to fire arrow #3.

That’s not going so well.  More than that, almost thirty years of watching the Japanese economy and Japanese politics have made me skeptical that meaningful structural change is possible.  The forces of the status quo are just too strong.  That’s also despite the will of Japanese citizens that such reform take place.  (In many ways, too, I see Japan today as like the Ghost of Christmas Future for the US.)

the Kuroda message

Late last week, an interesting thing happened in Tokyo.  In an interview with the Wall Street Journal, Haruhiko Kuroda, a career politician who is currently the head of the Bank of Japan (the equivalent of the Fed in the US), urged Mr. Abe to get going on structural reform.  “Implementation is key,” he’s quoted by the WSJ as saying, “and implementation should be swift…The major work to be done is by the government and the private sector.”  Bad things will happen to the economy otherwise.

Mr. Kuroda’s bluntness contrasts sharply with the wishy-washy statements en Bernanke has made before the US Congress about the need for supportive fiscal policy–none of which has been forthcoming–to aid the recovery in the US.

Of course, the stakes are much higher in Japan, where currency depreciation has caused a loss so far of about a quarter of the nation’s wealth, and a corresponding reduction in living standards for average citizens.  This enormous cost can only be justified if it results in structural reform.  But so far just about nothing has happened.

what needs to be done

Yes, Mr. Abe pointed out to the Journal in a response to Mr. Kuroda that electricity prices have come down and that protection of domestic rice farmers has been reduced a bit.

On the other hand, all the legislation enacted in the 1990s to prevent foreign companies from having any influence in the running of Japanese firms (takeovers of any size are virtually impossible) is still on the books.  Shareholder activists, foreign or domestic, are as unwelcome as ever.  Major Japanese investment institutions, presumably with government “guidance,” continue to take a hands-off attitude toward the companies whose stock they hold.  And companies themselves, other than perhaps the autos, seem to be in no rush to modernize the industrial practices that have caused so much economic hardship since the 1990s.

And, as Mr. Kuroda observes, time is running out for Japan.  The kind of positive jolt that deficit spending/currency devaluation/uslta-loose money give to an economy only lasts for a few years.  Without other changes, an economy gradually settles back into its former lower-growth state, only with higher inflation.  In other words, the economy in question is worse off than it was before.

For the sake of Japanese citizens, I hope Mr. Abe starts working on arrow #3 before it’s too late.  Unfortunately, almost thirty years of watching Japan tells me he’ll end up posturing a lot but doing nothing.  The only chance I see for a better outcome is if other politicians follow Mr. Kuroda’s lead and begin to speak out.  Unless/until this happens, I think the Tokyo market will continue to be an unpleasant place to be.

 

 

 

 

 

Third Point, Sony and Abenomics

August 8, 2013 By in Asian economic development, economics, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , , , 4 Comments

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”:

–currency devaluation

–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.

But no.

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.

an Abenomics scorecard

June 6, 2013 By in Current Market Thoughts, economics, Japanese development, Recent Market Action, Strategy Tags: , , , , , , Leave a comment

summing up Abenomics

Abenomics is the name given in the press to the radical macroeconomic rescue policies promiseded by Japanese Prime Minister Shinzo Abe in his successful election campaign last year.

The idea is to try to end a quarter-century of economic stagnation through the firing of three “arrows”:

1.  a massive increase in the domestic money supply

2.  further stimulus through deficit government spending, and

3.  structural reform legislation.

In many ways, this is an all-or-nothing bet.

Arrow #1, which is already in flight, has triggered in a massive 20%+ devaluation of the Japanese currency–and a consequent staggeringly large loss of national wealth.  Arrow #2, which is in the bow, will add to Japan’s massive national debt–run up to dangerously high levels through decades of politically motivated but economically wasteful porkbarrel government spending.

The consensus view of economists throughout the world, which I believe is correct, is that this “all in” bet depends crucially on the success of Arrow #3.  My view has been, and still is, that it will never leave the quiver.

For  Japan’s sake, I hope I’m wrong.

the Japanese stock market as barometer

I’m writing this post to make two points.

1.  One of the main arguments being used for the potential success of Abenomics in jump-starting the Japanese economy is the strong performance of the Japanese stock market since last July.  This performance, however, is considerably less than it’s made out to be.

From the low point for Japanese stocks last July 26th to the peak of the market (so far) on May 22nd, the main indices rose by about 85% in local currency terms.  They’ve since fallen by almost 18%, for a net gain in ¥ since July of 50%+.

Factor in the currency loss and the return in US$ is 20.2%.  That’s almost precisely what the S&P 500 has done over the same time period.  It’s well below the 35%+ gain in US$ that European stocks have posted.

2.  To my eye, the daily fluctuations in the Japanese stock market over the past ten months have been uncharacteristically wide.  This suggests to me that the main actors in the market have been foreigners.  Not just any foreigners, either.  I suspect the current market bulls are top-down investors driven by general macro concepts–and without much knowledge or experience of the Japanese economy or its securities markets.  I don’t detect any great desire for Japanese professionals to participate.

I’m not sure what this means, if I’m correct.  My experience is that Japanese institutions don’t often cover themselves with glory in their domestic stock market.  On the other hand, they have the inside track in assessing what is/or is not possible politically.

 

In short, I think there’s much less positive about Abenomics than meets the eye.