The financial media and investors were waiting tonight for Prime Minister Abe’s latest announcement on the extreme economic sport known as Abenomics. But his new installment dashed hopes, and after a short-lived rally, the Nikkei is down over 3%. But after the wild ride since May 22, when the Japanese index plunged 7.3%, a 3% decline is coming to look almost like normal daily volatility. (Well, now that it’s down nearly 4%, it might be a beast of a different color).
The initial salvo took place last fall when Abe announced aggressive fiscal spending. In April, the Japanese central bank committed to hitting a 2% inflation target, which pushed the yen lower and put the Nikkei, which had already appreciated 50% from its lows, on a new upward trajectory.
But to restort to that old Yankee saying, it’s not clear you can get there, meaning to a decent level of growth, from here, which for Japan is a country with terrible demographics and a backdrop of weak global growth. Japan blew its chance early in its crisis by not fixing its banks. Policymakers did keep the economy from keeling over via deficit spending and weakening the yen, which was tolerated abroad because the island nation successfully portrayed itself as a basket case. So even though the domestic economy fared badly, that was buffered by Japan retaining its status as an export powerhouse. But in 1997, when officials tired of years of building bridges to nowhere, they tried cutting spending, which promptly led to a second phase of financial crisis, when several long-term credit banks and the third biggest securities firm failed.
One school of thought believes that Abenomics is long overdue. As Ambrose Evans-Pritchard wrote in January:
This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who “brilliantly rescued” his country from the Great Depression.
Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran “Keynesian” budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.
He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity…Few dispute that Japan escaped from slump and pioneered the world’s most successful policy mix — in strictly economic terms — from 1932 to 1936. The trick was to act with overpowering force and combine all forms of stimulus, each leavening the other.
Monetarists say Japan’s great mistake over the last 20 years has been to launch one spending spree after another without monetary backing, like sending infantry over the top deprived of artillery support. The result has been to push net public debt to 145pc of GDP this year (gross debt is 245pc) without reaching “escape velocity”.
But there are some problems with looking at this example. The big one is that by abandoning the gold standard, Japan was contributing to the tear-down of the economic order of its day. Now the early repudiators, which included England, recovered from the Depression faster than the hold-outs. Moreover, one of the keys to the success of the 1930s recovery program was the trashing of the currency, which fell 60% against the dollar.
In other words, Japan was able to act unilaterally back then. Now G-20 members are attuned to the dangers of beggar-thy-neighbor currency and trade policies. Weirdly, Japan allowed China to push the yen into the nosebleed territory of 80 to the dollar and keep it there. Now, even though a fall to 100 is a large move, the yen was in the 110 to 140 v. the greenback range from the mid-1990s to the unwind of the carry trade during the crisis. So while the fall is helpful, it’s not even to the level of the 1990s, and that was insufficient to spur an export-driven recovery.
And Japan’s trade partners are already saber-rattling. South Korea and Germany are already unhappy with the fall of the yen, although South Korea’s trade figures aren’t yet showing enough damage to give it the moral high ground.
The Japanese have claimed that Abenomics has been intended to stimulate domestic demand, that the fall in the currency is just an unfortunate side effect. Remember that Japan is also the land where trade officials said with straight faces that they needed to restrict American beef imports because Japanese colons couldn’t digest it. But even thought there is probably a fair bit of truth in officials’ claims about their objectives, the shock and awe campaign hasn’t yet delivered the goods. And the worst is that market reactions are if anything at odds with policy aims. Normura analyst Richard Koo (via his new report excerpted in Clusterstock) explained that interest rates have started rising, not because rising demand has started to produce inflation, but because the central bank talk and actions have increased inflation expectations among investors. Koo also underscored that a late May survey showed that only 22% of the Japanese public saw any signs of improvement in the wake of Abenomics. Ouch.
So while the BoJ can push asset prices around, it’s not clear it can do as much as it thinks for the real economy. And they of all people should recognize that. Remember it was the Bank of Japan that decided to inflate asset prices in the late 1980s to create a wealth effect in the hopes of stimulating more consumer spending. We know how that movie ended.
Or to put it another way, while central banks can choke off growth by increasing interest rates, the converse, putting money on sale, isn’t going to stimulate demand when conditions are weak. We are seeing again and again that the liquidity goes into financial assets and other types of speculation.
But Abe’s announcements tonight were supposedly directed at helping the real economy grow. Why did they fall short? I’d like to get a reaction from readers of the Japanese press, since you can frequently drive a truck between what is reported in Japan versus commentary on Japan in the Western media. The financial press here is harping about the lack of labor market reforms, a standard neoliberal trope. This account comes from the Wall Street Journal:
But the long-awaited growth strategy—crafted to supplement the bold fiscal and monetary stimulus that has jolted global markets—dodges some of the tough decisions that many economists say are needed to fix the root causes of Japan’s prolonged slump. It includes only modest measures to make it easier for industrial giants to shrink payrolls widely seen as too swollen for current demand, and avoids any provisions to ease layoffs, which are all but impossible in Japan.
Mr. Abe’s proposals “are not enough for Japan to achieve sustained economic growth and overcome deflation,” said Hisashi Yamada, chief economist at the Japan Research Institute. “Without labor-market reform, Japan will hit a wall with growth.”
Huh? Japan has had a system of “freeters” or non-permanent workers, including at large companies, and I’ve heard from executives at top Japanese companies that there is already considerable concern about the impact on Japanese society, since these freeters lack the strong connection to a community that is deemed important in that society. And on a mundane level, freeters lack a sufficiently stable income to start their own households or get married. Moreover, it isn’t the big companies that are usually depicted as where the overmanning takes place in Japan. The big problem children are the fragmented retail sector and and the numerous small suppliers to large companies (although the latter have likely had their ranks considerably thinned over the lost decades).
And in terms of recovery, what would allowing big companies to cut jobs now accomplish? Abenomics is intended to boost demand. The neoliberal wet dream of crushing labor to boost corporate profits is contrary to that. The Journal cites “government statistics” that indicate that Japanese companies (presumably across the economy) have 4.6 million workers more than they need. With Japan having a labor force of roughly 67 million, the Journal is arguing that increasing the unemployment level by an additional 7% would be pro-growth. You cannot make stuff like this up.
And even with money super cheap for two decades, Japanese companies haven’t been eager to invest, so it isn’t as if increasing their profits would change that dynamic. (As an aside, Japanese see keeping employment levels high, or at least decent, as key to social stability. Japanese executives and managers, contrary to Western practice, have compressed the gap between entry level and senior level pay, which was never high to begin with, in order to save jobs).
What could help Japan is more demographic growth, as in more immigrants. But the Japanese don’t tolerate that at all well (they’ll be actively hostile to gaijin who go where they aren’t supposed to be), and you’ll notice that’s nowhere to be found on the reform list.
Now some of the market disappointment may be due to unrealistic expectations combined with Japanese vagueness (Japanese is a language in which it is possible to give entire speeches and say nothing). Some critical details weren’t spelled out, such as how big the “targeted corporate tax cuts” would be. But even the ideas that seem to have been fleshed out sound more like tinkering than the promised bold strokes:
The package is broken into three “pillars:” improving the productivity of private industry, making the labor market more efficient and inclusive, and developing new markets through fostering new industries and adding more overseas markets.
Making the case for new policies to revive Japan’s stagnant industrial sector, officials noted that capital investment has been negative for many years, and that the average age of equipment has risen sharply since the early 1990s.
The plan includes new tax breaks to encourage capital investment and the shedding of aging machines. It will propose altering tax law to make it easier for companies to merge and close or sell inefficient business lines.
Another problem has been rising energy costs, following the near-complete shutdown of the nuclear-power industry after the 2011 Fukushima nuclear disaster.
In addition to moving to restart more reactors, the government aims to overhaul the power-supply market for the first time in 60 years, opening the electricity market to competition by allowing any power producer to use transmission networks to distribute electricity to retail users. It would make it easier for the nine regional monopolies to enter each other’s markets. Transmission and distribution functions at the regional monopolies would be separated to make sure other suppliers could gain fair access to the transmission networks.
The package includes changes in the agriculture sector while opening it to more competition from imports. The new measures are aimed at expanding sales to ¥120 trillion in 2020 from ¥100 trillion currently, raising the number of young farmers to 400,000 in 10 years from 200,000 now and increasing agriculture-related exports to ¥1 trillion annually by 2020 from ¥450 billion. The government will encourage efficient large-scale farming and promote “authentic Japanese cuisine” overseas.
As one old Japan hand remarked before the overnight announcement, Abenomics so far sounds too much like what has gone before to turn him to persuade him that Japan would finally turn the corner. And Koo’s report describes why the rise in the Nikkei may have been a big headfake. Japanese investors initially stood aside, and the rally early on was driven by hedgies who thought shorting the yen was a better trade than betting against the euro (remember the Nikkei has long traded in opposition to the yen, so going long the Nikkei is expressing the same view). Japanese investors later joined the stock market rally as a momentum play.
So perhaps the continuing Japanese stock market correction is simply the punters coming to a more realistic grasp of Abenomics, that it will take some time to prove whether it can deliver the goods. And the US and Chinese growth having weakened in the intervening months is a serious headwind. Wish the Japanese luck. They need it.
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Then the Nikkei rises. Frankly who cares what the Nikkei does.
Speak for yourself. If you don’t care, you shouldn’t be reading a finance and economics website.
I agree with Ralph.
You dont care about economics… And read an economics website? Im sorry but I dont see the logic here. And you may not care, but most of us do.
Congratulations !
you’ve made a COMPLETE FOOL OF YOURSELF
“The latest setback in the Nikkei made traders in Europe cautious. The FTSE 100 index of leading British shares was down 0.7 percent at 6,501 while Germany’s DAX fell 0.4 percent to 8,262. The CAC-40 in France was 0.6 percent lower at 3,903.
Wall Street was poised for a modest retreat at the open, with Dow futures and the broader S&P 500 futures down 0.2%”
what do you need to connect the dots HAROLD AND HIS PURPLE CRAYON
“Japanese is a language in which it is possible to give entire speeches and say nothing.”
Now hold on there. After listening to Obama speak a few times I should think that anyone would realize that it is entirely possible to do that in English too.
Oh yeah, when I was in college one of my Japanese language professors was super enthusiastic about the prospect of a big influx of gaijin going to Japan to fix their demographic problem, which was why she was billing Japanese as a great language to learn. That said, it looks like she was probably an outlier. As well as being the first developed country to experience the new age of medieval undevelop, it also looks like Japan is the first to get a taste of the radioactive future that’s in store for all of us. I should have studied Chinese–although at least knowing Japanese does make studying Chinese a bit easier, which I think is the best that can be said to recommend its study these days.
No, no, you don’t being to appreciate Japanese. And it is absolutely not like Chinese, not the sounds or the sentence structure (the only sort of commonality is one of Japanese’s three alphabets is derived from Chinese characters, and that’s roughly 1100 kanji, but the overlap in words does not map into broader linguistic similarity, as, say, among Romantic languages). Japan is far and away the most alien place on the planet, even though it looks Western if you cross your eyes and don’t look at the characters on the signs.
There are entire articles in Japanese in the Nikkei (Nihon Keizei Shinbum) that are untranslatable into English because there is no content (as in the professional translators in the employ of the newspaper who are tasked to produce the English language version cannot translate it because there is no there there). It’s all vague atmospherics.
I’ve similarly had loyal people translating for me (and I knew enough Japanese I could understand what topics were being discussed and the level of politeness, even though I couldn’t follow the conversation) and there would be times when I could tell the speaker was going into the stratosphere, and I would watch the bank staffers who were translating the meeting stop taking notes. I’d sometimes try probing them afterwards (until I had some professional translators confirm what my guys were saying) and they’d say, embarrassed, that the guy hadn’t said anything starting at a certain point in the meeting.
Japanese consider Americans to be completely uncivilized because the amount of information we convey when we talk is seen as overbearing, unnecessary, and self-indulgenct. Being explicit is seen as being rude.
Oh I know all that about the difference between Chinese and Japanese. And I have definitely been told over and over that being explicit is very bad. Although one of my Japanese professors did say that “baka ni shinai de kudasai” was a very good phrase to use for breaking the ice if a business meeting was going wrong in that situation–being humorous and self-depreciating can get you out of difficult situations, even in Japanese culture!).
And as for kanji, I actually found memorizing hiragana and katakana to be more difficult than kanji, simply because kanji has a rational sense to it while the other writing systems seem to be little more than scribbles with phonetic sounds attached. And I do understand what you mean about the Japanese being culturally alien, but on the other hand I like Japanese since they are usually polite, cold, and emotionally distant (well, not people you actually know) which suits my temperament very well.
Anyway, I recently started learning Chinese since I just realized how pretty Chinese girls are. How my experience with Japanese specifically helps me with Chinese is that being familiar with kanji reading hanzi is made much more easy, at least for picking up meanings (I learned kanji from Heisig’s “Remembering the Kanji”, and that makes picking apart kanji characters and deriving meanings from radicals without phonetics getting in the way of the process not so bad). Also, it’s nice hearing some words that Japanese people use (like “cha”, or “ren”/”jin”) sprinkled in Chinese conversational speaking as well. Like hearing familiar words helps with memory). Chinese grammar is somewhat similar to English grammar I’ve noticed, so in a way it seems kind of like a synthesis between the two. Although that’s just what I’ve been thinking. I don’t know how it’s officially taught since I’ve been teaching myself and talking with Chinese girls I met on QQ. It’s a great way to pass the time!
Well as someone who is quite fluent in Chinese and currently learning Japanese, I’ll just make some small comments on the language aspect. Chinese language can indeed be an opposite to Japanese in that it’s possible to say a lot of things just by using 4 characters.
Also Kanji is not really Hanzi. It looks similar but it’s not the same i.e. the Japanese are a lot stricter when it comes to placing the strokes. For example, when you look at the Kanji and Chinese character for wine/sake side by side, you’ll probably wonder about the difference(s). Well in Japanese Kanji, the stroke that represents the wine level in the bottle (it’s pictorial) stretches from end to end. In Hanzi, this is not the case.
Not to say that there are no characters that’s written the same way in both languages, but my sensei who is Japanese considers Kanji to be separate from Hanzi.
Spoken Japanese and spoken Chinese are utterly different, but a well-educated reader of Japanese knows about 3000 or so of the 5000 characters need for reading Chinese. Especially, they know most all the big fancy ones. (Chinese has extra characters because it uses characters for the things that Japanese writes with kana, such as the little tiny words (this, that, is) and the vast vocabulary of onomatopoeia.)
So knowing kanji does give one a huge leg up for learning the hanzi.
On top of that, even in the spoken language, Chinese serves the role in Japanese that Latin and French do in English: providing the fancy words. Pretty much all the vocabulary Japanese students learn in high school and college comes from Chinese (even the word for Japan itself). Contemporary Mandarin pronunciation and Japanese pronunciation of the same word (“on-yomi”) can be quite different. Few spoken Chinese words are recognizable to a Japanese speaker when you hear them the first time and when you read them, even though you most often know what they mean but you don’t know how to pronounce them. But a Japanese speaker who learns Chinese has the kind of advantage an English speaker does in learning a Romance language: It is much easier to remember words once you do learn them and after a while, you master certain patterns in the pronunciation differences.
About vagueness: Someone can write something in Japanese and sincerely believe there is meaning present, and readers may think there is some kind of meaning or other present (nan-to-naku) if they skim it fast enough, but when you ask a reader to explain in other Japanese words what the sentence says, they eventually realize that there is no coherent interpretation of the sentence.
Think of an Escher painting. For example, all the reasonable possible subjects of the sentence are used as objects or indirect objects within the sentence, so not only is the subject not stated, but there actually exists no possible subject.
It is interesting to do this and to watch a native Japanese speaker’s face change as their estimation of their own understanding of a sentence drops each additional time they read it.
Short version: Yves’ experience and JGordon’s experience of Chinese and Japanese both make sense given the different positions they were standing in.
You can be sure that creating more farmers is going to raise farmland values – so speculators will get in on a land grab and trash any hope that the actual farmer will raise his standard of living – meanwhile, the liquidity surge into japan, for short term gain will drive, in the mid term, prices out of reach again – competition globally will deflate (what appears to me) this attempt to create a bubble. Sorry Japan, your attempt to put things in order, it seems to follow the same old financial exploitation techniques that the big money uses to extract maximal economic rent…..just another ‘between a rock and a hard place’.
Big picture: I think that the distinctive cultural traits of nations change slowly but sweet spot in the global economy changes fairly fast. So exactly the same characteristics that help a nation at one point in time become major obstacles at another.
It is like an old-fashioned light house rotating its beam of light. The light shined on Japan in the 1980s and both the Japanese and outsiders thought it was something they were doing. Then the light moved on. Instead of the advantage going to the nation with the hyper-disciplined work force and corporate sector, because it could put technology into actual products faster, the advantage now went to the nations more willing to throw large parts of their own populations to the wolves, because they had the flexibility to adjust to less predictable change and could turn their most creative types loose and could take the biggest advantage of labor arbitrage. So Walkmen and VHSs were engineered and manufactured in Japan, but the Internet and Google and Facebook and iPods and iPads came from the US, with much of the hardware manufactured in China.
It may be that there simply is no way that Japan can prosper in the current extreme neo-liberal phase. Perhaps what they really need to do is to try to aim ahead of the rotation of that lighthouse for a post-neoliberal phase in which Japan’s superior capacity to generate social trust is an advantage not a liability.
Re over manning in the ‘fragmented retail sector’.
Is that really a problem or just another feature of the Japanese approach? I remember reading many years ago that it was a deliberate decision to keep retail so fragmented. Not every company can be a lean, mean world-beating machine although some have to be to keep those exports going.
So what’s to be done with the large segment of the population that can’t hack it or simply isn’t required in the export sector? Answer: run a deliberately labour intensive retail sector as an alternative to welfare and unemployment.
Interestingly, Botswana has (or perhaps had – I’m out of date) a very similar plan except it was centred on cattle ranching. Many years ago a VERY senior member of the establishment explained how it worked and why. Government used a small part of its revenues (from diamond mining) and invested it directly and indirectly into the beef industry – access roads, boreholes, abattoirs, veterinary services, breeding programmes etc. He explained that this was popular as the people traditionally counted their wealth in cattle. From the government’s POV it put money into peoples’ pockets and kept them from flooding into the towns in search of work that didn’t exist. Overall he thought the beef industry did no more than break even in the face of periodic draughts and disease. The payoff was in maintaining social cohesion rather than financial.
It’s a far more rational approach than the neoliberal alternative.
Yes, I’m agreeing, but I was not so explicit in the piece.
That’s why I’m skeptical of the Western interpretations of why the Nikkei fell. The Journal kept harping on lack of labor market reforms. Yet when Westerners have visited Japan over the last 20 years, they comment over and over again that the country looks to be doing very well. Sure you see some homeless (which initially was just stunning to the Japanese) but it pales compared to what you see here even before the crisis.
They’ve gone to extreme lengths to maintain social cohesion and it’s worked. That’s why I can’t see the public embracing a big change like labor market reforms. So I wonder what the stock market reaction was about (or whether foreign buyers dumping stocks would be enough to produce that reaction).
I’ve had trouble getting my head around the Nikkei reaction as well. The BoJ is doing everything it can to engineer expectations of future inflation, including pushing bond yields up. If this was working I would expect investors to buy stocks, not dump them. It’s possible after twenty years of failing to hit inflation targets people just don’t believe it will happen.
I live in Japan and I have to agree with Ives here. A lot of the economic discussion has to be understood in the context of a country that by all accounts is doing very well. Economic figures might speak of deflation and low consumption but the fact is that *all* shopping malls are full *all* of the time and they keep opening new ones. Everybody has an iPhone and in general the best gear they can buy for what they do and if they don’t have more stuff it’s because they don’t have a house big enough to put it. Unemployment is very low, people have a huge amount of savings, they retire relatively young (and then move onto part time jobs), etc. Social cohesion hasn’t been threatened like in some European countries and the US. There have been no protests and public anger against the economic situation, nor any sort of occupy-like movement or calling on corporate or capitalist takeover, nothing.
So for the average Japanese, radical measures to fix some figures they don’t relate to on a day to day basis is probably not what they want. Radical labor reform, massive immigration, etc. need the country to be much closer to the bottom to really have a chance to be in the agenda.
The dialogue about Chinese and Japanese languages while interesting to some seems a trifle vaporous. Japan is being buffeted by excess production (China, Korea and Taiwan — CKT) at prices which are unaffordable to them to be able to maintain a reasonable sense of income equality within their society. Having exported a lot of their low cost production overseas to Thailand, Malaysia and China thinking that this would solve their problem of competitiveness, they are now confronted with the problem of the CKT beginning to eat into the higher level food-chain that the Japanese thought will save the day for them. Also, the slow growth in Europe and the U.S. is hurting them immensely. That is why Abe is seguing into a more militaristic posture vis-a-vis China and hoping to spend more money on advanced military systems which hopefully will creat more jobs if the Unites States will permit. For those of us who have followed and have sympathisized with Japan both culturally and economically, one sees a tragedy in the making. That is George Bush’s Iraq and Hitler’s Lebenseraum.
The global economy is in bad shape with Europe mired in internal devaluations without an end in sight. No amount of QE2 or QE3 is going to bail it out. Bernanke is wedded to the Wicksellian noton of “Natural Rate” of interest and will keep shoving money into the financial sector of the economy without much effect when large segments of the economy are desperately seeking investment. Relative devaluations are not going to help Japan, Brazil or the U.S.
Unless China seriously redirects its production-consumption inwards, a Depression and its progeny seem highly likely.
You are correct that China’s ability to redirect inward away from export dependency is crucial to the world economy.
Yes, Japan has lost some of its production to CMT rivals moving up the value chain, for example DRAM production to Taiwan. But why has Japan itself not been able to move up the value chain, for example into the CPU territory dominated by Intel? And why is Apple’s main competitor for smartphones the Korean company Samsung and not Sony or any other Japanese company?
Forgive me if I’m misinterpreting your comment, but are you seriously suggesting that resurgent jingoist nationalism among rightist factions of the LDP and the even more extreme cultural chauvenism among upstarts like the Restoration Party indicates some sort of push for military adventures on the continent?
Yves,
Back to your original question about the Nikkei drop, I haven’t seen much analysis in the Japanese paper I read (Asahi) about why that is happening, but it is mirrored by a rise in the yen, back above parity (back below 100).
The fact that the strong inverse correlation of the Nikkei and the yen-dollar rate remains intact is a small useful data point.
I remain hard pressed to see how making it easier to fire workers will help Japan make the transition away from export-dependency. The need for that transition has been widely discussed in Japan since the Plaza Accord of 1985.
Over the years, I have come back again and again to something a Japanese guy told me late one evening in a tiny eatery late night decades ago: “In our history, we can run in one direction really well, but we do not make small course corrections easily. We run in one direction until we run into a wall face first and get knocked out. Like the Black Ships and 1945. It is only then when we get up that we can go in a different direction. And run until the next wall…”
I was in Tokyo this winter for the first time in about 20 years after spending the entire 80s there. Japan is holding up far better than our neo-liberal betters would have us think, but there was something eerie about the place compared to the Tokyo I remember from the heady days before the bubble popped.
For balance, Tokyo was eerie, but also somehow freer and culturally more awake than in the go-go days of the Bubble.
Freeters. They actually seem to be concerned about disposable workers – unlike here in the US. Routine firings, layoffs, outsourcing, contract work, temping, feast or famine.
Yves, a little late to the party, but here’s something of a short answer to your question about how the Japanese press views this.
Abe is basically relying on the old LDP playbook, although he seems hestitant to go full bore just yet (Upper House elections in the Diet being the reason).
One issue that seems to generate some common consternation is restarting the nuclear plants, instead of focusing on wind power and more efficient thermal power generation.
Otherwise, the only positives anyone in Japan sees in Abe’s plan is the expansion of day-care for working mothers (not for another two years, and not enough), extentions of parental leave and some other non-specific promises.