The last couple of years have seen me reviewing the progress of Abenomics or the economic policies of Japan’s Prime Minister Shinzo Abe. These were initially lauded by the media with the Financial Times and Paul Krugman leading the way. However I expressed many doubts about how expanding the money supply and depreciating the currency would lead to an economic transformation for the land of the rising sun. After all it had tried such policies previously without conspicuous success and we had already learnt by then from the UK and the Euro area that higher inflation was likely to hit real wage growth. Accordingly any economic heavy lifting was going to have to come from economic reform which seemed unlikely when Abe-san himself represents the vested interests of old Japan.
The next feature of pro-Abenomics propaganda was that it was beginning to institute reforms by increasing the number and role of women in the workplace. This morning has seen something of a reverse for that. From Reuters.
Trade and industry Minister Yuko Obuchi, 40, the daughter of a prime minister and tipped as a future contender to become Japan’s first female premier, told a news conference she was resigning after allegations that her support groups misused political funds.
Just hours later, Justice Minister Midori Matsushima also resigned.
This leads to fears that the women promoted by Shinzo Abe have exactly the same problems as the men with issues such as corruption. So rather than a hoped for change of direction it seems that the same group are in charge whatever their gender.
If we move to the reform issue then this looks a bit like the first government of Shinzo Abe rather than a new dawn.
Abe’s first stint as prime minister in 2006-2007 was marred by scandals among his ministers – several quit and one committed suicide.
What about the economy?
A problematic piece of data was released in the middle of last week. This was industrial production for August which fell by 1.9% on July and was some 3.3% lower than a year before. The index where 2010=100 was only at 95.2. This report followed on a 2.9% year on year fall in July which replaced a period of positive growth.
This poses a problem as two of the three months of the third quarter are now accounted for and this part of Japan’s economy has shrunk in both. Whilst the business surveys are mildly positive for September (PMI was 51.7), I note that the Purchasing Managers Index in August was more positive at 52.2 and yet output fell. So this sector seems likely to be a drag on Japan’s economy in the third quarter of 2014.
Also we already have something of a correction to the claims that the economy would quickly bounce-back from the effects of April’s rise in the consumption tax.
What about Real Wages?
This has become an increasing issue in the credit crunch era as we have seen falls in real wages or at best stagnation spread. The (fairy) story told by Abenomics fans was that as inflation rose Japanese firms would increase pay to at least match it and the economic expansion would allow real wages to grow. Meanwhile the Ministry of Labour told us late last week that real wages in August were 3.1% lower than a year before. This was the fourteenth month in a row that annual real wage growth was negative. So on the evidence so far Abenomics has pushed real wage growth downwards rather than the upwards claimed.
Accordingly it is hard to see much of a boost to the Japanese economy coming from the domestic consumer as he/she faces up to lower wages in real terms. The irony here of course is that the rise in the consumption tax has pushed inflation up and real wages down.
The Economic Statistics and Research Institute has published it surveys this morning and signals a possible turning point. However as the coincident index fell from 109.9 in July to 108.5 in August and the leading index fell from 105.5 to 104.4 I am not sure where they get their optimistic tinge from.
We also saw modest year on year falls in department store sales and convenience store sales for September.
Financial Markets Surge
There is a grim theme of these times which is the decoupling of the real and the financial economy. This morning has seen an example of that as the Japanese Nikkei 225 equity index has surged by 578 points or a smidgen under 4% to 15,111. No doubt policymakers who have in my opinion an unhealthy obsession with equity market levels will be pleased. But once you look beyond the possible causes such as the improvement in other markets on Friday you also see this. From Japan Today.
Japan’s $1.2 trillion retirement fund will increase its allocation target for shares to about 25 percent from 12 percent, the Nikkei newspaper reported without attribution.
The Government Pension Investment Fund will also boost its holdings of foreign bonds and stocks to about a combined 30 percent from 23 percent,
No wonder the market surged! Has anybody asked the pensioners what they think of this? It makes me wonder two things. Firstly what equity market skills Shinzo Abe has and secondly why this is badged as a reform.
If you are wondering who will buy all the government debt that Japan is going to issue going forwards I guess we need to look at the Bank of Japan. There is certainly very little sign of panic in a ten-year bond yield of only 0.48%.
Oh and with the Bank of Japan buying Japanese equities too then we have a clear Goodhart’s Law issue. If you pressurize institutions to buy the equity market and force it higher then claiming higher equity markets are a sign of economic succession is at best a type of misrepresentation.
Shinzo Abe gets cold feet?
In an interview with the Financial Times Shinzo Abe is suggesting a type of Laffer curve being at play in Japan.
By increasing the consumption tax rate if the economy derails and if it decelerates, there will be no increase in tax revenues so it would render the whole exercise meaningless.
Such a situation will be familiar to those who have followed the travails of the periphery of the Euro area. Except here we are seeing a suggestion that 8% may be as high as the consumption tax can go which if you look at a VAT (Value Added Tax) rate of 20% for the UK seems odd to say the least. Also if you do believe that the Japan really does have a problem as it continues to have high fiscal deficits (7% of GDP in 2013) which only add to the issue of its national debt which is estimated by the IMF to be 243% of GDP in gross terms.
We see that even Shinzo Abe is now facing the contradictions which were always inherent in the policy of Abenomics. Raising inflation was always likely to have a depressing influence on the economy via its impact on the level of real wages. Then adding an increase in indirect taxation to this was only giving it a further push. Perhaps he hoped that the international environment would be more favourable than it is and would cover this up.
The problems I have highlighted above return me to my image of a rock and a hard place. Japan is experiencing something of a fiscal crisis with deficits adding to its already large national debt. The theoretical solution suggested by the IMF of higher indirect taxes – how has that worked for the IMF elsewhere?!- seems to be already in trouble with the next proposed rise being questioned. If we then factor in the impact of Japans population which is both ageing and declining then we see that it is only going to get tougher going forwards. As Japan’s population holds the vast majority of Japan’s national debt a default will cause as many problems as it solves.
Perhaps the new passenger airliner unveiled by Mitsubishi is a hopeful step for an industrial regeneration. But for Japan’s establishment the replacement of the daughter of a previous Prime Minister with the nephew of one about sums it up really.