1,087 trillion reasons to worry about Japan
Tokyo is trapped in a cycle of increased borrowing and ever more stimulus. Abenomics, unfortunately, is doing more to perpetuate this cycle than break it
The best way to cover any self-described reformer is tracking the gulf between what they promised and the underlying reality. That is troubling territory for Japan’s Shinzo Abe. On the surface, Abenomics has had some success. The Nikkei stock average’s giant rally since December 2012 marks a big win. Abe’s moves to tighten corporate governance are boosting Japan Inc.’s return on investment. Female labour participation rose to a record high, alleviating some of Japan’s demographic woes.
On the not-so-good list: real wages, broadly, are too stagnant to kick off a virtuous reflation cycle. Income gains, it’s worth noting, among women have been particularly sluggish. But one metric below it all—government debt—belies claims Abenomics is winning more than five years on: rising government debt.
Tokyo’s IOUs hit another record at the end of the past fiscal—advancing to 1,087 trillion yen, or nearly $10 trillion. That amounts to a $149 billion increase from last year, the equivalent of Dominican Republic’s annual gross domestic product.
The problem: Abe pledged to reanimate Japan’s animal spirits, while also reducing debt. On his watch, Tokyo even raised sales taxes to 8% in 2014 to pay down debt. But bond issuance is still increasing apace anyway. The Bank of Japan continues to hold interest rates at record lows.
This fiscal and monetary largess, on top of a global recovery, is behind the improvement in Japan’s prospects. Abenomics added some sugar jolts, and a few policy tweaks, but nothing that will sustain healthy and self-reinforcing growth. Herein lies the heart of the gap between the deregulatory boom Abe promised and the modest pops he served up.
Five-plus years on, moves to loosen labour markets, catalyze a start-up boom, alter tax incentives toward greater innovation and productivity, narrow gender-pay gap, devise pro-growth energy policies and adapt to a rapidly-aging workforce to take on China have been few and far between.
Abe had plenty of scope to make these changes and more. With majorities in both Houses of Parliament, a revival blueprint voters support and, until recently, good public-approval numbers, he could’ve railroaded through epochal change to raise Japan’s competitive game. Instead, he focused on government secrets legislation and national security.
And now, it may be too late. Two scandals are pushing Abe’s support numbers into the 30s (at times, the 20s), reducing his political capital. One: a cronyism controversy involving a sweetheart land sale to a school with ties to Abe’s wife. Two: Abe’s close friendship with Donald Trump’s White House, whose policies on trade and North Korea are running afoul of Japan’s interests.
All the while, debt has increased, belying pledges of fiscal reform. The BOJ, meantime, continues to hold rates below zero even as the Federal Reserve tightens. It means any growth Japan is experiencing today—it contracted 0.6% in the first quarter after advancing just 0.6% in the fourth—is based on financial steroids, not organic demand.
The BOJ, for example, is more likely to add more stimulus than drain it. Despite history’s most aggressive quantitative easing experiment, inflation is only halfway to the 2% inflation target. Abe’s finance ministry also is more likely to add fresh stimulus, funded by new debt, than reduce Tokyo’s debt burden. These metrics mean optimism over Abenomics is only skin deep. If Japanese executives had more confidence economic upgrades were coming, they might be sharing healthy corporate profits with workers. They might be investing in new industries at home. Japan’s biggest risk-taker, SoftBank billionaire Masayoshi Son, is deploying cash in Europe, Silicon Valley and India that could generate growth at home.
Tokyo, it follows, is trapped in a cycle of increased borrowing and ever more stimulus. Abenomics, unfortunately, is doing more to perpetuate this cycle than break it. With Abe’s numbers sliding, the latitude to drive change through a bureaucratic legislative system is minimal. At the same time, his Liberal Democratic Party has committed itself to another sales tax hike in 2019. That increase—to 10%—is meant to allow concerns among credit-rating companies that Tokyo is setting itself up for an eventual debt crisis.
There is a reason, for example, why investors like Singapore-based Jim Rogers avoid Tokyo’s debt. The combination of a graying workforce, tepid growth and deflationary forces aren’t comforting as these things go. As Rogers said in November: “Japan has staggering debt. They have a declining population and debt that’s going through the roof. If I were a 10-year-old Japanese, I’d get myself an AK-47, and I’d leave.”
Hyperbole aside, Abe, Japan’s supposed great change agent, has yet to allay such concerns. There’s still time, perhaps, if he can regain the trust of voters and locate his reformist mojo. But those remain big “if’s”. You’d think nearly six years in power would be time enough to scrap the steroids and build economic muscle.
Yet, investors have 1,087 trillion valid reasons to wonder where Japan is heading. The destination might not be a particularly good one.
William Pesek, based in Tokyo, is a former columnist for
Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
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