Companies not playing along with Abenomics: James Saft
Aug 13 (Reuters) – Abenomics has a critical weakness:
Japan’s companies are not playing along and it’s hard to blame
Japan’s economy, struggling to end decades of deflation and
recession, grew at a disappointing 2.6 percent annualized clip
in the second quarter, according to figures released on
Monday, a full percentage point below forecasts and a marked
slowing from the first three months of the year.
While the poor showing immediately focused minds on whether
the economy could withstand a planned hike in sales tax, the
real puzzle lies in the story behind yet another fall in
investment by companies.
So-called capital expenditure fell by 0.1 percent in the
quarter, frustrating predictions of the first gain in almost two
years. That’s critical because an unwillingness by Japanese
companies to invest and to hire is acting as a circuit breaker
on Abenomics, effectively blunting the transmission of monetary
and fiscal policy to the real economy.
Abenomics, a cocktail of fiscal and economics stimulus
poured over a base of reforms, is intended, among other things,
to drive down the value of the yen, which in turn should allow
newly competitive companies to export more, hire more workers
and contribute to a virtuous cycle of investment, consumption
The yen part has worked perfectly, with the currency falling
about 20 percent against the dollar in the past year.
That has certainly been a boon for Japanese companies, many
of which have seen profits double. High profits have not
translated into investment and growth however, despite
reasonable demand for Japanese products globally.
Perhaps even worse, recent surveys of purchasing managers
point to a worse outlook for the coming months.
“Worryingly, PMI data also showed companies cutting
headcount again after two months of job creation, reflecting
growing uncertainty about the economic outlook,” according to
Chris Williamson, chief economist of Markit, whose combined
manufacturing and services barometer fell to 50.7 in July, just
above the 50 reading which divides contraction from growth.
So why aren’t companies playing their part? Because they
don’t have to, for one thing. While the yen means companies
could cut prices to expand market share, they have another quite
attractive option: simply keep prices competitive on exports
but, rather than expand market share, allow profit margins to
expand. That is especially attractive given all the uncertainty
in Japan’s outlook. The weak yen is by no means permanent and
many factors might mean that investments made in Japan now don’t
A QUADRILLION HERE, A QUADRILLION THERE …
For one thing, Japan’s quadrillion-yen debt (yes, that’s
right, public debt passed 1,000 trillion, or a quadrillion, yen
in June, equal to 200 percent of GDP) might force it to raise
sales taxes as planned. That in turn would crimp domestic
demand, with about a third of economists forecasting a recession
if the sales tax rises from 5 to 8 percent next April as
So far, the behavior, as opposed to the rhetoric, of major
Japanese exporters shows a tendency to book profits and play
Toyota almost doubled its net profits in the second quarter
even though it sold fewer cars. And while Nissan bumped U.S.
sales of cars by a fifth after it cut prices, Ford, GM and
Chrysler all gained market share in their home market so far
In other industries profits are improving, as are exports,
but it mostly seems to be a demand story rather than a result of
the newly weak yen. To be sure, investment is a long process,
and Japanese companies are not known for making lightning-fast
decisions about significant expansions. It may well still turn
out, should the yen remain weak and should the domestic economy
seem stable, that Japanese companies in the end do come through
with investment, improving the outlook perhaps for 2014 and
Interestingly, the phenomenon of just sitting back and
enjoying fat margins without making new investment probably has
a different cause in Japan than in other places, like Britain.
While when the pound dropped in 2008, British companies “priced
to market,” simply allowing fat profits to roll in. That was
likely driven in part by compensation practices in Britain,
which tie executive pay closely to stock market movements
through share options. British CEOs, faced with the option of a
gratifying short-term bump in the value of their shares versus a
risky long-term investment in more production, usually chose to
take the money now.
In Japan, executive pay practices are significantly
different, making low investment more likely to be the result of
risk analysis colored by the very difficult experience anyone
managing a big company in Japan has had these past 20 years.
While there are a quadrillion reasons Abenomics may not
work, the weight of history only adds to the count.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)