Opinion

James Saft

Toyota bounty shows Abenomics snags

November 6, 2013

Nov 6 (Reuters) – Toyota’s sparkling earnings show how
Abenomics may be good for Japanese companies now, but perhaps a
bust for investing in Japan over the long term.

Toyota, the world’s biggest car maker, reported a
70 percent jump in profits last quarter, as it got a boost from
this year’s 12 percent drop in the yen against the dollar
.

A look under the hood, however, shows that Toyota’s gains
may not translate into the sustained expansion Japan hopes
Abenomics will spark. Named after Prime Minister Shinzo Abe,
Abenomics is an attempt to use government spending, radical
monetary policy and competitive reform to finally rescue Japan
from a 20-year-plus slump.

The first step was to hammer the yen lower, making Japanese
exporters more globally competitive. A weaker yen has helped
Toyota, but not perhaps in the way policymakers want.

Two things have to happen for Abenomics to succeed. First,
external demand prompted by a weaker yen needs to drive a
self-sustaining consumer expansion. That requires wage gains.

Second, companies need to invest and expand, using a new
pricing advantage from the yen to build volume, not simply to
make more money on every car sold.

On the evidence thus far, neither of the two needed things
is happening or is likely to happen.

Consider Toyota. While profits are up 70 percent, most of
the focus is on increasing margins, with capital expenditure
forecast to rise just 2 percent and research and development
forecast to stay the same.

That’s hardly the massive expansion Japan needs.

And while Toyota, and others, have indicated a willingness
to boost wages in the future if profits continue to roll in,
thus far they’ve been far more likely to hand out bonuses rather
than make permanent increases in their fixed costs.

It looks very much, in other words, as if Toyota, and likely
many other companies, are happy to increase profit margins but
not take on the risks of paying more and expanding rapidly.
Given the history of the auto industry and Japan itself, it is
hard to blame them.

Japanese workers, having lived through the past 20 years,
are understandably wary about increasing spending permanently
based on a one-off bonus.

And while Abe said in October that higher wages were “vital”
and has used various forums to pressure companies, even
corporate tax cuts haven’t had much of an effect. A recent
Reuters corporate survey found that only 5 percent of
respondents would use additional savings to raise wages.

WAGES AND INFLATION

This leaves Japanese workers in a difficult bind. Prices are
rising at last, at least a bit, but wages not so much.

Core consumer prices, which include oil products but not
fresh food, rose 0.7 percent in the year to September. Even
so-called ‘core-core’ prices, which excludes both food and
energy, were flat, the first time since 2008 that they have not
fallen.

While that might seem like cause for rejoicing, wages have
been stagnant. Salaries are in their longest slide since 2010,
with regular wages excluding overtime and bonuses down 0.3
percent in September. Total cash earnings rose 0.1 percent.

Minutes of the Bank of Japan’s October meeting, recently
released, showed some disquiet over the pace of wage gains, with
one member noting that sustained gains might not appear before
the annual wage negotiation round next April. Except then a
consumption tax will increase by 3 percentage points, almost
certainly more than swamping any wage increases.

The fear, of course, is that consumers won’t consume, and
when next April’s consumption tax comes along, Japan will drift
back into deflation and recession. And remember, Japan, as a
country with very large debts and a demographic downward path,
needs inflation. Only inflation, and genuine growth, will allow
it to manage its debts over the longer term.

Here again we have a great example of how extraordinary
monetary policy creates risks for everyone while handing out
what may be short-term benefits disproportionately to the
wealthy. The Nikkei 225 stock index is up by a third
this year, and by 50 percent over the past year. Profits among
exporters are, by and large, growing quite well.

Even those gains may prove to be short-lived, and taking a
five-year view, investors would be wise to be very cautious
about the future of Abenomics and Japanese assets.
(At the time of publication, Reuters columnist 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.
For previous columns by James Saft, click on )

(Editing by James Dalgleish)

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