Abenomics has two problems – consumers and companies: James Saft

August 5, 2014

Aug 5 (Reuters) – Companies and consumers alike are
declining to play their assigned roles in Abenomics, undermining
Japan’s chances of escaping deflation and economic malaise.

With exports falling, despite a cheap yen, and inflation
sagging again, pressure will be on the Bank of Japan, which
concludes a two-day policy meeting on Friday.

Thus far Abenomics, a mix of extraordinary monetary policy,
fiscal stimulus and longer-term structural reforms, has met with
some early successes, driving inflation and growth higher. But
households, crimped by the failure of income to keep pace with
inflation, are not spending as hoped, as demonstrated by
disappointing June retail sales data released last week, which
showed a year-on-year fall.

That’s in large part due to an April increase in a
consumption tax from 5 to 8 percent, itself an attempt to get
out in front of Japan’s rather dire long-term debt and tax
revenue issues.

It is hard to be surprised by Japanese consumers assuming a
defensive crouch, habituated as they are to year after decade of
tough economic times.

What’s been more surprising, and even a tad ironic, is the
way in which Japanese companies, long criticized for not
maximizing shareholder values like their Western peers, may now
be doing so in a way which brings Abenomics unstuck.

A key plank of Abenomics – spectacularly successful in
market terms – was the Bank of Japan’s determined campaign to
weaken the yen, which is now about a quarter less valuable
against the dollar than before the policy was announced.
This was intended to unleash a virtuous cycle in which companies
expanded production to take advantage of their new competitive
edge in the global market. People would be hired, new plants and
machines purchased or built and the rise in prices engineered by
the BOJ financially would be taken up and made genuine by real
growth.

That’s not what has happened.

Recent data showed exports falling 2 percent in June
compared to a year before, the second straight monthly fall.
Complicating matters is an 8.4 percent rise in imports, in part
because Japan’s nuclear plants are down and energy is more
expensive in depreciated yen. That adds up to the worst June
trade deficit ever in Japan, and a 57 percent rise in the trade
deficit for the first half of the year.

MARGINS OVER SIZE

In part, this all may imply a change in Japanese corporate
culture. Companies, many of which have diversified their
production bases outside Japan in an attempt to make themselves
less vulnerable to demographic issues and a formerly high yen,
now seem happier to simply take the low yen as a windfall gain.
Rather than pressing their advantage by investing at home,
corporate Japan is enjoying the newly fat margins while they
last but taking nothing for granted.

Certainly the optimistic Japanese corporate managers of the
1970s and 80s would have taken advantage of a weak yen not just
to fatten margins, as now appears to be the case, but to scale
up.

But 20 years of deflation and demographic stagnation at
home, combined with the importation of shareholder culture,
means that Japanese corporate strategists are now behaving more
like their peers internationally, pocketing gains from yen
weakness rather than empire building.

On a long view that might imply better allocation of capital
in Japan, but in the short term it brings up some unhealthy
realities for Abenomics.

It surely must also be true that both corporate managers and
consumers realize that while we have heard the twang, the third
arrow of Abenomics – structural reform – has yet to be felt.
Structural reform may well eventually produce a growing economic
pie, but it will expose portions of the economy to new
competition, something workers too will feel.

All of this leaves many investors with a feeling that
Abenomics, in failing to thrive, may be running off the rails.

That line of thinking is probably premature.

While Prime Minister Shinzo Abe’s popularity has fallen
markedly, both he and the Bank of Japan are fully committed to
the policy and can be counted on, especially at the central
bank, to meet economic or market reverses with more of the same
policy which preceded them.

At this meeting that probably simply means more debate on
how to reach their 2 percent inflation goal by the promised
deadline in 2015. That’s far more likely to result in a change
in communications rather than in policy, at least this time. But
if the trend in data stays gloomy, it may not be long before we
see further easing.

That may move financial markets in the desired direction,
but, given the tactics of corporations, leave unanswered the
question of whether Abenomics was designed for a Japan which no
longer exists.
(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 jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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