As China's stock market continues to worry investors, Japan's economy may again be suffering from a crisis of confidence.
- By William SposatoWilliam Sposato is a Tokyo-based writer who has been following Japan's economy and financial markets for more than 15 years.
TOKYO — The doubters of Japan’s economic recovery are back in the driver’s seat after a sudden worsening of China’s financial outlook, combined with poor Japanese economic data. They’re raising new worries about the government’s recovery program, called “Abenomics.” The second-quarter figures for Japan’s GDP revealed what is euphemistically known as “negative growth”: The figures, announced on Aug. 17, showed an annualized contraction of 1.6 percent from the first quarter. News headlines blared that the recovery strategy is in trouble.
This was quickly followed by a barrage of bad news from China, which is roughly matched with the United States as Japan’s biggest trading partner. The inability of Chinese authorities to draw a line under the sharp fall in stocks — Shanghai’s main stock market was down 22 percent over three days — has raised worries about the broader economy and given voice to suspicion that authorities have not been telling the whole story about China’s economic woes.
The new worries about Japan have come even though the actual data is far from alarming. Despite the quarterly downturn, growth for the first half of the year was still a respectable 2.2 percent, and many economists are forecasting a return to the plus column in the third quarter. A sharply weaker yen has helped exporters and pushed up profits from the overseas operations of big Japanese companies. “We believe the Japanese economy is still in a recovery mode, but the momentum remains weak,” Deutsche Bank said in an Aug. 17 research report.
Japan’s growth strategy, launched by Prime Minister Shinzo Abe when he took office in December 2012, promised that Japan’s economy could be rescued through a combination of massive monetary expansion, short-term fiscal stimulus, and longer-term reforms to the regulation-bound corporate world. But progress on much of the legislative agenda has been slow. Spending has lagged expectations — which might be just as well given the government’s dismal financial condition as one of the world’s largest debtor countries — and the regulatory reforms have been painfully slow in the view of many economists.
The one clear success had been seen in the asset-buying program launched by the Bank of Japan’s ebullient governor, Haruhiko Kuroda, whom Abe installed as head of the central bank in March 2013. Following the professorial and somewhat dour Masaaki Shirakawa, Kuroda is in the Franklin D. Roosevelt school of policymaking: Just as FDR said that all that Americans had to fear in the Great Depression was “fear itself,” Kuroda promised a bold program that would pull the economy — and, more importantly, the Japanese people — out of their nearly 25 years of stupor. (Japan’s fast-growing “bubble economy” came to a sudden end in 1990.)
Kuroda launched his “qualitative and quantitative easing,” similar to the U.S. Federal Reserve’s quantitative easing (QE) program, but with an extra “Q” for good measure. Instead of referring to arcane econometric data, he simply said the central bank would create a steady inflation rate of 2 percent by doubling the monetary base (the narrowest definition of the money supply) within two years. It doesn’t get much easier than 2-2-2.
And it succeeded, at least for a while. The core figures for the consumer price index (CPI), the most closely watched measure of inflation counting the cost of household goods and services minus fresh foods, maxed out at 1.5 percent in April 2014 — excluding the impact of a 3 percentage-point increase in the national sales tax — and has been on a downward slide since. The latest figures show that the core CPI was up just 0.1 percent in June, and the consensus forecast for July shows a drop back into negative territory with a 0.2 percent fall, according to Barclays.
So why hasn’t the monetary easing of an eye-opening $654 billion worth of asset buying by the central bank annually been doing the trick? At least part of the answer lies in global oil prices, which have provided a very tangible reduction in energy costs for Japanese families. The CPI data shows that fuel and electricity costs were down 3.1 percent from the same time last year. That should give the average person more money to spend and push up consumption of other goods.
The reaction has been the opposite. Overall private consumption fell 0.8 percent in the second quarter, and other key indicators such as sales at big department stores also fell. Underlying this has been a broader view that Abenomics has so far failed to deliver — at least for the average person. “There was some hope when it began in 2013 that it was going to happen,” said John West, executive director of the Asian Century Institute think tank. “But people on the street always thought that the little guy was getting nothing.”
That problem can be seen in consumer-confidence data, which fell in July to 40.30 from 41.70 in June — roughly the same as in 2012, before Abe came into office. Another key issue, West and other commentators have said, is to what extent Abe is truly focused on economic issues, especially with most of parliament’s time dominated by changing the rules governing Japan’s military, instead of trying to free up corporate regulations. “Abe seems more interested in security reform, collective self-defense, and exporting arms than the economy,” West said.
There are also some tangible reasons for individuals to remain cautious about the future. For Abenomics to work, higher prices must coincide with higher wages; otherwise, people will be worse off and therefore even less likely to spend. With corporate profits rising to a record high at the end of 2014, according to Finance Ministry data, there is certainly scope for dishing out a bit more to those corporations’ employees. And the government has trumpeted the closely watched spring labor negotiations between unions and major manufacturers, which produced a pretty solid increase of more than 2 percent for 2015. However, that has yet to show up in the broader wage data covering a wider set of workers: Employee compensation was up a modest 0.8 percent in the second quarter. That figure peaked at 2.2 percent in the third quarter of 2014.
This problem is not lost on the Abe administration, or at least those focused on the issue. Yoshihide Suga, the government’s chief spokesman and one of the prime minister’s closest advisors, said in late July that much more is needed. “The Abe administration is committed to creating a positive economic cycle and achieving growth, and to achieve those targets, significant wage increases are needed,” he told reporters.
It remains to be seen whether Abe can turn his attention back to the economy to the degree required. And the reforms needed are far from easy. The job market is characterized by a high level of protection for full-time staff coupled with a numbingly complex set of rules on the use of contract staff and part-timers. Progress in this area rests on the concept that if companies can fire workers more easily, they will go ahead and hire more people. Even if this is to work, it would take years to work through the required redundancies to start from a new base. Financial markets seldom have time for such long-term measures, and the interim pain will hardly be a calling card for the success of Abenomics.
Kuroda’s plan provides a similar conundrum. By pushing up the price of goods, he will in effect be discouraging consumption, the exact opposite of what the economy needs.
But Kuroda remains undeterred. In a recent speech, he told central bankers from around the world that despite some uncertainties, “our commitment to achieving the 2 percent inflation target will never be compromised.” He added that “with our unwavering determination, I am confident we can achieve that goal.” For a central banker, that is about as close to Roosevelt as it gets.