Economy | Don’t believe the hype about Abenomics
Japan Prime Minister Shinzo Abe had three so-called arrows in his Abenomics reform policy. Reuters/Thomas Peter

Abenomics hype?

Truth is, wages have barely budged under Japan Prime Minister Shinzo Abe

June 9, 2017 12:13 PM (UTC+8)

At the 1,626-day mark (as of today), Japan Prime Minister Shinzo Abe’s economic revival program is finally firing on all cylinders.

Growth has returned, optimism is flourishing and those lost-decades are in the rear-view mirror as the prime minister steers Japan toward an economic boom.

That, at least, is the impression casual observers are getting from the global media.

From Washington to Hong Kong, a sudden spate of headlines gush about how Abenomics is “back on track,” how it “saved Japan’s lost generation” of low-wage twentysomethings and how it’s emerged as a “surprise growth market.”

Investment banks, meanwhile, buzz about how “the sun continues to rise” in the No. 3 economy. Yet this burst of bullishness is as familiar as is it misguided.

Yes, Japan has grown for five consecutive quarters –- its best showing in 11 years. It’s also true that Abe just became the nation’s third-longest serving leader.

But to conflate these two mini-milestones and read them as evidence Abenomics has finally gotten out of second gear ignores reality.

In truth, we’ve been here many times over the last four years and five months –- surges of optimism that later prove to be false dawns. Expect headlines in the months ahead to reflect disappointment that deflation isn’t going anywhere.

The downgrade in first-quarter growth could be an omen of just that. Economists, perhaps influenced by media cheerleaders, expected an upward revision to the original 2.2% reading.

Instead, it was slashed to 1% as private consumption disappointed. This tells the real story, one Abenomics bulls keep missing: average households aren’t feeling the groundswell of progress the media says is afoot.

Truth is, wages have barely budged under Abenomics.

It seemed great news to business scribes, for example, that wages advanced 0.5% in April. Never mind they’d plunged 1% in the preceding month. Or that the tightest labor markets in at least 43 years aren’t doing much to boost incomes. In fact, when you factor in increases in energy and fresh food prices, wages were flat, at best, in April.

What’s going on here? Tokyo hasn’t delivered structural reforms to resurrect Japan’s animal spirits.

Two passengers sleep as they travel on the Japan Railways (JR) above-ground commuter line of the subway train system of Tokyo on June 17, 2008. Though not being a subway line, the JR line acts as a key transportation artery and is often marked on Tokyo subway maps. AFP PHOTO/PHILIPPE LOPEZ / AFP PHOTO / PHILIPPE LOPEZ
Animal spirits? Photo: AFP/Philippe Lopez

Abenomics, remember, is a three-engine proposition: monetary easing, fiscal pump-priming and supply-side deregulation on a scale not seen since the Meiji-restoration era of the mid-1800s.

Bank of Japan Governor Haruhiko Kuroda delivered phase one with drama and audacity. Abe securing the 2020 Olympics for Tokyo helped put phase two in motion. But part three –- structural change –- has put scant few points on the scoreboard.

Abe deserves credit for raising corporate Japan’s governance game. He championed a U.K.-stewardship code to shame underperforming CEOs, called for more outside directors on boards and talked of making return-on-investment a priority.

Yet these largely voluntary upgrades lack teeth and they’re loaded with loopholes.

Consider the drip, drip, drip of terrible news from Toshiba. Or Sharp’s lack of transparency in negotiating its takeover by Taiwan’s Foxconn.

Or the sad fact that the chief executive of deadly airbag maker Takata somehow — impossibly really — still has a job.

Odd, isn’t it, that nearly five years into Abe’s supposed shock-therapy regime, Japan Inc. has seen so few big takeover attempts from overseas?

Abenomics, let’s face it, is really just Kurodanomics.

The BOJ’s unprecedented liquidity was supposed to create breathing room for Abe to loosen labor markets, slash trade barriers, encourage entrepreneurship, cut red tape, empower women and internationalize industrial practices.

It’s now clear Abe thought printing yen would be enough.

He gambled (wrongly) that the BOJ would boost corporate profits and create a virtuous cycle of wage hikes, increased consumption and inflation.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan April 27, 2017. Reuters/Kim Kyung-Hoon
Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan April 27, 2017. Reuters/Kim Kyung-Hoon

Executives called Abe’s bluff; they’re waiting for the reforms he hoped wouldn’t be necessary before sharing hundreds of billions of dollars of profits with workers. This staring contest explains Japan’s chronically weak wages.

Another blunder: fighting the wrong war by targeting deflation alone.

Falling prices over the last 20 years are a symptom of Japan’s malaise, not the underlying ailment. Fighting just the symptoms is backfiring.

And the more Tokyo talks of imminent inflation, the more income-deprived households scrimp and save.

People cross a street in the Shinjuku shopping and business district in Tokyo, Japan May 17, 2017. REUTERS/Toru Hanai
Shoppers in the Shinjuku district in Tokyo, Japan May 17, 2017. Reuters/Toru Hanai

Political distraction also is serving Abenomics poorly, something Goldman Sachs analysts highlighted in a recent report: “Japanese economic reform momentum is taking a backseat to constitutional revision.”

The reference here is to Abe’s obsession with altering Japan’s pacifist constitution so Tokyo can send troops abroad.

So why all the gushing Abenomics headlines? Call it the economic bigotry of low expectations.

The couple of modest wins Abe racked up seem progress enough for many investors. And, yes, change is hard in what is effectively a one-party state.

But after nearly five years, a leader with a clearly articulated reform plan, majorities in both houses of parliament and decent approval rates should’ve achieved more than a couple of low-hanging-fruit tweaks.

Remember, too, that Japan’s 1% growth in the first quarter is a product of the developed world’s biggest debt burden and easiest monetary policy, not animal spirits. In other words, economic steroids, not organic and sustainable growth.

A uniquely wealthy nation, Japan has the resources and skill to muddle along without crisis -– and even surprise markets here and there on the growth front.

But the narrative that Abenomics is thriving and offering lessons for underperforming nations everywhere is as rich as Japan’s long-term trajectory is poor.

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