Suddenly, the global economic scene isn’t looking so good from Tokyo’s vantage point.
The first quarter saw a hiccup in the second-longest postwar expansion as growth contracted 0.6%. Economists have rushed in to reassure Japan bulls. Don’t worry, they say, this is about short-term inventory excesses that Japan Inc. will fix in short order. The future is bright.
Well, not so much, warns Christine Lagarde, head of the International Monetary Fund. “The clouds on the horizon…are getting darker by the day,” she said recently.
In many ways, officials in Tokyo can attest to that.
A convergence of ills
One concern about the contraction between January and March is just how much went wrong. Private consumption and public demand came in weak, while investment spending and net exports fared even worse. Not deep declines, mind you, but ominous enough of a pause in Tokyo’s eight-quarter growth run to change the basic calculus about where the No. 3 economy finds itself.
The bigger worry is what’s happened since then: Donald Trump’s trade tariffs. The fallout from the U.S. president’s 25% taxes on steel — 15% on aluminum –still have to show up in gross domestic product flows. And then there are the threatened steps that might have corporate giants scaling back plans for investment and salary increases.
Case in point: a threatened 25% levy on car imports. Trump’s desire for a weaker dollar has exporters rethinking expansion plans. His escalating tit-for-tat with China, Japan’s main export partner, means the clouds on the horizon of which Lagarde warned are growing ever larger.
The darkening external sector reminds investors how little headway Prime Minister Shinzo Abe has really made in restructuring the economy. The tweaks to corporate governance have indeed increased returns on equity. The Bank of Japan’s epic easing, in turn, boosted stock values. Yet none of these steps increased innovation, catalyzed a startup boom, reduced bureaucracy or got cash-rich companies to fatten paychecks.
Then there’s what’s to come. Abe insists on going ahead with another sales tax increase in 2019, from 8% to 10%. The last one, in 2014, slammed the economy. Why make the same mistake twice? Tokyo reckons it’s a necessary step to reduce a $10 trillion debt. Higher levies, Abe’s Liberal Democratic Party claims, are needed to pay down the government’s crushing IOU burden.
Fair enough, though Abe’s party had to borrow more to offset the economic fallout from a 2014 tax hike aimed at reducing borrowings. Next year’s tax hike also might have companies bracing for the worst. Add in Trump’s assault on the global trading system and you have a recipe for even less investing and corporate expansion for the 18 months ahead.
Trump effect adds to BOJ woes
The Bank of Japan is on the frontline of these mounting troubles.
On Friday, BOJ Governor Haruhiko Kuroda all but admitted defeat in Tokyo’s quest for 2% inflation. The BOJ allowed that inflation growth could slow toward 0.5%, making you wonder what the last five years of epic easing were all about.
Kuroda was having plenty of troubles gaining traction before Trump arrived in January 2017. Yet the Trump effect is intensifying the headwinds heading Japan’s way – headwinds that weren’t reflected in first-quarter GDP. And they’re upping the odds Japan could soon find itself back in recession.
As Trump’s legal troubles in Washington intensify, he’ll be keen to change the headlines early and often. Additional trade assaults on China and the rest of Asia are the lowest of low-hanging-fruit options.
This may be particularly true if Trump’s back-slap fest with North Korean leader Kim Jong Un backfires. The ridicule level in Washington is rising apace as Pyongyang’s propaganda machine (not to mention the massed ranks of western pundits) suggests Kim got the better of Trump.
Either way, Asia hasn’t seen the last of this White House’s penchant for lashing out via trade curbs.
Until now, Abenomics has at least benefited from heady global growth. Today’s rare synchronized recovery is in doubt as Trump’s mood toward trading partners grows darker by the day. And that augurs poorly for Japan’s outlook.