Tokyo’s spin doctors are suddenly stumped. When initial indications were that Japan’s economy contracted 1.2% in the third quarter, the talking points were that earthquakes and storms hit growth.
Don’t worry, they said, the trade war isn’t ending Japan’s longest expansion since the 1980s. Things will rebound, and fast.
That argument just got trampled with the publication of revised data showing that gross domestic product fell by 2.5%, more than twice the earlier estimate. What’s more, closer scrutiny of the details in the data – sliding capital expenditures, for example – muddy the prospects of a fourth-quarter revival. Bottom line: The rising tide of protectionism is threatening company profits and darkening the outlook for wages and 2% inflation.
Looked at through the prism of uncertainty, Haruhiko Kuroda’s comments last week seem prescient. In early 2013, the Bank of Japan (BOJ) governor pledged to alter the “deflationary mindset” within two years. Since then, he has moved the target forward, first to 2016, and later to 2017 and 2018. That was bad enough, but now Kuroda is talking fiscal year 2021 or later.
Of all the things that went wrong for Prime Minister Shinzo Abe’s reflation push, two in particular bear noting.
One, that ‘Abenomics’ ultimately had 1.5 “arrows,” not the three (monetary easing, fiscal stimulus and structural reforms) that Abe had promised. The BOJ took the first shot, firing trillions of dollars of stimulus into markets.
Fiscal policymakers took the second shot, but they messed up the end game. Construction ahead of the 2020 Tokyo Olympics surely added vitality to a comatose economy. But a move in 2014 to hike sales taxes to 8% from 5% deadened the effects. Another hike planned for 2019 – to 10% – is also sapping confidence.
Yet the third and more important arrow – structural reform – remains largely in the quiver. Claims that Abe strengthened corporate governance are belied by the crisis at Nissan, the reappearance of scandal at Olympus and shenanigans from Kobe Steel to Sharp to airbag maker Takata.
The real proof, though, that Abenomics only deployed half of its arsenal, at best, is how quickly the economy is succumbing to trade friction.
This is the second notable observation. Even if the current quarter fares better than the July-September period, Asia’s No. 2 economy will hobble into 2019 in ways Abenomics bulls never appreciated. Abe’s “reforms,” it turns out, were little more than a jazzier version of Tokyo’s pump-priming playbook of old.
Does this expansion owe much to a sharply weaker yen? Check. Did elected officials lean on the BOJ to add more steroids to un-competitive industries? Check. Did bureaucrats slow-walk changes to the Japan Inc. model? Check. Did Tokyo believe that exports were a better growth catalyst than startups and innovation? Oh yeah.
Some long-overdue moves
There are indeed signs Abe is opening Japan in important ways. Signing onto the Trans-Pacific Partnership process and a massive free-trade deal with the European Union mark progress. So does Abe prodding his party to import more foreign labor to offset a shrinking, aging workforce.
Yet both are steps Tokyo should have taken 15 years ago. Better-late-than-never moves are nice, but of limited potency when China’s rise is changing the Asian landscape at bewildering speed.
China, though, is now a wildcard as US President Donald Trump takes aim at Xi Jinping’s economy, further complicating 2019 for Japan.
As the BOJ battles the last throes of deflation, China is experiencing its own falling-price dynamic. In November, both consumer and producer prices fell from a month earlier – by 0.3% and 0.2%, respectively. Not huge drops, but worrisome nonetheless in the context of an intensifying trade war.
And things are heating up.
December 1 already seems a long way off. That was when Trump dined with Chinese President Xi in Buenos Aires to discuss a tariff ceasefire. Conflicting signals since then have had markets reeling.
Ditto for US officials having Meng Wanzhou, the chief financial officer of mainland tech giant Huawei, arrested in Toronto. That step marks an escalation of tensions beyond tariffs.
As China, Japan’s biggest trading partner, loses altitude, Abenomics will have an increasingly difficult time maintaining its own. The third quarter downshift may be an omen of things to come – and a tough one for Tokyo’s spin doctors to explain away.