As Japan enters a new imperial era, it’s carrying too much economic baggage from the last for comfort.
The nation’s current imperial era, known as “Heisei,” gives way to a new one with Emperor Akihito’s formal abdication on April 30. On Monday, the Japanese learned that the new era will be called “Reiwa,” which translates to “order,” “peace” or “harmony.”
It’s an interesting choice, considering that none of these sentiments can be applied to the trajectory of the economy as Japanese look ahead. In fact, all too many of the imbalances of the Heisei era – which began in January 1989 – will continue to challenge Japan’s government in Reiwa.
That’s the stark message from the latest “Tankan” survey of the biggest manufacturers. The Bank of Japan’s quarterly report showed sentiment has tumbled the most in six years. Cratering global demand has collided with a domestic economy dependent on exports.
It’s a reminder that the deflation Prime Minister Shinzo Abe pledged to put in the rearview mirror remains on his list of challenges for 2019. That makes for a grim historical bookmark. At a moment when 126 million people open a new chapter in their shared history, the troubles that began 30 years ago, when Akihito assumed the Chrysanthemum Throne, remain.
Risk, risk, risk
Recession is the immediate risk. That Japan is skirting one at all will come as a shock to ‘Abenomics’ bulls who believed Tokyo’s reform drive since 2012 has remade the world’s third-biggest economy.
The sugar high of historic monetary easing boosted exports and generated record corporate profits. The buzz was amplified by a 2020 Tokyo Olympics construction boom.
But the real highlight of Abenomics, a deregulatory revolution, never really arrived. There were some piecemeal reforms, including tighter corporate governance. There have even been moves to attract more foreign talent to augment a rapidly-aging population.
However, bold upgrades to increase competitiveness, incentivize innovation and empower women are few and far between. Hence the stagnant wage era in which Japan is stuck. And hence the speed with which the economy is slowing amid a trade war aimed elsewhere. China may be directly in Donald Trump’s crosshairs, but Japan is taking the real hits.
The latest Tankan survey tells the story. Confidence fell markedly – to 12 in March from 19 in December. Here, though, is the more important takeaway: Sentiment among top manufacturers hasn’t improved since the end of 2017. More bad news? A Reuters poll sees the index plummeting to 8 over the next three months.
What will the BOJ do?
All this puts the BOJ in a bind. Six months ago, Abenomics boosters were betting on monetary “tapering.” Markets buzzed about Governor Haruhiko Kuroda’s team reducing its 50%-plus ownership of outstanding government debt and 75%-plus share of exchange-traded funds. Now, punters are debating when the BOJ may pump new liquidity into the economy. And by how much, given recent volatility in exchange rates.
Corporate profits these last six years were driven by a 30% drop in the yen. As US President Trump pressures the Federal Reserve to cut rates, the yen could soon skyrocket. The latest Tankan shows CEOs are prepared for the yen to appreciate to as much as 108.87 per dollar this fiscal year (from 111 now). A bigger move is possible should Trump make good on currency-war threats.
If Japan Inc. was unwilling to fatten paychecks in, say, 2013 when the Nikkei Stock Average was surging 50% annually, they surely won’t in 2019. At the same time, the odds of a hike in the national sales tax to 10% from 8% this year now look iffy.
This scratches at problems rooted in 1989, when Japan’s imperial “Showa” era ended. That was when the “bubble economy” began imploding, leading to deflation and the developed world’s biggest public debt burden. Ostensibly, the tax hike is aimed at paying down debt.
The near future, though, will see even more borrowing as headwinds intensify. Even if the US and Beijing ink a trade deal, Trump plans to leave tariffs on $250 billion of mainland goods in place. He is also threatening to slap 25% taxes on imports of cars and auto parts.
So, as one era ends for Tokyo, old headwinds will haunt Team Abe for some time. From an economic standpoint, there’s little “order,” “peace” or “harmony” in sight.