Japanese Prime Minister Shinzo Abe looks at U.S. President Donald Trump during a joint news conference in the Rose Garden at the White House on June 7 in Washington, D.C. (Photo: Chip Somodevilla/Getty Images)
As the Nikkei Stock Average plunges, Japan is producing a bull market in something rather ominous for 2019: déjà vu.
The feeling of familiarity concerns a return to recession and deflationary forces. Didn’t Prime Minister Shinzo Abe arrive on the scene six years ago to avoid this very scenario? Those asking this question tend to grasp at the wrong answer -– that Japan’s sudden return to the red is all Donald Trump’s fault.
ARTICLE CONTINUES AFTER ADVERTISEMENT
Sure, the U.S. president’s dumb trade war wrecked Japan’s 2018. It was, after all, supposed to be the one in which Abenomics finally produced solid wage gains, boosted consumer prices and validated the 98% stock surge on Abe’s watch. Fallout from Trump’s tariffs has since sent investors fleeing Japan’s export-driven recovery, the longest since the 1980s.
That revival hit a wall in the third quarter, when growth contracted an annualized 2.5%. Tokyo’s spin machine would have us believe that drop reflected earthquakes, storms and bad luck. Yet Trump’s assault on Asian supply chains did the real damage. And yet, most of the blame leads to Abe’s office in Tokyo, not Trump’s in Washington.
Fact is, Japan’s $4.9 trillion economy wouldn’t have halted so abruptly of Abe had used the growth years to reinvent a model with more in common with South Korea than Germany. For all the huge talk of structural Big Bangs and reanimating animal spirits, Abenomics turned out to be a tale of old-school weak-currency stimulus, not the Reagan/Thatcher reawakening into which investors bought.
It’s important to understand what’s gone wrong to see where Japan is headed in 2019.
Look no further than the Carlos Ghosn drama at Nissan Motor, which is only the most publicized corporate scandal of the last 12 months. Improved governance, remember, was believed to be a key Abenomics success. Well, not so much.
The promise of Abenomics rested on “three arrows.” In rolling out his revival scheme in 2012, Abe drew from an old samurai metaphor. It held that three arrows fired haphazardly at a target might work. But three aimed in unison can’t miss. The first two shots hit well enough. The first was history’s most aggressive monetary easing experiment, which pushed the yen down 30% and boosted exports. The second –- fiscal loosening -– was propelled by 2020 Olympics construction.
But the kill shot remains largely in the quiver. This is the supply-side reinvention Abe touted in a 2013 visit to the New York Stock Exchange, where he declared “Japan is back.” Surely the stock market was back. But the real economy in which Japan’s 99% toils, not so much.
ARTICLE CONTINUES AFTER ADVERTISEMENT
Abe wagered that monetary and fiscal boosts alone would restore Japan to its 1980s greatness. The idea was that record corporate profits would prompt executives to hike salaries, catalyzing a virtuous cycle that made Chinese leaders quake and Japan the “It” economy of the 2010s.
Instead, Trump’s trade war caught Abe’s economy naked in the Warren Buffett sense. As the Sage of Omaha famously observed, it’s only when the tide goes out that investors see who’s been skinny-dipping. The Trump effect has done just that, reminding investors of how little Japan Inc. has really changed.
The initial public offering extravaganza of 2018 wasn’t a new generation of startups Abenomics produced, but a 37-year-old company mostly investing outside Japan. And yet even SoftBank’s telecom IPO, the biggest globally since Alibaba’s in 2014, flopped, sinking 15% on Dec. 19, this first day of trading.
Founder Masayoshi Son’s dismal sense of timing dented his reputation as Japan’s answer to Buffett. SoftBank’s roughly $100 billion Vision Fund, after all, is making Son’s business look more like a hedge fund than a mobile network. His splashy investments in startups from Silicon Valley to Bangalore to Singapore partly explain why, until Dec. 19, investors largely gave Son the benefit of the doubt.
ARTICLE CONTINUES AFTER ADVERTISEMENT
SoftBank’s Masayoshi Son attends a news conference on May 9th to discuss the company’s financial results for the fiscal year ended March 31. (Photo: Alessandro Di Ciommo/NurPhoto via Getty Images)
Abe, too. Yet Son’s hubris, coupled with Ghosn’s at Nissan, reminded the world that Japan Inc. answers to no one. Tweaks aimed at prodding executives to care more about shareholders, increase transparency and up productivity are too little, too late. Calls for corporate boards to add more women fell flat. Hopes seniority-based promotions would give way to meritocracy proved fanciful. Plans to shake up the bureaucracy that stymies change fizzled. Abe’s bet on close ties with an erratic White House blew up on Japan’s uncompetitive economy.
Sure, Abe has had his wins. Concluding a trade deal with the European Union was no small thing. Sticking with the Trans-Pacific Partnership after Trump bolted was wise. And Tokyo’s year-end push to welcome more foreign workers to offset an aging and shrinking population are to be applauded.
Yet freer trade might only depress the inflation Abenomics sought to generate (Tokyo is a long way from the targeted 2%), while non-tariff barriers will dampen the benefits. Japan’s half measures on immigration are underwhelming, at best. The mess at Nissan makes a mockery of Abe’s claims to be cleaning up corporate practices.
ARTICLE CONTINUES AFTER ADVERTISEMENT
The palace coup that ousted Ghosn, a Brazilian-born, Lebanese-raised Frenchman, has Japan’s opaque legal system under global scrutiny (the chieftain has been in police custody since Nov. 19). It also has overseas investors crying foul, worried that xenophobia remains at play in Tokyo. Though Ghosn stands accused of underreporting income, far bigger misdeeds at Takata (deadly airbags), Olympus (a $1.7 billion fraud), Toshiba (book-cooking) and Tokyo Electric Power (radiation crisis in Fukushima) haven’t landed CEOs in jail.
Bottom line, though, Japan Inc. has an accountability problem that Abenomics has yet to address.
Abe also enters 2019 dreading the specter of negotiating a bilateral trade deal with a zero-sum-game American leader with a weak relationship with facts and reality.
What’s more, economic retooling is even less an Abe priority in 2019 than the preceding six years. The 12 months ahead are all about realizing his dream of revising a pacifist Constitution forced on Tokyo, postwar, by American forces. Abe’s driving ambition is to restore Japan’s ability to fields a conventional military, one that irks Beijing and Seoul.
The sense of déjà vu is only likely to intensify as growth slows, the “deflationary mindset” persists and Tokyo treats the symptoms, not the underlying problem. That problem is a once-vibrant nation of 126 million people lacking confidence in a future that China already is dominating. And a political establishment talking about more debt-financed stimulus, not fresh reforms.
ARTICLE CONTINUES AFTER ADVERTISEMENT
Six years after Abe promised a new beginning, Japan is again grappling with old headwinds. And while Trump gets some of the blame, the stark image Abe sees as he peers into the mirror is that of a revival scheme that has no clothes.