Japan shifts agenda as Abe’s arrows miss

During New Year’s week in Tokyo, workers carefully penned their wishes for salary hikes in 2014 and tied the small pieces of paper on which they wrote to trees in the grounds of the city’s many temples. Meanwhile, their bosses dug up records going back almost two decades for information on formulas governing any potential increase in wages.

It has been that long since workers received more than token increases in their remuneration.

Wages have been falling in real terms since the late 1990s. Masaaki Kanno, JPMorgan’s chief economist in Japan, predicts that real wage income will drop 1.4 per cent in 2014, the largest annual drop outside recessions since 1980, when records first were kept.

Yet if Prime Minister Shinzo Abe is to succeed in revitalising Japan, boosting domestic incomes is a vital part of the process. The test will come in a few weeks. March is when the annual ritual of wage negotiations takes place. Optimism is not warranted, however. The talk is more of one-time bonus payments than of meaningful, lasting hikes in wages. Moreover, 40 per cent of the labour force is temporary or part time, and those workers are unlikely to see any gain at all. Their hourly pay is already less than half that of full-time workers.

Abenomics flagging

It is clear that Abenomics is running out of steam. Indeed, most analysts believe one reason for this is Mr Abe’s apparently waning commitment to his own reform programme. Ministry of Finance bureaucrats recently presented a former US Federal Reserve official visiting the capital with a list of 30 reforms they claimed were in the works. None of them was significant, or even memorable. JPMorgan’s Mr Kanno recently noted that reform on the three core issues of agriculture, medicine and labour has failed to show any real progress.

Data in the past few weeks have not been exactly upbeat. After surging 4.4 per cent annualised in the first half of last year, GDP decelerated sharply to a more trend-like 1 per cent gain in both the third and fourth quarters, JPMorgan economists noted. Both the private consumption index and core machine orders fell in December, the latter almost 17 per cent. GDP figures are being revised down and the trade deficit has dramatically worsened.

There will probably be worse in store come April. It is typical of Japan’s bureaucrats that they plan to raise the consumption tax at that time from 5 per cent to 8 per cent and simultaneously to introduce yet another fiscal stimulus package to offset the contractionary impact of the tax just as the economy softens. It would have been far better to put more money in the hands of the people than in the hands of the government.

The country’s numerous – though intermittent – fiscal packages have had virtually no multiplier effects over the past two decades. They are more a resource transfer to the bloated, inefficient construction sector than a catalyst for sustained growth.

Moreover, given the government’s determination to drive down the yen, the cost of imported energy is going up, which means people’s purchasing power is being eroded. Meanwhile, exports have been weak while imports have surged.

Nationalist agenda

The Bank of Japan is likely to ratchet up its easy money policies and purchase ever more securities. But the effect is more likely to push up asset prices (especially Tokyo property prices) than to boost the real economy.

It is therefore little wonder that the Topix index is down more than 6 per cent in the year to date, the worst performance of any of the major asset classes JPMorgan monitors.

More worrying, though, is that Mr Abe appears more committed these days to his nationalist agenda than to his economic programme, given his visit to Yasakuni shrine, his efforts to redefine the constitutional limits on military activity and his preoccupation with a new national security law. He has already increased the budget for the self defence forces, Japan’s closet army, after 11 years. Some historians say that since the Meiji era back in the 1860s, Japan has never recovered from recessions except through war (preferably other peoples’ such as the Korean war and the Vietnam war).

On Christmas Eve, the Nikkei newspaper asked whether Japan’s supply of ammunition to a UN peacekeeping mission in South Sudan “could pave the way for broader weapons exports”. Meanwhile, Japan’s relations with its neighbours continue to deteriorate both because of those nationalistic policies and its cheap-yen policy.

That is one reason why shares like those of Mitsubishi Heavy Industries, a defence play, have been among the stronger performers. But does that rising stock price reflect the restored animal spirits of the Japanese or something more worrying?