A postcard from Tokyo
Japan macro trip report
Japan is a fascinating country. Its culture, people and cuisine are just as intriguing as its unconventional policies. Here are my key takeaways from a week of meeting policymakers, academics, investors and analysts.
At a time when European and US politics are in very much in the headlines, populations in many Western democracies are pushing back against the status quo and the establishment; Japan stands out as a haven of political stability.
I came across an extremely broad consensus that Prime Minister Abe was likely to be in power through 2021. There are some hurdles to clear for this to play out, but all seem very manageable. The consensus timeline looked something like this:
- Abe calls a snap election of the lower house for early 2017
- Abe handily wins the snap election
- In March 2017, at its party congress, the ruling LDP changes its rules to allow Abe a third successive term as party leader
- These events clear the way for Abe to remain in power until at least the 2020 Tokyo Olympics
Abe remains unusually popular for a Prime Minister who has governed for four years. His approval rating has even rebounded over the course of this year. Though it’s unclear how much of that is a bounce from his very popular cameo as Super Mario at the Rio Olympics’ closing ceremony or the result of an opposition that remains in disarray?
The flip side of political stability is that there appears to be little appetite for accelerating reforms or fiscal spending. Japan’s culture highly values stability, the Prime Minister is popular and safe, and there is no public outcry for reforms…so why rock the boat? Having said that, there has been some modest progress and I have some sympathy for the argument that reforming Japan too abruptly could be counterproductive, with the government losing support for its measures and stopping any reform dead in its tracks.
The LDP politicians I met all spent much time talking about the huge amount of progress that had been made on reforms. While it was difficult to not feel some disappointment compared to the high expectations that had been set in similar meetings in the early years of Abenomics, I did come away feeling that at least things are moving in the right direction on many fronts. And of course Japan’s underperformance throughout much of 2016 has done a lot to reset market expectations at a lower level.
An area to keep an eye on in 2017 is labour market reform. The government has grown increasingly unhappy with the corporate sector’s contribution to turning the country around. The plan was to boost corporate profits by increasing fiscal spending and weakening the yen with aggressive monetary policy. Companies would then pass on some of these gains to consumers in the form of more jobs and higher wages, which would in turn help break consumers' deflation mentality. Wage growth has turned positive, but is still a lot less than the government would like. Expect more efforts in this area. Several policymakers suggested, having unsuccessfully tried dialogue, that the government would turn to carrots and incentives next. Also, the government would not hesitate to use methods such as taxing retained earnings in the future if needed.
I heard nothing to suggest that Japan will start the helicopters any time soon. However, policymaker bias remains towards more, rather than less fiscal stimulus and the co-ordination between Abe and the Kuroda-led central bank remains strong.
The trip confirmed my view that the BoJ’s new policy framework is another small step on the path toward helicopter money rather than backdoor tapering. On the surface the new framework seems contradictory, trying to target both the yield level and asset purchase volumes.
But the meetings suggested that the seemingly muddled framework is mainly the result of trying to appease different factions on the BoJ board. The yield target is the new priority. As a result the BoJ policy would work as an accelerator of any positive shock to the economy. Rather than the usual response being higher bond yields and tightening financial conditions, the BoJ could maintain bond yields at the 0% cap, creating a virtuous cycle. There was much less clarity, however, as to how the BoJ would respond to a negative shock. Would maintaining asset purchases at ¥80tr be enough? Could there be another rate cut further into negative territory and a lower yield target? Or a completely new policy?
Listening to the Western consensus of two lost decades and a deflationary spiral it sometimes feels difficult to understand why there is not more urgency to reform Japan. But walking the streets of Tokyo I am always struck by how well and orderly everything works, by the amazing quality of the food, how clean it is, the many new and gleaming buildings. It does not look like a country in deflationary decay.
It makes one think whether maybe, just maybe, the Japanese are doing more right than we have given them credit for. I can’t imagine Japanese policymakers will be looking to Europe and the US with great envy any time soon...