Two bulls, one bear

Masayuki Kichikawa (Bank of America Merrill Lynch), Yuichi Kodama (Meiji Yasuda Life Insurance) and Jesper Koll (JP Morgan Securities) spoke today at the Foreign Correspondents Club of Japan on the topic of “Abenomics”—A Story of Success or Failure.

Unlike the “on-the-one-hand,” “on-the-other-hand” common parlance (some might say equivocation) of economists, the three speakers at the press conference  were straight-forward: Koll and Kichikawa unabashedly bullish on Abenomics (Koll prefers the term “Nipponomics”), and Kodama, the lone pessimist among the group.

Three or four times Koll prefaced his positive comments with the phrase, “whether you like Abe or not,” which leads me to conjecture that he likes the economics of Abe, not his right-wing overtures. He makes his case that Abenomics will succeed—not because of Abe, but rather because of several other factors:

—   the restructuring and realignment of the supply chain among Japanese corporates, or “Japan Inc.”

—   a demographic “sweet spot.” Yes, Japan’s population is aging but the baby boomers have aged beyond the point where their income decline has been a drag on national income; their pensions or savings further stabilize drops in disposable income. Moreover, there are early signs of labor shortages of skilled workers in their 30’s and 40’s, a trend that will spur wage and income growth.

—   the “Mr. and Ms. Watanabe” effect. Consumer spending will turn up, as indicated by rising prices in residential real estate for the first time since the “bubble” popped.

—  stability of government. Other than Koizumi and Nakasone, no other prime minister has remained in office for more than two years in recent Japanese political history. Particularly if Abe wins big in the July 21 elections of the upper house, he would be the third, a rare chance to consolidate power and shoot boldly with his “third arrow.”

Koll predicts startling 3% inflation and 3% economic growth “by the time the Germans win the World Cup in 2014”, as he quipped.

Kodama, the bear in the shop, stressed a fundamental flaw in Abenomics—an inconsistency between explosive monetary easing (the BOJ has doubled the money supply and the size of its balance sheet) and ability to maintain historically low long-term interest rates.

—   Abenomics has set a high bar of expectations; if inflation does occur, interest rates will rise, with a sharp impact on the costs of government borrowing and drag on economic recovery.

—   The consumption tax is scheduled to increase to 8% in 2014. Introduction of the consumption tax (3%) and increase to 5% dampened the economy, yet in both cases there were offsets in tax reductions elsewhere. Either social security benefits (government pensions) must be adjusted (an extremely contentious political issue) or the consumption tax must be raised to support these entitlements. Politicians will follow through with an increase of the consumption tax to 8%, but offsets (perhaps breaks for low-wage workers) are not on the table as of now.

—  The rise in the equity markets, reflecting a predominance of foreign investors, and weakening of the yen buy time but do not buy sustainable growth. Needed are fundamental structural reforms, including reduction of corporate taxes and labor reforms.

Surprisingly, none of the economists stressed the pressing need for measures to stimulate entrepreneurship in SME, unleashing economic growth and job creation.

Koll argued that enactment of the TTP alone can stimulate the economic growth to support an increase of the consumption tax.

That assumes that Abe can successfully negotiate agreement from the deeply-imbedded agricultural lobby. The heavy lifting is yet come on many of the knotty reforms needed to produce the “new golden age” in Japan that Koll anticipates.

As one TV commentator put it, Abe’s third arrow so far “seems less an arrow and more a fishing net.”

All the best,

Warren J. Devalier
©2013 Warren J. Devalier