Week of August 15, 2016
- PM Shinzo Abe has to cope with a variety of difficult topics: while his super majority in both chambers provides him a one-time opportunity to alter Japan’s constitution, it looks like a long shot as the outcome of the obligatory referendum does not look promising. Then there is the anti American sentiment in Okinawa: 74 percent of U.S. facilities in Japan are based in Okinawa, occupying about 18 percent of the main island and here about half of U.S. forces in Japan are stationed. Many in Okinawa want the Americans to leave. Earlier this month the 80-year old Emperor indicated that he wants to abdicate. The Chinese are knocking at Japan’s doors by entering its waters. With the US presidential elections upcoming, the uncertainty of the outcome makes it difficult to plan ahead. "Although Hillary Clinton is not all that popular in Japan - where the ruling Liberal Democratic Party (LDP) has found it easier to work with Republicans - Trump is toxic”, writes Foreign Policy. Trump in one of his speeches: “If we’re attacked, Japan doesn’t have to do anything. They can sit home and watch Sony television, OK?” And apart from those political issues, there are the challenges to get Japan’s economy on track. Happily for PM Abe: he is now in Rio to attend the closing ceremony of the Rio Olympics.
- The Chinese army started building a pier for warships close to the disputed Senkaku Islands, see this article in the Pacific Sentinel, while Japan starts to develop a new surface-to-ship weapon, which would be the longest-range missile ever built by Japan, writes the Financial Times. "The new missile, say military experts familiar with the plans, is designed to “complicate enemy planning”. By positioning them on Japanese islands in the East China Sea and with a range that stretches to the edge of Japan’s territorial claims, the missiles would discourage naval aggression. If an attacking force were planning a landing on a Japanese island, its commander would need to destroy the missiles beforehand - in effect initiating conflict. To me it looks as if both countries are playing the game of Go, the highly complex and oldest board game.
- Japan's defense ministry will seek for 2017 a record budget of JPY 5.16 trillion or apr. EUR 45 billion, reports the Asahi Shimbun, as tension rises in the East China Sea and North Korea steps up its missile threat, a government official with direct knowledge of the plan said. The hike of 2.3 percent over this year's budget of JPY 5.05 trillion marks the fifth successive annual increase sought by the ministry, which is keen to stiffen Japan's defenses as North Korea upgrades its ballistic missile technology.
- 10-year maturities are called long term but negative interest rates result in in ultralong terms, reports the Nikkei. "Newcomers in Japan's superlong corporate debt market are using the money raised for such purposes as share buybacks, much to the chagrin of the Bank of Japan, which had hoped that its negative-rate policy would spur capital investment.” It is not only real estate and infrastructure companies that launch ultralong debts, but also pharmaceutical companies. The Bank of Japan wanted to clear the way for companies to procure capex funds at low costs. Yet businesses are using that money to lift ROE, something that is supposed to be accomplished by boosting profit. This trend risks weakening economic growth across the board. "The distortion caused by the negative-rate policy is steadily growing behind the win-win situation between corporations and investors," warns Mana Nakazora, head of investment research at BNP Paribas Securities (Japan).
- Japan's exports tumbled in July at the fastest pace since the global financial crisis with a resurgent yen and weakness in overseas economies weighing on overseas shipments - a warning that Japan cannot rely on exports to drive growth. Exports in July fell due to lower shipments of cars to the United States, ships to Central America and steel to Italy, the data showed. Exports to China - Japan's largest trading partner - fell an annual 12.7 percent in July, extending the 10.0 percent decline seen in June. U.S.-bound shipments fell 11.8 percent year-on-year, versus a 6.5 percent annual decline in the previous month. The yen has risen around 20 percent versus the dollar so far this year (Nikkei).
- Some weeks I wrote about the question if Japan’s government is spreading around so called “helicopter money”. By a strict definition this is not the case, writes Reuters. But as the government plans to issue more 40-year bonds, it is looking more and more like some monetization of debt is underway. The BOJ says as long as it buys Japanese government bonds (JGB) from the market, it is not directly underwriting bonds to fund government spending. "However, that distinction has become blurred as investors buy bonds only to take profits by selling them immediately to the BOJ - a transaction coined the 'BOJ trade.' "The BOJ is now buying the entire JPY 30 trillion (EUR 264 billion) in bonds newly issued by the government annually. In a sense, it has the same effect of helicopter money (Reuters).
- 20 years ago I read in the book Made in Japan by Akio Morita (Sony’s founder) that volatility in currency exchange rates is the most difficult factor to tackle. "You can organise your factory into the world’s most efficient one, you can develop the most brilliant technology, but against an unfavourable exchange rate you can’t do anything." Now the answer to a higher yen is all about cost cutting. At Toyota’s HQ some elevators have been taken out of use, airco’s are trimmed and light bulbs removed at Sharp, all in an effort to create cost consciousness among the employees (Asahi Shimbun).
- Nikkei reports that nearly a fifth of Japanese employees feel they are being exploited by their companies, putting in long hours of overtime with little reward. Labor shortages and understaffing may be on reason overtime is increasing, particularly in Japan's retail and other service sectors. But wages and other benefits have failed to keep pace with the increased workload, and more employees, especially those in their 20s, are shunning long hours. "An overwhelming majority - 84.3% of respondents - said work-life balance is important for enjoying life, with 18.2% of respondents saying they do not want to work overtime at all. Only 32.2% of respondents said they would not mind putting in extra hours to get promoted. This trend could be in part down to generational differences: Japanese workers in their 20s, who went to school under a more relaxed educational policy than their parents, seem to be less career-oriented than their peers in China and other Asian countries.”
- Do you believe in block-chain? Yours truly does and I think that The Netherlands is well positioned for this. The Dutch Central Bank is preparing an ambitious experiment aimed at discerning if an entire financial market can be built on a blockchain. I am not sure if the Japanese financial sector is well equipped to develop blockchain applications. Why? "In Japan there are relatively few startups in a country that often ranks low for entrepreneurship. Consequently, blockchain talent is scarce, and finance houses risk being left behind as global peers pass blockchain savings on to clients (Reuters).
- Remarkable contradiction: while more and more people in Japan are using social networks, the time they spend on the platforms is tiny compared with users in other countries. Japan has more than 68 mln users of the various social networks, but individuals are active on average only 19 minutes a day, according to GlobalWebIndex, a U.K.-based market research company. Users in the Philippines topped the company's survey of 34 markets with a staggering 3 hours, 56 minutes spent daily on social media. South Korea stood second to last at 1 hour and 3 minutes, showing a large gap between Japan and the rest of the world (Nikkei).
- Immigration into Japan: it remains a problem although the number of Japanese that favour admitting foreign workers is bigger than those who oppose this: 22% vs. 15% (but 63% are not sure.) Last year the number of foreign permanent residents reached a record 2.23m, a 72% increase on two decades ago - and the number of people on non-permanent visas is also rising. "But the goal seems to be a surreptitious increase in the number of temporary workers and a more accommodating system for skilled workers, not the settlement of foreigners on a grand scale. Only tiny numbers of foreigners become Japanese citizens and even fewer are granted asylum: only 27 in 2015, a mere 0.4% of applicants.” The Japan Immigration Policy Institute, a think-tank, reckons Japan needs 10m migrants in the next 50 years. The population is projected to drop to 87 mln by 2060, and the working-age population (15-64) from 78 mln to 44 mln, because of ageing (Economist).
- Now that the Rio Olympics are nearly finished, it is time to look ahead, to the 2020 Tokyo Olympics. "My government will manage the Games very differently”, said Yuriko Koike, Tokyo’s newly elected Governor as here reported in the Irish Examiner. "We want to take pride in our Games, and we cannot do that if we hobble future generations with debt. The Tokyo they inhabit must not be dotted with white-elephant structures that served a single purpose in 2020, only to mar the skyline for years and decades after. Admittedly, I am coming to the task late in the day, and some of the plans for the Games - such as the layout of event spaces around the city - have already been set into motion by my predecessors.”
The Tokyo Olympics and Paralympics were estimated at the time of the Olympic bid as costing JPY 734 billion or EUR 6.4 bln. With large jumps in building materials and personnel costs, however, the total soared. Through revising the plans to use existing facilities instead of new ones, additional costs were reduced by about JPY 200 billion, but the total is still estimated now at JPY 2 trillion, or EUR 17.6 bln as reported by the Mainichi Shimbun. Yuriko Koike is now also in Rio and there are without any doubt some lessons to be learned.
- Japan's exports tumbled in July at the fastest pace since the global financial crisis with a resurgent yen adding to the challenge of weak external markets: New worries for Japan as exports tumble (Reuters video).
- Video by Japanese government on Chinese ships in contested waters: http://uk.businessinsider.com/chinese-fishing-ships-near-senkaku-islands-2016-8
- Japan expert Jesper Kroll on Japan’s economy: WisdomTree's Koll: Japan's Economy Is Stalling