Week of June 27, 2016
- Upper House elections are held in a week time, on Sunday 10. There is little doubt that PM Abe will win handsomely and will have an outright majority together with his junior coalition party Komeito in the Upper House (he already has a majority in the Lower House). With a 2/3 majority he even could think of changing Japan's constitution, in particular Article 9 that prevents Japanese armed forces to act rather than to react. The next step will be a referendum and “that may do Mr Abe little good. Public opinion is so strongly against revision that even if the process got under way he would get nowhere. Komeito, too, would dig in against changing Article 9”, writes The Economist. Voters age has been lowered to 18 now, but there is little appetite among younger voters to go to the ballot box.
- And what does this expected win mean for the Japanese economy? “More bullet trains for Japan, fewer deep reforms”, writes Reuters. Japan’s answer to economic downturn always has been to increase spending on infrastructure: trains, roads, bridges, buildings. That may have been complemented since 2 years with an enormous quantitative easing and a push to lower the Japanese Yen, but what is missing are structural reforms, in particular in the labour market. Yet in this article I see a strange contradiction. A reform of the labour market as promoted by the IMF should result in as easier “fire-hire” by companies, but at the same time (my observation): less secure jobs and even more lower paid temp workers will not bring inflation. So in some sense I understand why there is reluctance to fire Abe’s third arrow (Reuters).
- Chinese naval ships and military jets are increasing their entries in Japan’s territory, and the activities are heading south, i.e. directions the contested Senkaku islands. The number of take-offs (scrambles) by Air Self-Defense Force fighters against Chinese aircraft in the April-June quarter this year was up more than 80 from the 114 in the same period last year, SDF Chief of Joint Staff Katsutoshi Kawano said at a press conference on Thursday. Accidents do happen I am afraid (Yomiuri / the Japan news).
- Abenomics is all about arrows: PM Abe defined three when starting his new tenure in 2012: monetary and fiscal stimulus were easy launched but the third arrow is of a different kind: this arrow has to hit vested interests. "Following three years of challenging progress on structural reform - Abenomics’ most important arrow - Abe launched a second round of arrows in September 2015”, writes East Asia Forum. "The three new arrows aim to create a strong economy, provide better childcare support and improve social security. The three new arrows are meant to bring about meaningful structural reforms. While not entirely new or innovative, they will hopefully serve to re-energise policy. These new arrows come with targets. Abe pledged to increase nominal GDP to JPY 600 tln or EUR 5.2 tln, which is a 20 per cent increase. No timeframe was provided and the target will be difficult to meet with a shrinking population. The focus should be on incomes, rather than the aggregate size of the economy. The new second and third arrows are all about demographics. They aim to stabilise the population at 100 million in 50 years from the current 127 million. Limited childcare is the most immediate bottleneck in increasing the fertility rate. With a shortage of childcare places, it is difficult to increase the fertility rate from the current 1.4 to the target of 1.8 — still below the replacement rate of 2.1 — while simultaneously trying to increase the participation of women in the workforce. Japanese women are some of the most educated and capable in the world but many find it difficult to stay in the workforce and maintain a career. Work and family culture need significant change. Abe’s ‘womenomics’ reforms have helped increase female participation, but from a low base. It is not yet clear whether this increased participation is mostly in career-track professions or the growing non-regular workforce.”
- The Japanese Yen as safe haven while the country has an enormous public deficit, a shaky economy and a rapidly ageing population, so why a safe haven? “Japanese companies will bring back money from overseas when needed, foreign investors opt for yen and then there is carry trade” says Tony Munroe of Reuters, see Japan's in a pickle, so why is the yen so popular? Hmm, this article in Forbes indicates that there might be a massive devaluation, so what is true? Last week, when DUJAT met with Prof. Eisuke Sakakibara, better known as Mr. Yen, he admitted that it is rather an image of the Yen as safe haven than that there is real strength.
- Japan is planning to increase the tax burden on corporate and individual income shifted overseas, as the government tries to curb tax avoidance, writes the Nikkei. "Under current law, income declared at an offshore shell company is generally taxed at Japanese rates along with domestic earnings if the firm is located in a jurisdiction where the corporate tax rate is less than 20%. The Finance Ministry is considering scrapping the 20% limit and switching to a system that imposes taxes based on income categories. Dividends, intellectual property and royalties are among the earnings and assets that would be subject to taxation" (Nikkei).
- Corporate Japan’s overseas acquisitions were already slowing down, but BREXIT isn’t helping. Outbound deals involving Japanese firms have totalled USD 17 billion so far this year, Thomson Reuters data showed, 65 percent down on the same period last year and the lowest half year total since 2013. The number of deals fell to 343 from 369. The fall in Japanese outbound activity is in contrast to a spike in such activity by Chinese companies, which has more than doubled in two years to hit a record USD 120 billion in total deal value so far in 2016. But the reasons for Japanese companies to buy abroad - a shrinking population and weak domestic growth, allied with record cash reserves - remain in place (Reuters).
- Mitsui Sumitomo Insurance has introduced a service that issues catastrophe bonds for non-financial companies in Japan, offering these businesses an option to guard against natural disasters. "The debt instrument works like insurance. When a predefined natural disaster hits such as a magnitude-7 earthquake or a massive typhoon, the covered company is compensated and the obligation to repay principal is partly or fully forgiven” (Nikkei).
- The end of June is always the time for shareholders meeting in Tokyo. Until some years ago most shareholders remained silent, but that is changing. Suzuki Motors, Hitachi, Asahi Kasei, Daihatsu Motor and others have been subject to criticism, also from institutional investors such as insurance companies (Yomiuri / The Japan News).
- Last week I reported about the surge in sale sof safety boxes / vaults. More and more Japanese are stashing their money at home in a safety bow, even if this is highly unprofitable due to the costs of the box and the insurance. Reasons: the introduction of My Number, a personal identification system that enables Japan’s tax authorities to track your assets, but also the negative interest rates banks offer (albeit it not for individual savers). Now, why not put your money in the world’s largest pension fund, the Government Pension Investment Fund or GPIF? Well, that is no good alternative either, as this fund is to report a huge loss, no less than JPY 5 tln, EUR 43 bln. Reason: the request by the Japanese government to allocate more funds to stock investment au lieu of conservative bonds. The news comes as Prime Minister Shinzo Abe fends off accusations that his administration tried to delay the official release of the fund’s results until after parliamentary elections next week, writes Japan Today.
- Like in other countries, it comes to women to control the cash to be spent by their husbands. And they are becoming …, well let’s call it: more cautious. That’s no good for Abenomics, as pub visits boost the economy as well. In 2016 the average salaried worker has managed to negotiate about JPY 37,873 or EUR 331,61 (note the accuracy!) per month to spend on lunch, drinking, smoking, coffee and any hobbies he can eke out of the cash left over.
Interestingly with more women at work, there is a reverse of spending: working women outspend their husbands when lunching (Financial Times).
- My favourite contemporary Japanese writer is not Murakami but Kazuo Ishiguro, who lives in the UK since he was 5. He wrote a big article in the Financial Times on what is to be done after BREXIT: The Remains of the UK (his most famous novel is The Remains of the Day, starring Anthony Hopkins and Emma Thompson). Great read!