London, England, July 12, 2016 -- The surprise move of the Bank of Japan last two weeks in setting negative interest rates for the first time in its history can be considered at best a very desperate move in a time of trouble, with hopes for the best. But luck was not on the side of the central bank as just a few days after the announcement, the Japanese stock market fell by almost 8%, taking with it most of the gains that have been accumulated over the past two years. To make matters worse, the latest GDP figures indicate a renewed shrinking of the Japanese economy which is a big problem for Shinzo Abe and his Abenomics.
While the most fundamental goal of Abenomics has been the weakening of the Japanese Yen, the process currently seems to be going the other way, the prime minister, together with the central bank governor will therefore be coming under even more severe pressure. The prime minister's ambitious plans of economic revival, which have been labelled ‘Abenomics' has often been heavily criticized, including many calling of names like a ‘money spewing bazooka' with which the central bank's $700 billion annual quantitative easing efforts have been labelled.
This economic policy of the Japanese prime minister, which was affectionately named Abenomics, is made up of three different policies which were made to combine together to battle and reverse the two decades of deflation that has threatened the future of the Japanese economy. The three policies or three arrows are:
1. The monetary arrow - This policy is focused on initiating conditions that will help to expand the money supply and thereby combat deflation.
2. The fiscal arrow - There would be an increase in government spending in order to stimulate economic growth.
3. The structural arrow - The implementation of structural reforms by the government to improve productivity and competition and hopefully avoid economic stagnation.
Growth Problems of the Japanese Economy
Japan is an aging society and this makes economic growth difficult. Richard Sharpe, Co-Head of Global Mergers & Acquisitions for ACOM Tokyo Securities explains it this way: "There is virtually no other growth engine left in Japan, except for exports. This is the result of a rapidly aging and shrinking society."
He continues to explain that for every 1% growth of the Japanese economy, 0.5 to 0.7% of that growth comes from exports. If the society continues to age and shrink at this rate, by 2020 Japan would be losing about 600,000 people a year. You should know that it is very difficult to see economic growth in an aging and shrinking population like Japan's.
A Look at the Yen
Japan is a huge industrial power, the world's third largest economy. The recent 8% loss of the stock markets that erased the gains of the last two years is huge when translated in cash value. But it’s still peanuts compared to the amount of money the country could make from more exports, leveraging Japan's industrial might. The theory then is to make Japanese goods cheaper on the international market and thereby increase sales.
Back when this plan was hatched the Yen was exchanging at 80 Yen to a Dollar. for the next two years until 2014, the Yen was manipulated in accordance with Abenomics to lose value, slipping gently from 80 Yen for a Dollar, to 120 Yen for a Dollar.
Abenomics has succeeded in boosting Japanese exports and the Japanese exporters, especially the big ones were appropriately ecstatic. In 2014 for example, Toyota posted a record annual profit of $18 billion. This party continued with even many other Japanese companies earning and stacking huge amounts of cash, until this year.
The current situation of the Japanese economy is a lot different than it was the last few years. The Yen is currently strengthening and the Japanese firms who made plenty of cash have stock-piled them, refusing to spend a dime.
The Yen has gone from 120 Yen for a Dollar, to 112 Yen to a Dollar, in the last two weeks alone. This strengthening Yen is a big nightmare for the government of Japan and a heavy blow to Abenomics. In a desperate bid to steer the economy back on track, the central bank governor Haruhiko Kuroda then pushed interest rates below zero. Richard Sharpe Co-Head of Global Mergers & Acquisitions at ACOM Tokyo Securities, who overseas $1.75 bn of clients assets explains that "Until the Yen started strengthening; the central bank never had any interest in a negative interest rate. You see, when there is trouble around the world, people with large sums of money will find safe havens to dump their money." He continues "There are currently lots of problems around the world, from China to U.S.A to Germany, everywhere you look, and there are problems, so this is prompting people to bring their money to a safe haven like Japan."
Cash Stockpiles in Tokyo are gigantic.
The central bank governor's reaction with the imposition of a negative interest rate is a message to both those investors bringing their money to Japan and also to Japan's large banks and corporations who are sitting on enormous stockpiles of cash and refusing to spend them. The message is simple and clear "If you park you money in Japan or leave it in the banks, then you will lose money". This should deter more foreign investors from bringing in more cash and maybe persuade those with money already inside Tokyo to find other countries to pack their money. When this happens, the pressure on the Yen will probably be eased and it will then start to lose its strength.
According to Richard Sharpe: "Many Japanese Corporations have stockpiles of cash that are larger than even their stock market valuations, but the problem is that they are not willing to spend it". By implementing a negative interest rate policy, the central bank is effectively also telling these corporations that they will start to lose percentages of their cash stockpiles, unless they start spending the money.
This negative interest rate and the central bank's quantitative easing program are meant to encourage more spending, hopefully setting the economy awash with enough cash to spike inflation rates. According to Mr Sharpe, the cash stockpiles of Japanese corporations may be as large as $3 trillion. These corporations are neither interested in paying more shareholder dividends nor increasing wages, two avenues that could help boost the reflation efforts of Shinzo Abe and Haruhiko Kuroda.
The Mangers Could be right
According to Mr. Sharpe of ACOM Tokyo, not everyone is as optimistic as the prime minister and the central bank manager concerning the long-term effects of Abenomics. Many managers believe that Abenomics will come to an end someday, but the underlying issues that plaque Japan will continue to exist. This issue is that of population and demographics.
The Japanese demographic is turning grey. The working population is shrinking and there are not enough young people to replace them anytime soon. This is a major concern and headache for Japanese firms because investing in a shrinking economy does not make much business sense. The money could be better spent elsewhere, but not in Japan where they are certain that when the "money spewing bazooka" goes quiet, the economy will slowly return to deflation. "Demographics is destiny", goes an age old adage, it may be proving itself true in this Japan's situation.
The Problem of Nationalism
The deeper problem with Japan and its economy is the issue of nationalism. Mr. Sharpe explains that Prime Minister Shinzo Abe is against immigration and his cabinet is also made up of right-wing nationalists. This makes it impossible for Japan to open itself up to immigrants who would fuel the economy, help change the demographics and spark economic growth. The corporations are also controlled by older people who have very strong aversions to change and inflation, but would prefer to maintain the current hierarchical and homogeneous Japanese society. It seems then that the biggest obstacle to Abenomics in Japan is simply the issue of Japanese nationalism.
Contact:
Haruki Kasumi
Acom Tokyo Securities Ltd
Tokyo, Japan
+81-327637492
mkt@acomalliance.com
