Ja­pan ex­ports its way to ir­rel­e­vance

The Pak Banker - - OPINION - Wil­liam Pe­sek

There's a dif­fer­ence be­tween bad eco­nomic news and the dev­as­tat­ing va­ri­ety that Ja­pan re­ceived Mon­day. Prime Min­is­ter Shinzo Abe might have been able to weather the sec­ond-quar­ter data show­ing a drop in Ja­panese con­sump­tion and a 1.6 per­cent de­cline in an­nu­al­ized growth. But it's not clear his gov­ern­ment can re­cover from the latest news about sput­ter­ing ex­ports, which fell 4.4 per­cent from the pre­vi­ous quar­ter.

An ex­port boom, af­ter all, was the main thing Abe­nomics, the prime min­is­ter's much­her­alded re­vival pro­gram, had go­ing for it. The yen's 35 per­cent drop since late 2012 made Ja­panese goods cheaper, com­pa­nies more prof­itable and Nikkei stocks more at­trac­tive. But China is spoil­ing the broader strat­egy. The econ­omy of Ja­pan's big­gest cus­tomer is slow­ing pre­cip­i­tously, which has im­per­iled earn­ings out­looks for Toy­ota, Sony, and trad­ing houses like Mit­sui. But Abe needs to rec­og­nize, as China al­ready has, that this is only the latest sign of a broader re­al­ity: Asia's old ex­port model of eco­nomic growth no longer works.

China's de­val­u­a­tion last week raised fears of a re­turn of the cur­rency wars that dev­as­tated Asia in the late 1990s. That's a reach, con­sid­er­ing that ex­ports are play­ing less and less of a role in China. McKin­sey, for ex­am­ple, found that as far back as 2010, net ex­ports were con­tribut­ing only be­tween 10 per­cent and 20 per­cent of Chi­nese gross do­mes­tic prod­uct. The ser­vices sec­tor is grow­ing in size and in­flu­ence to re­bal­ance the econ­omy -- not fast enough, per­haps, but change is nev­er­the­less afoot.

If any ma­jor coun­try has been re­ly­ing too much on ex­ports it's Ja­pan. As yet another re­ces­sion beck­ons, the Bank of Ja­pan will likely re­spond with yet more eas­ing to ex­tend the yen's declines and save gi­ant ex­porters. No mat­ter how cheap the yen gets, though, China will still be slow­ing. All the stim­u­lus BOJ Gover­nor Haruhiko Kuroda can muster won't change the wors­en­ing tra­jec­tory of the re­gion's most-pop­u­lous na­tion. That's why Abe needs to take a page from Bei­jing and fo­cus more on cre­at­ing new in­dus­tries at home.

Tokyo sel­dom ac­knowl­edges it can learn any­thing from Bei­jing. Ja­pan wrote the book on ex­port­ing your way to pros­per­ity, one fol­lowed to great ef­fect from South Korea to Viet­nam, and even­tu­ally even China. But re­cent years have seen the stu­dent (China) sur­pass the teacher in mov­ing past that sim­plis­tic growth strat­egy.

Abe­nomics, mean­while, has proven to be a time ma­chine en­deav­or­ing to re­turn Ja­pan to the ex­port boom times of 1985. But even with ad­di­tional BOJ stim­u­lus, says Diana Choyl­eva of Lom­bard Street Re­search, ex­ports don't of­fer Ja­pan a path to sus­tain­able growth. Europe is still limp­ing, the U.S. con­sumer isn't the re­li­able growth en­gine it was a decade ago, and China's rel­a­tively mod­est de­val­u­a­tion (about 3.5 per­cent in to­tal) still means the yen's value will rise on a trade-weighted ba­sis.

Ja­pan's only avail­able so­lu­tion is to en­cour­age more job growth from the ground up. But the coun­try's weak-yen pol­icy has proven to be more ef­fec­tive at en­sur­ing job pro­tec­tion from the top down. The gov­ern­ment had hoped that a de­val­ued yen would boost cor­po­rate prof­its, giv­ing ex­ec­u­tives the con­fi­dence to raise wages and giv­ing house­holds an in­cen­tive to spend more. Ex­ec­u­tives, how­ever, have been tak­ing a trust-but-ver­ify stance. Be­fore fat­ten­ing pay­checks, they want Abe to im­ple­ment struc­tural re­forms to make the econ­omy more com­pet­i­tive and end de­fla­tion. In a sense, Abe­nomics is en­gaged in a high-stakes star­ing con­test with cor­po­rate Ja­pan.

If Abe re­al­ized this, he would act fo­cus on sup­port­ing small and mid­size com­pa­nies and en­cour­ag­ing startup ac­tiv­ity. A new sur­vey by Dentsu Com­mu­ni­ca­tion In­sti­tute shows about 30 per­cent of Ja­panese aged 18 to 29 have no in­ter­est in be­ing salary­men and salary­women like their par­ents.

Rather than sup­port the Ja­pan Inc. giants that pre­fer new gen­er­a­tions of life­long work­ers, Abe could use tax in­cen­tives and gov­ern­ment-funded ven­ture cap­i­tal funds to en­cour­age young peo­ple to form their own com­pa­nies and in­vent prod­ucts that have a chance of spear­head­ing new in­dus­tries. Toss­ing cor­po­rate wel­fare at Sony and Sharp for the past sev­eral years hasn't spurred them to come up with a vi­able an­swer to Ap­ple's iPhone or Sam­sung's Gal­axy line of smart­phones. In­stead, it's been Chi­nese up­starts Xiaomi and Huawei that have be­come global play­ers in that sec­tor. That's not to sug­gest China sets the best eco­nomic ex­am­ple in all re­spects -far from it. Bei­jing has re­cently put the coun­try's eco­nomic cred­i­bil­ity at risk by ma­nip­u­lat­ing the stock mar­ket, while Chi­nese com­pa­nies have con­sis­tently avoided all man­ner of ba­sic trans­parency.

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