How Abe Is Mak­ing a Fail­ure of Suc­cess

Re­forms ▶ Ja­pan’s pow­er­ful prime min­is­ter still can’t get the econ­omy go­ing ▶ “Re­form re­quires whack­ing away at vested in­ter­ests” Scary Num­bers

Bloomberg Businessweek (North America) - - Global Economics -

Prime Min­is­ter Shinzo Abe has had a great run since as­sum­ing power in 2012. His Lib­eral Demo­cratic Party-led coali­tion govern­ment was re­elected in 2014 with a com­fort­able ma­jor­ity in the Diet. Polls sug­gest it would prob­a­bly win again if Abe calls lower house elec­tions in the near fu­ture, as some ex­pect. He could be in power through 2020, be­com­ing Ja­pan’s long­est-serv­ing prime min­is­ter. No politi­cian in Ja­pan poses a se­ri­ousus threat.

Sur­pris­ingly,y, the elec­toral cloutt hasn’t given him free rein to push his sig­na­ture­a­ture eco­nomic pro­gra­mam for­ward. Launched hed with great fan­fare e three years ago, Abe­nomics aimed to re­vive Ja­pan with a three-pronged strat­egy of ag­gres­sive mon­e­tary eas­ing, fis­cal spend­ing, and struc­tural re­forms. In­stead, the In­ter­na­tional Mon­e­tary Fund in April halved its 2016 growth fore­cast for Ja­pan to 0.5 per­cent, de­fla­tion re­mains a worry, real wages have fallen for four con­sec­u­tive years, and the Nikkei is down 11 per­cent this year as for­eign in­vestors head for the ex­its.

Abe’s power is con­stantly be­ing chal­lenged. He faces push­back on his eco­nomic re­vi­tal­iza­tion drive not just from the op­po­si­tion Demo­cratic Party, but also from some fel­low LDP law­mak­ers and his own ru­ral voter base. “Re­form re­quires whack­ing away at vested in­ter­ests, but when you’ve been in charge, like the LDP, for the bet­ter part of 60 years of a highly ho­mo­ge­neous so­ci­ety, most of those vested in­ter­ests will also be your bedrock con­stituen­cies,” says Jun Oku­mura, a vis­it­ing scholar at Meiji In­sti­tute for Global Af­fairs.

Abe wants to cut cor­po­rate taxes; lib­er­al­ize the agri­cul­ture, en­ergy, and health-care in­dus­tries; and make the la­bor mar­kets more flex­i­ble and open to women and for­eign work­ers. It’s been slow go­ing. LDP fis­cal con­ser­va­tives have fo­cused in­stead on Ja­pan’s debt (thehe world’sw high­est). They per­suaded Abe to go with a hike in the con­sump­tion­tion tax from 5 per­cent to 8 per­cent in April 2014.20 The move trig­gered a re­ces­sion­sion an­dan off­set the progress that the Bank oof Ja­pan’s mon­e­tary eas­ing had made in stok­ing the stock mar­ket and wweak­en­ing the yen.

With the yen ris­ing and growth slowinslow­ing, Abe’s clos­est ad­vis­ers know theyth need to do more. Kozo Ya­mamoya­mamoto, a mem­ber of the “re­flare­fla­tion­ist camp,” on April 13 cal­le­called for new fis­cal stim­u­lus, fresh BOJ eas­ing, and even a ttax on com­pa­nies with big cash hoards to prod them to in­vest. Even so, Abe is un­der pres­surepre to hike the sales tax to 10 peper­cent.

At the same time, the prime min­is­ter needs to speed up struc­tural re­forms, say the IMF and the U.S.Ja­pan Busi­ness Coun­cil. One as­pect of those re­forms is guid­ing the Trans-pa­cific Part­ner­ship trade pact through the Diet. Ja­pan im­ports about 60 per­cent of its food and has agreed to re­duce du­ties on many farm prod­ucts. Abe ar­gued in a Jan­uary Diet speech that the trade deal would gen­er­ate jobs, boost growth, and usher in a “new era in agri­cul­tural pol­icy.” Ja­pan’s largest farm lobby, Ja-zenchu, is de­mand­ing that the govern­ment com­pen­sate pro­duc­ers hurt by the deal and warned in Oc­to­ber of “grow­ing voices of un­ease and anger in farm­ing re­gions.” If the LDP’S ru­ral sup­port weak­ened, it would af­fect its abil­ity to win elec­tions.

Or­di­nary Ja­panese re­act neg­a­tively to the idea of struc­tural change, says Mireya Solís, a se­nior fel­low for East Asian stud­ies at the Brook­ings In­sti­tu­tion. “They have no stom­ach for it,” she says. With la­bor re­form, they think there’ll be more fir­ing than hir­ing, Solís adds.

De­spite the speed bumps, “there has been no change in the trend to­wards re­cov­ery,” Abe said in a news con­fer­ence in March. No mat­ter how long Abe is in of­fice, reen­er­giz­ing the econ­omy will re­main a chal­lenge be­cause his core sup­port­ers are re­sis­tant to change. � Enda Cur­ran and Isabel Reynolds, with Anna Kitanaka

GDP, year-over-year changege The bot­tom line Prime Min­is­ter Abe is the most pow­er­ful politi­cian in Ja­pan, but his re­form poli­cies face op­po­si­tion even from his own party.

con­tro­ver­sial, wheat lob­by­ists are call­ing for more fed­eral re­search fund­ing, as farm­ers and uni­ver­si­ties rec­og­nize that yields must in­crease. Nige­ria and In­done­sia, with their fast-grow­ing mar­kets, are be­com­ing big buy­ers of Amer­i­can wheat, and the re­li­a­bil­ity of U.S. agri­cul­ture is a sell­ing point. A Rus­sian drought in 2010 trig­gered an ex­port ban, lead­ing to bread ri­ots in Egypt and the Arab Spring in 2011.

Wheat will al­ways be grown in re­gions that are too dry or cold for soy­beans and corn, and the U.S. will re­main a ma­jor ex­porter. But that doesn’t mean the in­dus­try can con­tinue on the same path, Pen­ner says. “There’s a point at which we won’t be able to re­cover. I don’t think we’re at that point, but the com­pe­ti­tion is only go­ing to get bet­ter.” �Alan Bjerga

The bot­tom line The strong dol­lar, cli­mate change, ris­ing com­pe­ti­tion, and stag­nant yields have top­pled the U.S. from the top spot in wheat.

Art Peck, chief ex­ec­u­tive of­fi­cer of Gap, made a bold prom­ise last June at an in­vestor meet­ing in San Fran­cisco. Spring 2016, he said, would mark a fresh start for the com­pany and its flag­ship brand, a turn­ing point from sales de­clines and a two-year slump. He as­sured the au­di­ence that he and his top ex­ec­u­tives were fo­cused on de­liv­er­ing re­sults and new prod­ucts. “Spring is a no-ex­cuses mo­ment,” Peck said, “par­tic­u­larly in the women’s busi­ness.”

Ten months later, the trans­for­ma­tion has yet to ma­te­ri­al­ize. Sales have con­tin­ued to dis­ap­point. Op­ti­mism from bet­ter-than-ex­pected re­sults in Fe­bru­ary dis­ap­peared by the time March fig­ures were re­ported. Com­pa­ra­ble sales at Gap stores open at least a year and on­line have de­clined for the past eight quar­ters. With more in­ven­tory on hand than ex­pected in April, the com­pany will need to ag­gres­sively dis­count prices to sell the goods. An­a­lysts and in­vestors ques­tion whether Peck and his team have a plan and won­der just how much trou­ble the com­pany is in. “Spring was sup­posed to be a block­buster quar­ter for them,” says Simeon Siegel, an an­a­lyst with No­mura Se­cu­ri­ties, “and it didn’t ma­te­ri­al­ize.”

New prod­ucts are fi­nally on the hori­zon. Jeff Kir­wan, global pres­i­dent of the Gap brand, and Wendi Gold­man, ex­ec­u­tive vice pres­i­dent for prod­uct de­sign and de­vel­op­ment, say “pre­mium” and “qual­ity essen­tials”— namely T-shirts, jeans, and khakis— will bring back cus­tomers. Although new in­ven­tory is al­ways be­ing stocked, some of th­ese ba­sics will ar­rive in May, they say. Store win­dows high­light­ing the line will fea­ture white and color tees in dif­fer­ent fab­rics and cuts.

“Op­ti­mistic, cool, el­e­vated Amer­i­can style” is what Gap as­pires to, says Gold­man, one of the ex­ec­u­tives charged with re­viv­ing the once-iconic brand. But many shop­pers say Gap lost its cool rep­u­ta­tion years ago and now oc­cu­pies a mid­dle ground, with a bor­ing va­ri­ety of prod­ucts of lesser qual­ity than in com­peti­tors’ stores. “It’s just a lot of T-shirts and striped socks,” says Cathy An­der­son, who lives in Wash­ing­ton, D.C., and writes a fash­ion blog called Poor Lit­tle It Girl. “It’s re­ally messy—i’m not a rum­mager.”

Woo­ing cus­tomers will be tough, re­tail an­a­lysts say, be­cause many other big ap­parel re­tail­ers to­day also carry ba­sics, of­ten at lower prices. Gap’s sig­na­ture prod­ucts were “so sim­ple that ev­ery­one started do­ing it,” says Michael Ap­pel, pres­i­dent and founder of Ap­pel As­so­ci­ates, a re­tail con­sult­ing firm. “It’s very hard to keep the busi­ness go­ing on those ba­sic, core cat­e­gories when ev­ery­one else is knock­ing you off.”

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