Terrie's Take: Rakuten's Online Drug Dealing, JR, Food Exports, Yen Vs. Dollar, Teacher Salaries, and Hanging?
Terrie’s Take is a selection of Japanese-centric news collected and collated at J@pan Inc by long-time resident and media business professional Terrie Lloyd. AkihabaraNews is pleased to present Terrie’s learned perspective; we all could use another take on the news - here’s Terrie’s:
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Terrie’s Take on November 18, 2013
- Vested Interests and Abenomics
- JR East looks to expand internationally
- Interesting food export trends
- Yen to head lower against U.S. dollar
- Teacher salaries to be cut
- GHQ wanted different hanging method
Vested Interests and Abenomics
On November 7th the nation was treated to the spectacle of Rakuten CEO, Hiroshi Mikitani, spitting the dummy over a Health Ministry decision to backtrack on deregulation of Internet sales of OTC drugs, after being forced to allow such sales per a court decision at the start of the year. Although the ministry said that it was only re-regulating less than 1% of the drugs in question, Mikitani's point is that they are setting the scene for a complete ban on future online sales of prescription drugs, which is a huge market, worth about JPY9trn annually.
With this spat, Mikitani is voicing what many other Japanese businesspeople think, that Prime Minister Shinzo Abe's Abenomics could be doomed by his government's inability to deal with vested interests -- in this case, the 100,000 members of the Pharmacist Association.
As we have been noting in our newsletter over the last few months, while Abe has successfully reinvigorated the stock market by having the BOJ buy mountains of government debt, thus devaluing the yen and earning exporters windfall profits, this play only goes so far. Abe's and the country's problem is that long-term promises to the voting public, i.e., mostly old people who are expecting lifetime pensions and almost-free health care, are hard to take back. So if the government can't contain its ongoing rise in social welfare costs, its only other option is to raise taxes and induce inflation to stimulate consumption and thus economic growth.
So Abe has started out right, by focusing on corporate profits and the stock market, but to keep the momentum going -- his so-called "third arrow" -- he now has to deal with reform of entrenched sectors that will supply that growth. The problem is that these sectors are where the government's (the LDP's) main supporters lie, and thus are politically difficult to deal with. For example, the Japan Medical Association (JMA) through its Nippon Ishi Renmei lobby group, is one of the largest donors of funds to the LDP, and most certainly does not want sectoral changes that will upset its control of the highly lucrative medical market.
Neither do those entrenched in pharmaceuticals distribution, education, pre-schooling, aged care giving, labor dispatching, agriculture, rail transport, roading management, telecommunications, postal service, electricity, water, gas, and the thousands of other public and semi-public bodies that regulate the most financially rewarding parts of the economy. Indeed, as Mr. Gary Dugan, the Chief Investment Officer for Asia-Middle East for US$53.4bn U.K. investment company Coutts said in the recent Bloomberg interview, "The worry is that Japan is controlled by pressure groups..." Yup, even some of the biggest investors on the planet know to call a spade a spade.
Anyway, Mr. Dugan pointed out that his rather sizable fund was "maximum overweight" on Japanese equities until October, when it started selling some positions because it was worried about Abenomics stalling. The fund has decided that two major signals will tell them if Abe is serious or not, and worth backing. These will be whether he restarts the nation's nuclear reactors and gets electricity prices back under control, and whether he will cut corporate taxes.
Dugan points out quite rightly that although Japanese companies are sitting on about JPY220trn of cash (BOJ estimate for June), they are not going to pass this on to employees as regular salary increases until they can see that their cash flows are protected. Dugan says energy costs and corporate taxes are the key to this happening. Interesting to see the smart money spell it out for the rest of us.
So will Abenomics be successful or not?
Our take is that it is already too late for Mr. Abe to influence a further increase in the national consumption of goods and services to take us past April 2014. Companies are not going to part with that JPY220trn of cash if they think that the sky is going to fall in next year. And given that real wages for employees actually decreased this year, families other than those 15% lucky enough to hold stocks are not going to be buying a lot of luxuries beyond April either. So we have a log-jam that is unlikely to be moved in the short-term by anything the government dreams up in the next 5 months.
Instead, we think that any major change in Japan's economic future will depend mostly on external factors. For example, will there be another war in the Middle East? If so, and if Abe gets the nuclear power stations back on line beforehand, then investors will seek safe haven in Japanese yen -- actually a very negative event for Japan, since the yen will move back to JPY80-JPY90 to the dollar. This will cause government debt servicing costs to sky rocket and most likely cause panic among investors. Read the theories of hedge fund investor Kyle Bass in the USA to understand the downside of a massive loss of confidence in government debt.
Another potential spanner in the works will be if the U.S. or a number of Japan's exporter neighbors decide that enough is enough and start competing with Japan to weaken their own currencies (or in the case of the U.S. they simply strong-arm the Abe government to keep the yen higher). Indeed, we've been amazed how submissive Korea, Taiwan, and China have been in allowing Japan to devalue its currency so dramatically. At some point, most likely when the yen falls below the 100 mark, we expect these countries to start taking much more aggressive countermeasures, and given the state of relations with China, this could get very ugly.
So what is Abe to do? The reality is that there probably isn't anything he can do beyond what is being done now. His problem is that his countrymen and women like their status quo and will only change when forced to -- usually by external or extreme circumstances. A failure by the government to fund its debts would qualify as one such tipping point. Another would be a trade war or cold war with China or with several nations all at once. At that stage, the government of the day, probably years after Abe has retired, will announce national austerity measures, including limiting social welfare to those who pass a means test, massive cuts in infrastructure spending, and hiking taxes.
The U.K. has been down this road before, and we think it's only a matter of time before Japan will as well -- but not willingly and not before it has to. How long? Well if like the U.K., the consumption tax does go all the way to 20% in the next 5 years, then in absence of external calamities, we expect the government to buy itself another 10-15 years of dithering at least..
JR East looks to expand internationally
One wonders why a semi-government monopoly would feel the need to go abroad, when things are quite comfy at home. Still, whatever the reason, JR East has announced that it will open an office in London early next year, making this their fifth overseas. Apparently JR East is hoping to land a role in the UK's new HS2 high-speed railway to operate between London the northwest of the country. Estimates are that the global market for railway infrastructure will hit JPY22trn by 2020, up 20% from last year. The foreign push seems to be working, in that JR East recently won a major contract for an urban rail system in Bangkok, bidding alongside Toshiba and Marubeni for the project against incumbent Siemens of Germany.
(Source: TT commentary from e.nikkei.com, Nov 14, 2013)
Interesting food export trends
While Japan Agriculture (JA) may wring its hands publicly about TPP opening the flood gates for food imports, the fact is that many farmers are already looking to the future and have concluded that there are export opportunities in Asia. This Nikkei article focuses on several companies that are exporting Japanese produce (land and sea) to SE Asia. According to the article, Japan exported JPY449.7bn of agricultural and fisheries products in 2012, and the government has set a goal to increase this to JPY1trn by 2020. Further, it is estimated that there are now about 56.3m Asians who earn more than the average Japanese, comprising a promising consumer base for Japan's high-grade exports. ***Ed: You can contrast that JPY449.7bn number with the UK's agriculture and fisheries exports, which were about JPY2.2trn in 2009. Japan has a long way to go to catch up.**
(Source: TT commentary from e.nikkei.com, Nov 16, 2013)
Yen to head lower against U.S. dollar
The Japanese yen closed at 100.01 to the U.S. dollar on Friday, its lowest level for two months, and this coupled with strong yen-weakening comments from Finance Minister Aso Taro are indications of more weakening to come, according to FX experts. In lieu of any international crises, the consensus is that the conditions are right for PM Abe's team to push the yen lower still, in an effort to give the economy enough momentum to get past the rise in consumption tax slated for next April. ***Ed: The logic is right, in that further weakening of the yen for the next 5 months will contribute to record exporter profits and make it difficult for companies to resist calls to share those profits as wage increases with employees. Problem is that they will probably pay one-off bonuses rather than increase base salaries -- further frustrating Abe's efforts to turn the economy around.**
(Source: TT commentary from wsj.com, Nov 14, 2013)
Teacher salaries to be cut
Good editorial in the Japan Times (for some reason their paywall let us in today) about the Finance Ministry's proposal to cut the salaries of teachers at elementary and junior high schools. Apparently the mandarins at the ministry are trying to find ways to cut costs among government employees, and realized that teachers of little kids get about JPY100,000 a year more than municipal officers (whoever they are), and so they are going to reduce the nation's roughly 600,000 teachers by JPY100,000 a year each -- ironic, given that the government is trying to strong-arm private companies into increasing salaries. ***Ed: As the editorial points out, one wonders what the long-term costs to Japan's education standards will be, though.**
(Source: TT commentary from japantimes.co.jp, Nov 16, 2013)
GHQ wanted different hanging method
Documents newly uncovered show that the U.S. occupation officials in 1949 tried to get Japanese prisons to change their hanging method, after it was found that they were using a 19th century system that is painful and slow. Although the request was made, Japan still uses the same archaic method today. ***Ed: Apparently the hangman's knot is supposed to be placed at the left front of the neck, so as to jerk the head back, break vertebrae in the neck, and sever the spinal cord. This, according to a lengthy article on Wikipedia, causes the hanged person to become unconscious almost immediately, instead of taking 10-20 minutes suffocating to death.**
(Source: TT commentary from asahi.com, Nov 17, 2013)
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Images: Terrie’s Take; AkihabaraNews.com