Terrie's Take: Abenomics Not Looking Awesome, Sony No VAIO, Mt. Gox Sinking, and Trade & Finance
Terrie’s Take is a selection of Japanese-centric news collected and collated 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 February 10, 2014
- Things Not Looking Good for Abenomics
- Sony getting out of the PC business
- Online gaming business primer
- Mt. Gox going under?
- Exports still weak
- New tax-free investment accounts popular
Things Not Looking Good for Abenomics
A new "industry" has been born over the six months, one that will last until April 1st this year. What is it? None other than the typings of a legion of economists and businesspeople (including your's truly) speculating about what will happen to the Japanese economy after the consumption tax increases from 5% to 8%, and therefore what will happen to Abenomics. This is not just idle speculation. The impact of the consumption tax on consumer sentiment and thus spending by corporations across the board will affect us all. Our forecast is that Abe's consumption tax increase is too early and it will cause a recession in the following 3 quarters. If we're right, then it means you have the next 6-8 weeks to lock in any business that you are hoping to win in 2014, because after that we think that many companies will temporarily conserve their spending at least until September, watching and waiting to see what will happen. And by virtue of the fact that everyone will be doing the same thing, the recession will be real.
Why do we think things will go retrograde? Four reasons:
1. No third arrow
For all the hype, PM Abe is only human and only capable of executing just so much change at any one time. Given that he is trying to engineer not just financial but also political (of the nationalist variety) and social change, and given that each vested interest group he needs to win over requires an army of LDP handlers to negotiate with them, it is no wonder that there has been no significant "third arrow" so far. You'll recall that the third arrow is structural reform. Now, it could well be that Abe has some big surprises in store, like legislation allowing private medical care as an alternative to compulsory public care, but we wouldn't bet on it. The nation's vested interests are dug in deep and Abe doesn't want to get into a bruising fight he may not win. While the farming sector is weak enough to make a good target on the behalf of TPP negotiations, Education, Law, and Medicine are still far away from undergoing any fundamental changes.
2. Few pay rises
Abe needs "good inflation" to make his policies work and to stay in power. Good inflation means floating all ships at once. However, as we have said in several recent takes, the only real beneficiaries of the current market froth are the few Japanese holding shares in the stock market, or who are speculatively trading currency. In the meantime, the average Joe may be doing a little last minute spending before April -- which is why the financial figures look promising right now, but it's temporary. As we reported last week, the nation's stock market investors think that deflation-proof businesses, like beef bowl chains, are going to be doing best in the next 6 months, while luxury businesses like department stores will do it tough. As a result, Isetan Mitsukoshi Holdings shares are down 15% in the last month.
The problem is that it doesn't look like there are going to be any major pay increases happening any time soon to get consumers back out on the streets. For example, the union at Nippon Steel has asked the steel maker for an increase of JPY3,500 per worker, or about 1% increase over last year. The last time Nippon Steel increased salaries was 14 years ago in 2000...! The picture is much the same elsewhere, with Rengo, a lot larger than the 27,400 workers at Nippon Steel's union, only asking for 1% higher base, and possibly 2% on bonuses. Given that a report came out recently from the Ministry of Labor saying that adjusted for inflation, the nation's basic wages are now at a 16-year LOW, it's highly unlikely that workers are going to feeling richer after April 1st. This can only mean that consumer spending will fall and public sentiment is going to get worse.
3. Yen strengthens temporarily
The Japanese consumer is a fairly predictable beast, and last time the consumption tax was increased, from 3% to 5% in May 1997, the nation fell into deflation (where it has been stuck ever since) as consumers stopped spending and consumer products/services companies starting frantically cutting prices to stay in business. The impact of the last tax increase, which was smaller than this one, but which was also accentuated by the Asian banking crisis at the time, was about 18 months. We think that the current planned increase will have a similar chilling effect for at least another 18 months.
Added to the general pessimism of consumers will be the news of temporary setbacks to exporters, the only really buoyant section of the economy. In 1997, the yen strengthened for about 6 months, before then weakening dramatically. If the same was to happen again, then the yen will probably rise to about JPY96 to the dollar in the next 6 months, before eventually weakening to the JPY110-JPY115 level by the end of the year. Japanese companies hate volatility and have long memories. So they are likely to hang on to their JPY2.2trn cash pile rather than spend it on more wages, at least until they can be sure that a weak yen is here to stay. They are also very aware of the fact that without a growing domestic market they are now highly exposed to international factors such as wars, economic setbacks, natural disasters, etc.
4. U.S. politics
Usually the U.S. is the single biggest external factor influencing Japan's economy, as we have seen both with the post-Lehman decline in US consumer spending and its impact on Japanese exports (tools and components to China -> goods to America), and more recently the tailing off of the Fed's quantitative easing program and its effect in strengthening the yen (as easy funds move from risky developing country investments back to safe havens for a while). The tailing actions are likely to remain tame under the new chairperson, Janet Yellen, but the perceived ongoing weakness of the US economy does scare investors and exaggerates movements in the markets.
Then, let's not forget that the next US presidential election happens in November 2016, and campaigning is likely to start in late 2015. Past experience tells us that not much new legislation gets done in that period, and indeed, conservatism rules. This means that if Obama can't get TPP past his own Democrat party by mid-year, TPP probably won't happen any time soon, if at all. If not, then Abe loses his means of applying external pressure on local vested interests, and that means the end of any meaningful reform in the agricultural sector for a while.
Are there any bright spots on the horizon after April 1st?
Well, the likely severity of the situation will rev up the government's tourism push. It's easy to service 10m tourists paying 10% consumption tax and asking for little or no services in return. Since the JNTO just set up an office in Jakarta, we imagine that visa loosening for Indonesia is not far away and this could unleash as many as 200K more tourists per month from that country.
Also, if you're into shares, you could be looking at those companies that supply the public works projects the LDP is so good at executing. For example, how about the 60m wide x 9-13m high tsunami wall that MLIT is proposing for Tohoku? We don't know how much concrete that will consume, but given there are currently 300km of levees up that way and all of them need rebuilding or new construction, you're probably talking a very significant amount...! The largest player, Taiheyo Cement is already planning to ship about 10m cu. m. of concrete to Tohoku in 2014, and our guess is that this will probably double once the levee rebuilding hits full speed. Of course the coastline is going to be as ugly as can be, so forget about any of those Indonesian tourists heading to the coastal areas, where the economy most needs them. ;-)
Sony getting out of the PC business
It's a sign of the times when Sony decides to dump its PC business, spin off the TV division (with eventual likelihood of selling it off), and cut 5,000 jobs globally. The company has announced a restructuring charge of JPY90bn for the next two years (JPY110bn loss for this fiscal year) to get past the changes. Of all of its businesses, smartphones and PlayStation console games are still showing promise, although both are difficult segments to stay competitive in. ***Ed: Letting go of the Vaio business must have been hard, but it's the right decision. Commoditization of mobile computers (cell phones, tablets, etc.) means that only the cheapest mass producers and value-added software firms are going to stay in business long term.** (Source: TT commentary from eetimes.com, Feb 6, 2014)
Online gaming business primer
Venturebeat.com features a really excellent primer by Masanari Arai of Kii Corporation about the online games market in Japan and how the Japanese do things differently. Arai points out that Japan is now the best-monetized market for smart phone games, surpassing the USA for spending. But whereas U.S. users buy downloads, Japanese instead prefer in-game purchases. Furthermore, Japanese players fall into four categories and that one of these, the "Socializer" is more likely to buy player-to-player gifts to help out their friends who are also playing online, versus western players who tend to be more competitive. (Source: TT commentary from venturebeat.com, Feb 7, 2014)
Mt. Gox going under?
If you're like us, you've vaguely heard of Bitcoin, a cryptocurrency that keeps users basically anonymous and which is highly popular in countries where currency is controlled and in industries that like to skirt the law. You may not know, however, that until mid-2013, one of the largest bitcoin exchanges, businesses that exchange bitcoins for real currencies, was Mt. Gox here in Japan. The company at one point was believed to handle almost half the trades (1m or so) done on the bitcoin network. Now, however, doubts over whether the exchange is still solvent and can still honor bitcoin redemption/exchange requests means that its trading volume has fallen to just 30,000 trades. The largest exchange for the currency is now BitStamp in Slovenia. ***Ed: The shadowy Bitcoin network is alive with complaints about Mt. Gox being highly unresponsive and slow to honor trades, so most users no longer trust it. Of the two founders, both of whom are foreign, one is still in Japan. You can still find an entry for Mark Karpeles on Linked In.** (Source: TT commentary from businessinsider.com, Feb 7, 2014)
Exports still weak
Although the overall economic indicators such as unemployment are showing the best numbers for the last seven years, there is concern that these are temporary and are directly related to the run up to the consumption tax increase. In contrast, export data just out for December 2013 and thus completing that year, show that trade for the whole year was locked into a tight band of 5% or so of the JPY6trn recorded in December. This means that instead of exports noticeably climbing, which Abenomics needs and should be causing, instead the export sector is flat. ***Ed: A Credit-Suisse report in January clearly says that exports are unlikely to increase for two major reasons: weak demand for machinery and tools in Asia and the fact that the hollowing out of Japan-based manufacturing base means that there are less companies able to take advantage of the low yen.** (Source: TT commentary from tradingeconomics.com and credit-suisse.com, Feb 7, 2014)
New tax-free investment accounts popular
No one likes paying tax, and as a result, the government's plan to channel more money into the stock market by allowing people tax-free (NISA) investment accounts is working as intended. Apparently the new accounts attracted JPY300bn from 2.75m people during the first month (January). Of these, about 17% have started trading stocks. The NISA program allows investors to keep the first JPY1m of profits tax-free. ***Ed: Unfortunately and generally speaking, most of the NISA accounts are not new cash coming into the market, but rather existing investors moving to the tax-free program. Still, it's a start and as neighbors start seeing Mrs Watanabe pocketing her profits, maybe stock trading will catch on one suburb at a time.** (Source: TT commentary from asia.nikkei.com, Feb 7, 2014)
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That was Terrie's Take. What's yours?
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Images: Terrie's Take; AkihabaraNews