Terrie's Take: Japan's Falling Exports, No Welfare for Foreigners, Bad Chicken, Hot Weather, and Working Women!
Terrie’s Take is a selection of Japan-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 July 28, 2014
- Falling Exports and What Comes Next
- No welfare for foreigners
- No Chinese chicken at McDonalds Japan
- Uh-oh, it's going to be hot after all
- 5-Year plan to cut government payroll by 10%
- Women can boost workforce by 1.05m people
Falling Exports and What Comes Next
We've been watching with interest the post consumption tax economic performance, to get some hints as to future government stimulus actions (important for knowing where to target sales: i.e., at the recipients of government largess), and the movement of the Japanese yen (important for those of us exporting). The Finance Ministry came out with some negative data this week, showing that the nation's exports fell 2% in June, and that the trade balance was in deficit, again, to the tune of -JPY822.2trn. Of particular concern was a 6.8% year-on-year fall in auto exports, the largest export category at 23.2%, and this on top of a disastrous 18% drop in May.
One suspects that the top guys at the finance ministry actually get some grim satisfaction out of issuing these terrible numbers, because they confirm what seems to be the prevailing view at the ministry, that Abenomics is too risky and is unlikely to succeed. Not that they can say what they think in public, but if they are thinking it, unfortunately they might be right. Without surpluses created by exports, or alternatively spending by consumers (or preferably both), you really have to wonder how the Abe government ever thinks it will dig itself out of the current financial hole. While they no doubt hope to inflate their debt away, effectively passing it on to the general public by way of a weaker yen, that won't work if the hole is getting deeper each year and there isn't a ladder out.
The current situation is nicely summed by Assistant Professor Kazumasa Oguro, previously an economist at the finance ministry, who points out that Japan's gross debt to GDP will rise from the 190% today to an unsustainable 500% by 2050 (his numbers), if the government continues to borrow at the current rate -- which is more than 50% of its budget (versus earnings from tax income). He sees little hope that the government can reduce borrowing because of simple demographic trends. By 2060 the nation's working population will comprise a ratio of just one worker per pensioner, versus the already sub-par but still manageable level of 3:1. Oguro is especially concerned that since pensions and health care benefits now account for 33% of the national budget, this level is going to increase by almost 1% annually.
Actually, we think the current situation is a bit surreal. On one hand the government and BoJ are saying the economy will improve from Q2 (the current quarter), as people start to recover from the shock of the consumption tax. They're saying, "Don't worry, all is well." Yet emerging statistics suggest otherwise and that in fact things appear to be getting worse. It's commonsense isn't it? If exporters have no reason to beef up production here in Japan, then exports are going to continue to stay flat or fall further. And if there is no increase in domestic corporate activity, then there will be no increase in wages either. So, where then will the improvement in the economy come from?
Analysts appear to agree that exports are down for the following main reasons:
1. Exporters are already well invested in their target markets. By the government's own stats, some industries such as automotive parts have been producing over 36% of their output overseas (2011) -- a number which probably exceeds 40% today. With the value of being local in each given market, and with looming manpower shortages, uncertain FX, and high domestic taxes in Japan, why would they bulk up again here at home?
2. Unwillingness by exporters to drop prices to grab more market share, and instead just keeping the higher profits. Since the Lehman Shock, Japanese international firms have learned the value of liquidity and they are not ready to give up their piles of cash for more market share just yet. Instead, they are holding on to what they can get, and stashing it away for a rainy day.
3. Then, lastly, perhaps the most important factor -- the soft global economy. The Asian Development Bank has just reduced its growth forecast for major industrialized economies from 1.9% to 1.5% for 2014, mostly due to slower US growth. SE Asia growth is also down because of Thai and Viet-Chinese political tensions.
This is a factor that the Abe government can do nothing about and which appears to be the biggest threat to Abenomics. While diluting your currency with massive Quantitative Easing (QE) may work for a nation like the USA, whose currency serves as the base for world trade and whose armed forces can be projected around the world, Japan has neither of these advantages. So every time there is an external shock or weakness, the careful plans of the nation's economists go out the window and international market forces (those "animal spirits" Abe is so fond of) take over.
Certainly there are plenty of sources of turmoil to be had in the world right now. It is not hard to see ISIS or Al-Qaeda uniting fighters all the way from Libya to Iraq, and embarking on a holy war against their neighbors and the West. Or separately an escalation in the Ukraine which forces Putin and Russia into an open encounter. Or a melt-down in China's shadow banking sector. Or another domestic earthquake, a global drought, an EU member country bank run, etc. It has to be frustrating for the Abe team to see the yen so easily get overtaken by global concerns and thus get stuck at JPY101-JPY102 - US$1 since January, regardless of how much financial engineering they are trying to do.
As a quick reminder, there are basically four main reasons why the Japanese yen is considered a "safe haven" currency and thus in continuing high demand. 1) The size of its economy and its ability to absorb large flows of money; 2) low interest rates; 3) strong net foreign assets, thus providing diversification and less vulnerability; and 4) an economy well removed from the source of turmoil.
Japan pretty much fills all these conditions (except turmoil from earthquakes, of course).
So as businesspeople, what should we anticipate will happen over the next few months?
Given the amount of armed conflict in the Middle East and Ukraine, as well as gathering pressure on the Chinese economy, these and other external factors will continue to weigh on investors and thus the yen is likely to stay where it is or even strengthen further. So, our guess is that BoJ will be forced into another wave of QE in September-October. The Abe government is also likely to implement some more direct financing programs in addition to the indirect ones it has been doing through the DBJ, INCJ, Post Office Bank, and GPIF. It's pretty obvious that if only 12%-14% of Japanese own shares, then pumping the stock market alone will have limited usefulness, and in Japan at least companies don't seem to follow the trickle-down theory.
Maybe Abe will be tempted to raid the cash pile of Japan's exporters. This pile is reputed to exceed JPY200trn, and is growing by the month. Abe could institute some kind of special tax rule that requires cash to be repatriated to Japan and invested into nationally approved programs, OR, the company's head office will be taxed at a higher rate. While this might be too punitive and drastic for a business-friendly political party, we're sure that the government can come up with variations that effectively offer the same kind of carrot-and-stick incentive to get the money to come back home. "War (on inflation) Bonds" perhaps?
But if Abe really wants to touch off a wave of domestic optimism and consumer spending, he needs to reach down past the big boys, to the slice of companies that actually hires the bulk of the nation's workers -- the SMEs. These companies have been virtually untouched by the wave of liquidity sweeping the markets, to their detriment, and this is a major reason why salaries are not going up. Our guess is that the Cabinet Office will come up with some way of bypassing the risk-averse banks and get the money directly into the hands of the small players.
How? Maybe some kind of subsidy program keyed to employment and capital investment, delivered through METI or the People's Finance Corporation. Alternatively, and as we have mentioned in a previous Take, they could also set up a venture capital operation that matches government funds to private funds. Cool Japan could be a good platform to try something like this out on.
Whatever the actions of the government will be, there is one thing we can be sure of. By the extent and boldness of the LDP's actions, we will know just how bad the nation's problems are. Small ideas will mean that the government feels it still has time and funds up its sleeve, while bold initiatives will mean "look out below!" If the later, for businesses like our's it will mean quickly jumping at opportunities as they become available, because if things really are that bad, the funds won't last that long.
No welfare for foreigners
Since the 1950's the subject of whether long-term foreign residents in Japan could get welfare support from Japanese local governments was a non-issue. Although the laws clearly say that only Japanese are supposed to get such support, Japan as a matter of course gave similar consideration to long-term foreigners on humanitarian grounds. Well, with a case in Oita, the Japanese Supreme Court has now decided that foreigners are NOT guaranteed financial support when they get into financial difficulty, even as pensioners or invalids. In a decision that simply reminds foreigners that life is unfair, the court case now allows local governments the right to decide whether to offer or withhold such support. ***Ed: So, tell us again WHY we are paying taxes, when we can't receive the simple benefits that other first world nations offer automatically to all legal tax paying residents?** (Source: TT commentary from scmp.com, Jul 21, 2014) - http://bit.ly/1AlU6v6
No Chinese chicken at McDonalds Japan
A few days too late, McDonald's in Japan has said that it will stop selling chicken products made in China, after a scandal in China emerged about expired and contaminated meat being sold to it by local suppliers. The cancelation of Chinese products will mean that there will probably be a shortage of chicken on Japanese menus until the company can get product delivered from Thailand. ***Ed: In our household, our policy towards buying Chinese products is very simple. Unless we know that the food was produced and processed in-house by a Japanese-owned firm, if it's from China we don't buy it. Millions of other families seem to be thinking the same thing and this incident just reinforces our position.** (Source: TT commentary from usatoday.com, Jul 25, 2014) - http://usat.ly/1tciq0H
Uh-oh, it's going to be hot after all
Where is that El Nino effect on the weather when you need it? While the Met Agency originally predicted a cooler and wetter summer due to the El Nino weather pattern kicking in at the middle of August. However, instead it is now issuing heat warnings for most parts of Japan. Temperatures are expected to hit 35-38 degrees towards the end of the week. Three people died of heatstroke last weekend and 3,179 people received treatment for the condition. ***Ed: Commonsense is the order of the day -- plenty of water and avoiding physical exertion at midday are a good start.** (Source: TT commentary from wsj.com, Jul 25, 2014) - http://on.wsj.com/1tPwTNF
5-Year plan to cut government payroll by 10%
In an ongoing program to cut down the size of central and regional government in Japan, already less than half the size on a per capita basis than the government workforce in the USA, the Abe government says it will either cut or transfer about 10% of its payroll between 2015 and 2020. The program will affect 29,672 of the nation's 296,544 central government civil servants. The farm ministry will bear the biggest cuts, with about 14.2% of its workforce affected. ***Ed: As much as we don't like bureaucracies, experts are saying that these cuts are probably going to have a negative effect on the economy, and that some of the national construction projects should be targetted for cuts instead.** (Source: TT commentary from japantimes.co.jp, Jul 26, 2014) - http://bit.ly/1l4OgV9
Women can boost workforce by 1.05m people
A government white paper out this week states that if childrearing support were provided to Japan's mothers, the country could free up to 1.05m more people for the workforce. Japan's working population is expected to fall from 65.77m last year to just 56.83m people by 2030. The government is particularly targeting women in their 30's who typically retire to have families and are lost from the skilled workforce for good. If they do return it is in their 40's and in jobs of less responsibility and pay. ***Ed: Maybe we're math-challenged, but while the objective is good -- giving women the choice to reenter the economy if they wish -- what difference will 1m new workers make when the nation will be down by 9m people? Also, from what we understand, most of the labor shortage at present is at the two extremes of the workforce: technology and manual labor -- neither of which are probably very relevant to returning mothers.** (Source: TT commentary from the-japan-news.com, Jul 26, 2014) - http://bit.ly/1xjPoK4
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That was Terrie's Take.
Let us know down below!