Now is the time for Japan structural reforms

Japan's Prime Minister and leader of the ruling Liberal Democratic Party Shinzo Abe attends a news conference following a victory in the upper house elections by his ruling coalition, at the party's headquarters in Tokyo. © Reuters

TOKYO -- A sense of relief prevailed over the Japan Association of Corporate Executives seminar in the mountain resort of Karuizawa, central Japan, on July 14 and 15. Most delegates seemed more preoccupied with checking foreign exchange rates and stock prices on their smartphones than the seminar itself.

The solace resulting from the Tokyo stock market's rebound to its pre-Brexit level, was tempered somewhat as news of the Nice terror attack filtered through.

Once the horror had sunk in, many began voicing concerns at the apparent global trend toward inward-looking politics.

"Politics is the biggest risk for the world economy," Yoshimitsu Kobayashi, chairman of the association, said. "While the economy is globalizing, politics is moving toward isolationism."

"If isolationism spreads across the world, Japan as an island nation will suffer more losses than other countries," said Teruo Asada, chairman of trading house Marubeni.

With increased production and investment overseas, Japanese companies can no longer feel immune to rising political risks in other parts of the world.

Toyoda Gosei, a resin and rubber parts maker belonging to the Toyota Motorgroup, has maintained a subsidiary in the U.K. for around 20 years. Company president Naoki Miyazaki said, "We are afraid that Britain's decision to withdraw from the European Union will adversely affect us in tariffs and other matters."

The yen, which soared in value to a level of 99 against the dollar following the decision, has since fallen, temporarily hitting the 107 level. But, according to the Bank of Japan, the country's large manufacturers have worked out business plans for the current fiscal year based on assumed foreign exchange rates averaging 111.41. The competitive edge of Japanese products, ensured by a weak yen, has been considerably eroded by its current value.

Yoshimasa Maruyama, chief market economist at Tokyo-based SMBC Nikko Securities, has been flooded with inquiries from overseas investors wishing to know if the BOJ will adopt a "helicopter money" policy to provide fiscal funds by purchasing government bonds.

Although the policy itself is highly unrealistic, speculation of it becoming a reality continues, in part due to Japanese Prime Minister Shinzo Abe meeting with former U.S. Federal Reserve Chairman Ben Bernanke, the man who proposed the idea. The speculation has led to selling of the yen and rises in Japanese stock prices.

"Overseas investors, who tend to be affected by speculation unrelated to the real economy, are exerting influence on the formation of stock prices, while companies are preoccupied with raising their stock prices in the short run," lamented a senior official at Japan's Cabinet Office.

In fact, Japanese companies are prioritizing share buybacks and dividend increases over investment needed for their future growth.

With the ruling bloc winning the upper-house election earlier in July, Japan finds itself in a position of relative political stability in comparison with many other countries. But hard-nosed structural reforms are making little headway, while investors focus on additional monetary easing and near-term economic stimulus measures.

The end to deflation promised by the prime minister's Abenomics policy, has yet to materialize. Personal consumption remains sluggish as consumers continue to tighten their belts.

Akio Nitori, chairman of Japanese discount home-furnishing chain Nitori Holdings, said the company would not raise prices "at any cost."

Japan has yet to achieve the elusive virtuous cycle in which companies improve earnings on sustained price rises while pay hikes encourage increased spending.

The government will work out a large package of economic stimulus measures this month. But it will primarily consist of public works projects and other short-term measures reliant on fiscal spending.

What the country needs most is the political resolve to create a new growth path based on radically new and different ideas.

The real and potential rates of Japan's economic growth between fiscal 1995 and 2015 averaged 0.8%, suggesting that the world's third largest economy will readily contract following any shock triggered overseas.

Despite being a time-consuming, laborious process, structural reforms will raise the level of growth. In a period of such political stability, now is the time for Japan to carry them through.

loading...