TOKYO – The Fumio Kishida stock market bounce already has a “dead cat” quality to it.
This is finance industry vernacular for a temporary jump in asset prices that’s followed by a resumption of bearish sentiment. The odds are the Nikkei Stock Average is looking at a similar trajectory once it dawns on investors how little fresh thinking Prime Minister Kishida’s government is bringing to power.
Kishida was championed by Liberal Democratic Party (LDP) powerbrokers because he’s the “safe” choice. Markets wanted Taro Kono, the former minister and Covid-19 czar who put a faltering vaccination program on track.
Japan went from trailing Myanmar earlier this year to approaching a US- and Europe-beating 75% vaccination rate.
In the weeks after Kishida’s predecessor Yoshihide Suga resigned on September 3, the Nikkei shot to 31-year highs on hopes a more activist leader – like Kono – might accelerate structural reform.
Party elders, though, went for a more establishment candidate. In other words, a predictable cog in the proverbial wheel of a political machine that’s controlled Japan with only two brief interruptions since 1955.
Analyst Stefan Angrick at Moody’s Analytics says “Kishida’s stable majority ensures ruling coalition control over parliamentary committees and chairmanships, providing him with the means to pursue his agenda to address social and income inequalities ahead of the upper house election in mid-2022.”
The trouble – and what Nikkei bulls might be missing – is that Kishida’s talk of a “new capitalism” is both vague and all too familiar. Rhetorically, Kishida seeks to steer more of the spoils of gross domestic product (GDP) to the middle class.
But then the LDP has been pursuing a rather careful version of capitalism for decades now. All too careful, many investors have long argued.
After the 1980s “bubble economy” imploded, Tokyo pulled out all the stops to shield the public from the fallout. Government after government – most lasting only one year – served up trillions of dollars of debt-financed public works projects, aggressive Bank of Japan monetary easing and massive efforts to bail out financial institutions buckling under the weight of non-performing loans.
The Shinzo Abe years represented a break from the LDP doctrine. For nearly eight years in power, from 2012 to 2020, Abe pledged to reduce bureaucracy, boost innovation, devise a more meritocratic labor system, empower women and woo foreign investors.
Instead, Abe directed the BOJ to flood markets with yen liquidity. Abenomics, as it was once known, ended up being little more than Reaganomics, Japan-style. Wealthy property owners and stockholders had a stellar Abe era.
The other 99% was less fortunate as wages flatlined – even before Covid-19 arrived. The pandemic did additional damage to living standards.
As Abe tilted the benefits of Tokyo policies toward the 1%, he neglected to provide safety nets for average-to-lower-income households. “First and foremost,” says Shigeto Nagai at Oxford Economics, “politicians must abandon the unrealistic and optimistic premise of Abenomics that Japan can cure all ills just by reflating nominal growth.”
Enter Kishida, who aims to return Japan to the pre-Abe course of a gentler, more inclusive capitalism. And with, supposedly, a new, new strategy to redistribute wealth and give the average Japanese a raise.
Yet softening the blow from Abe’s pro-investor-class administration is one thing. Actually broadening the benefits of growth, and on a consistent basis, is quite another.
First, of course, Kishida’s government needs economic growth to redistribute. As 2021 stumbles toward a close, GDP gains are grinding to a halt just as new Covid-19 variants imperil Japan’s all-important export markets.
In September, for example, factory output shrank for a third straight month. Japan’s automobile sales plunged 31.3% in October from a year ago, the fourth straight monthly drop. Weak consumption is colliding with supply-chain disruptions to slam a vital industry and to further depress wages.
This puts Kishida in an immediate bind. “Markets are once again pricing in his promised fiscal stimulus package,” says analyst Jeffrey Halley at trading platform company OANDA. Economist Saisuke Sakai at Mizuho Research says that as “a political gesture,” a spending package “around 30 trillion yen ($264 billion) would suffice.”
Little fiscal latitude
That’s easier said than done. In mid-2020, the Abe government pumped $2.2 trillion into the economy, or 40% of GDP. That jolt barely kept growth above water, never mind generating a robust recovery. With public debt nearing 250% of GDP – and the bill for the Tokyo Olympics coming due – Kishida’s team has little fiscal latitude.
The same goes for the BOJ, which may be reluctant to add more liquidity into a financial system nearly drowning in it. Since 2013, BOJ Governor Haruhiko Kuroda’s team has been cornering the government bond market. So much so, that on certain days zero bond trading occurs.
The BOJ big-footed the stock market via massive purchases of exchange-traded funds. Earlier this year, the central bank became the biggest holder of Japanese stocks, topping the ginormous Government Pension Investment Fund.
Corporate CEOs need not worry about innovation and restructuring when the ultimate investment whales are propping up their shares.
Kuroda’s team could opt to do more. It could buy up even greater portions of the bond and stock markets. It could hoard big blocks of corporate debt, asset-backed securities, mortgage-backed securities or local government debt. It could step up efforts to manipulate the yen exchange rate downward.
But after eight-plus years of supersizing the BOJ’s purchase programs, Kuroda may face a diminishing returns problem. Its balance sheet is now bigger than Japan’s $5 trillion of annual output.
At the same time, Kuroda is tempted to go the other way and taper BOJ buying. Former Trade Minister Banri Kaieda worries the “side-effects” of negative yields are backfiring. Because a “flat” yield curve makes it harder for banks to profit from extending loans, the BOJ is actually impeding credit-creation activities.
The idea is that by returning the yields on, say, medium-term securities to positive territory, banks would have a greater opportunity to pump up profits. That, in turn, might incentivize banks to up lending, restore the so-called multiplier effect that gives BOJ policies such potency.
The other problem is a weakened mandate. The LDP lost seats in Sunday’s election. There also were some high-profile upsets. A case in point was Akira Amari, the LDP’s No 2 official who lost his parliamentary seat in Kanagawa Prefecture, near Tokyo. It made for quite an awkward changing of personnel at the very top of the ruling party food chain.
Will Kishida be his own man?
The election also might’ve set in motion a reboot for Kishida’s political fortunes. As Jake Adelstein astutely argued for Asia Times, loads of candidates that Abe, his former deputy Taro Aso and Amari supported lost on Sunday. That, some pundits believe, may clear the way for Kishida to be his own man.
At the same time, the real victor among opposition parties was the right-wing Japan Innovation Party, which came in third in the lower house. Its main priority is revising Japan’s pacifist postwar constitution. It could pressure the LDP to take steps that irk China and South Korea.
All this increases the odds Kishida will seek to assert his economic authority right out of the gate with increased stimulus. Yet early indications are that Kishida isn’t willing to ruffle any feathers.
Initially, he proposed tax increases to pay for higher average wages. This flip-flop alone has economists fearing the worst: that Kishida will be another one-year prime minister who has negligible success in increasing competitiveness.
“Kishida had it right the first time, before he backed away from his promises: Japan cannot restore growth without more income equality and cannot achieve income equality without better growth,” says Richard Katz, editor-in-chief at The Oriental Economist Report.
“Indeed, says an OECD report, had Japan not suffered an increase of inequality during 1990-2010, its per capita GDP would have grown almost 25% faster.”
What’s more, Kishida’s “new capitalism” rhetoric sounds barely more credible than South Korea’s “trickle-up growth” chatter or China’s “common prosperity” talk. In all three cases, specifics on how to achieve more inclusive growth are hard to find.
So far, Kishida has talked in generalities. He needs to craft a specific plan to do in short order what Abe couldn’t in nearly eight years with a much bigger majority than the new government has. If Kishida is going to change Japan’s trajectory, he’ll have to hit the ground running – and stick around for more than 12 months.