The Two Abes

Is the Abe government afraid of bad news leaking out before this summer's Upper House election?

Honest Abe	Shinzo Abe

Japan’s LDP government, led by Prime Minister Shinzo Abe, has an ambitious reform agenda, but it cannot be fully implemented unless the LDP gains control of the Upper House of the legislature in the summer election of 2013. The agenda, referred to now as Abenomics, is an economic policy based on expanding the money supply in order to cause inflation that will, it is hoped, shrink government debt and devalue the currency in order to boost exports and stimulate domestic demand. Critics say this policy could fail to produce its desired effects and could lead to higher interest rates that will cause Japan to default on government debt. Interest on debt is presently at about 1%, yet interest payments consume 1/4 of government revenue. With each 1% rise in interest rates, one more quarter of the budget would have to go to interest payments, and, obviously, there are only three quarters of the whole left to play with. The architects of the plan say it won’t cause a rise in interest rates, but so far they offer no convincing explanation why this won’t happen when creditors will want a rate of return higher than Abe’s 2% inflation target. In order to hold onto power, the LDP have to win the next election before any negative effects of the new policies appear. The strategy for this spring appears to be to spend whatever borrowed funds are necessary to make Abenomics look good for the time being, win the Upper House, then worry about the consequences later. Damn the torpedoes.

Since the LDP came back to power, there has been a powerful public relations campaign to support the new economic policies. It appears to be a well-coordinated conspiracy among government, big business, the bureaucracy and the national broadcaster NHK, in addition to various boosters in the private media. It has been extremely successful from a psychological point of view. Voter support is high, and the stock market is up 20% (coincidentally the same figure by which the yen has been deliberately devalued), even though corporate earnings are yet to show any sustained positive results.

There is a good chance that all of the optimism could evaporate at any time, and the prime minister seems to know this. The LDP strategy includes instructions not to speak of specifics before or during the summer election campaign, and the conspirators are taking expensive measures to keep voters and investors happy over the next few months.

The government has announced, for example, that this summer, unlike the last two summers, the public will not need to cut back on electricity consumption. Nothing has changed in the dire circumstances of the Japanese energy problem in terms of the balance of payments, and the global imperative to reduce carbon emissions is still there, even though the Japanese government has too many immediate problems to even think about global warming anymore. This summer will be as hot as previous summers. Fuel imports are still hurting the balance of payments and nuclear plants are still offline. If anything, the problem is worse because the weak yen makes fuel more expensive. But none of this matters to the Abe government. The only thing that will be different this summer is that the LDP desperately wants to have control of both houses of the legislature, so payment of the higher energy costs can just be pushed down the road. Abe does not want voters to be reminded of the Fukushima catastrophe while they sweat through summer heat on their way to the polling booth. It is essential to make them think happy days are here again, at least until September.

In addition to the announcement about the electricity supply, Abe has promised that benefits of his policy will be felt by the working man and woman only after this summer because he has "asked" companies to pass on their yet–to-be-realized earnings to employees, which, he fails to mention, would imply lower profits and a reversal of the present run-up in the stock market. Workers can expect to see a summer bonus, apparently, but there is no mention beyond that of permanent salary increases. I suspect that even if companies don’t have increased revenues with which to pay bonuses, there will be a few token examples touted in the media to make it look like the policy is working. A few flagship companies will take out loans if necessary to support the party they want to see elected, probably with back-channel financial support for agreeing to be the poster children for Abenomics. Such is the lockstep nature of the government-bureaucracy-corporation-media machinery. And it will probably work. In this country, you can fool most of the people all of the time.

A report in The New York Times this week (Japanese Exports Rise, but Demand for Goods Is Lackluster) provides some interesting data from the Japanese Ministry of Finance about what is affecting Japan’s worsening trade deficit. Much of it indicates that Abenomics is failing already and not likely to deliver on its promises.

These are the highlights of the report:

• In the fiscal year ended March 31, imports exceeded exports by a margin of 8.17 trillion yen, or $83.4 billion at current exchange rates... That was almost twice as large as the previous year’s deficit, also a record.
• … surging imports of Chinese-made smartphones and computer chips helped give Japan a $40.7 billion bilateral trade deficit with China last year.
• At the same time, exports to China dropped 9.1 percent as a flare-up in tensions over disputed islands in the East China Sea prompted … anti-Japanese boycotts. 
• … sales of Japanese automobiles and auto parts led a 10.4 percent rise in exports to the economically recovering United States, the ministry said…  Japan recorded a $54 billion two-way trade surplus with the United States.
• Thursday’s figures surprised some analysts by showing that Japanese exports did not receive a noticeable lift from the sharp depreciation of the yen under the economic recovery plan put forth by the new prime minister, Shinzo Abe...
• …despite the yen’s declines, however, Japan recorded a trade deficit last month of $3.7 billion, more than four times as large as the trade shortfall in the same month the year before. It was the largest deficit ever recorded in the month of March.
• Over all, Japanese exports fell last year by 2.1 percent to $652 billion while its imports rose 3.4 percent to $736 billion, the ministry reported.
• Imports of fuel, which account for more than a third of Japan’s total imports, surged last year as the nation’s atomic plants remained idled from the March 2011 nuclear accident. The ministry reported a 14.9 percent increase in imports of liquefied natural gas… and a 5.3 percent rise in imports of petroleum.

If fuel imports represent 1/3 of the $736 billion spent on imports, this equals $245 billion. Fuel imports (gas and oil) increased about 20% because of the nuclear shutdown, so this means they went from about $204 billion to $245 billion. Thus the extra paid for fuel was $41 billion of the $736 billion spent on all imports; that is, only a 6% addition to the cost of all imports. Oil is priced in US$, so the problem was worsened by the deliberate devaluation of the yen, which coincidentally lost about 20% of its value. However, crude oil prices went from $105 to $88 from April 2012 to April 2013, which more or less negates the effect for Japan of the devalued yen – the balance of trade would be worse if oil prices had not declined.

On the other hand, imports of natural gas increased more than imports of oil, and the price of natural gas went from $12.50/MMBtu* in March 2011 to $15.90 in March 2013 - a 27% increase (with a peak of $17.20 in June 2012 – a 37 % increase). These increases have been made more expensive by the devaluation of the yen that started in the autumn of 2012.

Data on oil prices: http://oil-price.net/dashboard.php?lang=en Data on natural gas prices: http://ycharts.com/indicators/japan_liquefied_natural_gas_import_price *MMBTU = one million BTUs (British thermal units)

Another factor that had nothing to do with currency and energy prices was Shintaro Ishihara shooting his mouth off about the Senkaku Islands throughout 2012. The Noda government followed up by handling the situation badly, and the damaged relations with China caused exports to China to drop off. Ishihara’s crackpot outburst might have done as much damage to the Japanese economy as the tsunami and three nuclear core meltdowns. Then again, without his antics, the tsunami and the nuclear crisis, the trade deficit might have been much the same, depending on factors beyond Japan’s control. The negative demographic and economic trends had begun well before the tsunami rolled ashore in 2011.

The conclusion to draw from all these factors is that the loss of nuclear energy was almost an insignificant factor. Before 2011 it produced only 20-30% of electricity. The extra carbon fuel used to replace that loss can’t amount to much of an increase of overall fuel imports that were used before 2011 for electricity, transportation and industrial uses. If it works out to requiring the import of an additional 5-10% more fuel, and this is crippling to the economy, a conservation campaign, aimed not only at electricity but transportation too, could eliminate the problem. In the long term, there is so much more that can be gained in improved energy efficiency and investment in renewable resources.

If fuel imports really were the dreaded enemy of recovery, Abe would not have embarked on a deliberate devaluation of the yen. What every honest economist knows is that the cost of imported raw materials doesn’t matter as long as you can produce a sufficient amount of value-added manufactured goods for export and produce a trade surplus. This can then be used to finance government borrowing. That is the goal of Abenomics, and if it fails, it means only that Japan can no longer sell as much to the world as it used to. When the Japanese establishment blames the situation on the loss of nuclear power, it is just further evidence of its ineptitude and ignorance, or a shameful unwillingness to tell the public truthfully what the data implies.

The fact that stands out from the Ministry of Finance’s data is that the trade deficit was twice as large as the previous year’s deficit. Energy consumption has not doubled in this time, neither in quantity nor price, so it is not the main factor working against Japan’s economic revival. The more likely causes are demographics, inefficiency, lack of innovation, the rise of economic competitors, inept diplomacy and mismanagement of alliances.

Sources:

"Abe Says Incomes Should Begin To Rise After Summer," Nikkei.com, April 18, 2013.
Martin Fackler, "Japanese Exports Rise, but Demand for Goods Is Lackluster," The New York Times, April 18, 2013.
"Gov't may not request power-saving across Japan this summer," Mainichi Japan, April 17, 2013.Yoko Kubota, "Look to Japan's ageing industrial sprawl for roadblock to Abenomics," Reuters.com, April 22, 2013.