From its start Abénomics has been a collection of pre-existing ideas brought together for re-launch with each takeoff adding to the momentum created by the one before until there is enough confidence in the economy to make growth self-sustaining.
Describing the plan as made up of three arrows has never been helpful and is even less so now that the third shaft has been loaded with multiple aims. In the absence of a coherent logic for each part, government has taken to asserting what the outcome will be and trusting that will make it so.
The first part of the plan is the massive monetary expansion put in place by Bank of Japan Governor Haruhiko Kuroda soon after he was appointed, following the return to power a year ago of the Liberal Democratic Party (LDP) led by Shinzo Abe.
Its aim is to boost spending, trigger inflation and drive out the persistent deflation that has led to consumption being so often deferred. This makes sense but does not factor in the propensity to save of a now rapidly aging population which is worried about its pensions.
The second, a flexible fiscal policy, began with a decision to raise the sales tax by 3% to 8% next April. As this legislation was already on the books, Mr Abe’s lengthy round of consultations on the point took on an increasingly theatrical appearance.
Perhaps the showmanship was in order to win acceptance for the parallel plan to divert the bulk of the revenue raised by the hike away from running down the country’s huge debt and into rebates and economic pump priming, thus providing the headlined flexibility.
The third is structural reform. This is as badly needed today was when the bubble economy began to burst in 1990. In the 23 years since then the LDP has been in power for all but five and the country’s demographic profile has worsened precisely as forecast.
Show us the money
Under Mr Kuroda’s predecessor, Masaaki Shirakawa, the Bank of Japan repeatedly told government, in effect, show us the structural reform plan and we will show you the money. That never happened.
Now monetary easing has been put in place ahead of any reform and it has become an article of faith that this will set the economy on the path to expansion by providing companies with the credit which standard economics dictates they need.
Proving that such corporate demand actually exists is tough. Japan’s big companies are very much leaner today than when things went pop and many are cashed up with little need to borrow. They are using their wealth to expand abroad, given the shrinking population at home.
Just the same demographic trend means that only 15.5 million of Japan’s 127 million people are in the 25-34 age bracket from where entrepreneurial start-ups typically spring. This puts limits on number of new ventures and the lending needed to make them grow.
Financial firms also expanding abroad by going abroad
Banks and institutional investors – such as the giant insurance groups – are aware of this and they too are vigorously expanding abroad.
On 21 December the Nikkei carried an unsourced report that in October Japanese banks’ foreign assets, mostly loans, had climbed 36% up year-on-year to reach over 100 trillion yen for the first time since 1998.
The peak of overseas lending was in 1990 when it hit 195tr yen. After that the figure fell continuously as banks retreated to deal with domestic bad loan problems and decades of consolidation.
In addition to direct lending, the banks are also on the acquisition trail with the most recent move coming last month when Mitsubishi UFJ’s purchased a majority stake in Thailand’s Bank of Ayudhya (known as Krungsri) .
Insurance groups too went through a prolonged consolidation from the mid 1990s and have recently been busy making many acquisitions abroad.
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The pursuit of both monetary easing and structural adjustment have also fed a claim that in order for them to work the 800 trillion yen of household savings kept in deposit accounts, at the end 2013, as well as money in Japan Government Bonds (JGBs) must be shifted from these ‘unproductive’ stores into risk investments such as equities.
GPIF hauled aboard
It was inevitable that Japan’s Government Pension Investment Fund (GPIF), the world’s, largest institutional investor, should be hauled aboard this whirligig and the way that has happened follows the pattern in which assertion is deployed to create an alternative reality.
On 21 November the final a report of a panel appointed to review GPIF’s management structure and investment policies, led by Prof Takatoshi Ito of Tokyo University’s Graduate School of Economics, indicated that the Fund had room to divest itself of some of its large hoard of JGBs.
In an interview with Bloomberg published on 4 December, GPIF president Takahiro Mitani was quoted as saying he thought the BoJ would not meet its target of creating an inflation rate of 2% by the end of 2014. This implied that GPIF time to consider the panel’s proposal since it saw the central bank as continuing its massive purchases of JGBs.
Just two days later Bloomberg published an interview with Prof Ito in which he called for GPIF to start selling bonds ‘now … while the BOJ is buying’ so as to reduce its holdings of domestic debt to 52% of 109.79 its trillion portfolio, compared with 60% today. (JGBs are already just 52%, the rest is in Fiscal Investment and Loan Programme [FILP] paper.)
Do as I say
It is astonishingly naïve for the chairman of an advisory panel to expect its recommendations be implemented with no further consideration just days after they were made – especially when that would involve the disposal of securities worth over 9 trillion yen. Naturally enough the bond market fell in response to his comments.
Wider purposes appear to have been at work here. Prof Ito’s demand allowed him to demonstrate that he is a force to be reckoned and secured for government the word of a distinguished professor [albeit one signed up as an LDP pensions advisor] that it is on track to meet its 2% p.a. inflation target – a goal some feel is impossible.
For Prof Ito the cheerleading has already worked: even before the GPIF report was published he had been appointed head of yet another government panel. He is, though, not the only one talking his own book and one of the favourite vehicles for this is leaks to journalists who do not question the information.
The same 3 December Nikkei article reporting that the Ministry of Finance will ‘issue twice the amount of bonds that track inflation next year’ carried the unattributed assertion that GPIF will ‘add inflation-protected bonds to its asset mix as soon as next month’. This cannot be bad for demand and suggests the Fund thinks the inflation will hit the target.
Talking his own book
Towards the end of the same month Yasushi Ando, CEO of buyout fir New Horizon Capital and what Bloomberg describes, as yet another, ‘adviser to the LDP on pensions’ told the information provider that GPIF should invest 3 trillion yen in private equity in ‘about April 2015’ and increase that to 10tr yen by 2013.
The sole reason offered for this advice was that the move would ‘normalize with world standards’ of which the California Public Employees’ Retirement System is given as an example.
Calpers and its peers elsewhere are, though, not past the tipping points at which they have has more going out in benefits than they receive in contributions. GPIF is in a very different demographic place and investment income is vital to meeting its obligations.
This need for yield today and yield tomorrow makes investment in utilities with revenue streams attached an attractive choice be it via or public or private equity. Japan Exchange Group is said to be mulling the start of trading in infrastructure funds before April 2016.
On 12 December, Bloomberg quoted Shinichiro Okada, who is overseeing the sale operating concessions for New Kansai International Airport Co, as saying that GPIF ‘is a strong candidate investor for infrastructure including these airports’ in Osaka Prefecture.
Thrashing about in the dark
The next day the Nikkei published* an entirely unsourced assertion that [emphasis added]:
Under a partnership with the Ontario Municipal Employees Retirement System … [GPIF] now plans to invest in airports, railways, ports and power facilities in the US and Europe. Joint Management will begin in 2014. Between tens of billions of yen and hundreds of billions of yen will likely be invested, although the exact amount has yet to be set.’*
This appears to indicate that the Fund wishes to join the Global Strategic Investment Alliance (see archive 27 April 2017 Japanese join Canadian plan in huge new infrastructure fund’ yet no one appears to have asked the consortium whether it can accommodate GPIF’s desires.
Indeed the Nikkei has developed the habit of writing about this entity, which it never names, as though it were Japanese-run, even though the country is well known to lack the expertise that would be needed.
Omers is actually the dominant shareholder while Japanese participation comes from the Pension Fund Association and a group led by Mitsubishi Corp which includes Mizuho Bank and the Japan Bank for International Co-operation.
Turning Tokyo into a global financial centre - again!
A lack of knowhow is not the only thing standing in the way of turning Tokyo into an international financial centre but this has now joined Abénomics third-arrow aims and Prof Ito’s second panel is charged with producing recommendations to make it so.
The new ‘Panel for Vitalizing Financial and Capital Markets’ is under the aegis of Ministry of Finance (MoF) which has spent 30 years working to prevent just this development which should have been a natural consequence of Japan’s becoming a capital exporter.
London became a global financial hub by financing international trade through its bankers’ acceptances market. From the 1930s, as America’s capital pool grew deeper, New York took over the top slot and more transactions were denominated in US$ dollars.
In the 1980s Japan’s MoF fought fiercely to stop Japanese banks taking on a similar role. Even when they came to see that it could be to Tokyo’s advantage to have at least its imports denominated in yen, most of the underlying financing remained in the US unit.
Doing it the HSBC way
While foreign firms should have been mopping up Japanese liquidity by listing on the Tokyo Stock Exchange they have instead been delisting to avoid expensive bureaucratic requirements. Issuance of samurai bonds has also stayed subdued having never nosed above even the 2.6 trillion yen it saw in 2007, for the same reason.
Rather than their clients having to come to Tokyo, the banks and securities houses have been expanding by going to clients in their home markets and they are likely to continue internationalising after the manner of the UK’s HSBC — by establishing local branches, offices or other units around the world.
The dominant force in the domestic debt market will meanwhile continue to be the Japanese government which in the financial year starting on 1 April 2014 will issue paper of a record 181 trillion yen.
Not all of the total will be in JGBs as 16 trillion – double the amount in the current year – has been kicked into the parallel universe of borrowings by the Fiscal Investment and Loan Program (a.k.a ‘the second budget’).
What matters is the yen:dollar pair
In the end the fate of the Japanese economy, regardless of Abénomics, rests largely with the direction of the yen an that will be decided by the relative strength of the US economy.
If 313 million Americans can provide the companies, institutions and households of 127 million Japanese, who decline to accept inward migration, with growth and investment opportunities, plus a stable or strengthening currency, that is where their money will flow while they stay at home, clip the coupons and worry about Mr Abe’s defence policies.
* By far the best translation of what the Nikkei said is here.
© 2013 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com.
This blog would not exist without the help and humour of Diane Stormont, 1959-2012