Terrie's Take 856 - Why Abenomics Won't Work - It's the System, Stupid
terrie at mailman.japaninc.com
Sun Jul 3 22:58:14 JST 2016
* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
General Edition Sunday, July 03, 2016, Issue No. 856
- What's New -- Why Abenomics Won't Work - It's the System, Stupid
- News -- Tuna goes from shortage to glut
- Upcoming Events
- Travel Picks -- Cherry Season in Yamagata, Nordic-style Farmer's
Market in Shibuya
- News Credits
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+++ WHAT'S NEW
With the soaring Japanese yen over the last couple of weeks, we have
been thinking a lot about the frailty of Abenomics, and how if you
discount the quantitative easing (QE) efforts of the Bank of Japan there
has been pitiful little of substance being done by the government to
improve the economy. The problem with QE is that it looks like a
politically easy "hack" to devalue the yen, increase exports, get
everyone excited, and distract them from fixing the fundamental problems
back at home. And it would be easy if it wasn't for those pesky
Americans telling them recently that enough is enough. Based on
purchasing power parity, FX experts say that the yen is probably still
undervalued by about 10%-17%. The US certainly knows this and doesn't
look ready to give Abe a carte blanche to devalue then export his way
out of trouble.
Abe correctly said in 2013 that the economy needed to be turned around
with three arrows. The third arrow, which was supposed to be
deregulation and reform is in our opinion where he has failed, mostly
because Abe will not address the country's most serious systemic issues.
In a 2015 article by the Financial Times, the reporters gave Abenomics
Third Arrow a score card, rating reform of the agricultural sector as A-
while labor reform was a D. This was entertaining, but it made us
realize that while the international media are focusing on Abe's
projects, the real problem is that the nation's governance and
allocation-of-finance systems themselves are broken. That being the
case, no amount of hyped projects, such as "Womenomics" and "Special
Economic Zones", will make much of a difference.
The FT score card article is here: http://on.ft.com/29nTS33
You see, the root cause of Japan's malaise, after the rise of China and
aging of society, is the cancer of vested interests. Historically Japan
has survived by having an entitled upper class (samurai families) who
enjoyed their privileges by pledging fealty to the center of power, and
by business and farming groups who formed cooperative societies and
sub-classes of their own to protect and support their members. Fast
forward to the 21st century and those samurai are now Kasumigaseki
bureaucrats, and the business societies are keiretsu. This is something
embedded in Japan's history and psyche and therefore very difficult to
Although we are no longer in the feudal era, and the international value
of pure brain power alone has bred a meritocracy, the idea of membership
and entitled groups never went away. The LDP ruling party and indeed PM
Abe himself are living proof of this. Unfortunately the Japanese
education system has bred out most of the natural fighting spirit that
in another country would have caused the voters to rise up and get rid
of the politicians and bureaucrats who are responsible. But even though
the courts have ruled against the unfair 5:1 vote advantage that farming
seats have throughout the country, because of apathy and resignation no
one does anything about it.
So instead of indignation, we have a multitude of vested interest groups
feeding at the government trough. As businesspeople we see on a daily
basis these governmental and public-private entities getting public
funds and favorable regulations, all the while ensuring that competing
private enterprise companies are denied equal access and equal
treatment. So, just as there are hundreds of types of cancer, Japan's
government-favored entities list is a long one, and in our opinion is
responsible for the stunting of many otherwise promising domestic
business sectors, especially service sectors.
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The following are just some examples of too-close-to-be-healthy
organizations that work with government to exert control over their sector:
* Japan Agriculture (JA) which controls the country's food supply and
"feeds" off its producers.
* Japan Medical Association (JMA) which locks out private healthcare.
* Japan Pharmaceutical Association, which largely restricts sales of OTC
drugs to those by its members.
* Japan Post (insurance, banking, and parcel delivery) which gets
special exemptions to operate in ways private firms cannot.
* NTT and its various related companies, which control the state's
* Japan Rail (JR), which controls trans-city public transportation and
which only innovates when challenged by air carriers.
* Japan Highway (now called NEXCO East, Central, and West), which
controls the nation's arterial routes, sometimes over bridges to nowhere.
* Various tourism bodies which strangle local players with regulations
and lock out competition.
* Hello Work which controls recruiting and labor allocation and locks
out recruiting in many industries.
* Japan's public sector gambling organizations, which earn at least
JPY5trn a year - like the Japan Racing Association (JRA) for horse
racing, JKA Foundation for cycling and auto racing, Japan Motorboat
Racing Association (Kyotei) for motor boat racing, Lotto (Takarakuji),
Pachinko regulation through the Pachinko Gyokai Dantai, a police
controlled organization - which controls gaming and entertainment.
* ...and, many others.
Each one of these entities controls billions of dollars of business, and
where, if these sectors were opened up, could help unleash a huge
movement of investment funds from private sector companies looking for
better opportunities - including those companies that at present are
either splurging silly money on foreign acquisitions they are not able
to manage properly, or sitting on more than JPY340trn because they see
nothing worth investing in here in Japan itself.
As an example of how removing entitlement can re-invigorate a sector,
you need to look no further than the airline industry and how the
Japanese government initially regulated the industry to effectively lock
out everyone except the incumbent government-related operator, JAL, and
their keep-them-healthy-through-(some)-competition rival, ANA. We wrote
(see below) about the transformation that took place in Japanese
aviation after Japan Airlines got so deeply in trouble that the
government agreed to allow a U.S. airline to come in and sponsor JAL's
recovery. In doing this, they had to meet the US government demand to
open up Japan's airspace to foreign airlines - the so-called "Open
Skies" accord. Then, 'Lo and Behold!', within 5 years Japan's aviation
sector has returned to rude health, and there are now more foreign LCCs
trying to land at underused regional airports than you can shake a stick at.
In contrast, if you look at Abenomics, you can see that each project the
Prime Minister has focused the press on, is simply a surrogate or a
distraction. For example, agriculture? Well, with just 2m real farmers
(and foresters) left in the country and a domestic food production of
just 40% in 2008, this is something that HAS to change and the arrival
of the TPP threat courtesy of the foreigners (always a convenient excuse
for change) has let Abe make some initial noises about change. But now
that TPP is likely to fail or be long-term stalled because of US
politics, it looks like most of the concessions won from the farming
lobby will be diluted or will simply be forgotten, and things will be
back to where they were. This is not just disappointing, it also
provides ample proof of the staying power of Japan's vested interests.
Womenomics? Well, there are no vested interests to tackle there, since
women have always been unappreciated and untapped as a work force.
Immigration? Foreigners can't vote, so no vested interests to compete
against there either. Special Zones? They're either a joke, like pitting
hotels against Minpaku in Ota-ku and Osaka only, offering foreign house
maids to Japanese where there are almost none at present, or private
kindergartens where the state isn't interested in creating its own - so,
again, no vested interests there.
Labor Reform? The government already reformed AGAINST better conditions
for workers when they allowed Panasonic and other major Japanese firms
in the early 2000's to subcontract manufacturing to outsourcing
companies, thus creating an official underclass of part-timers and
contract workers. They did this to allow those companies to survive, and
are unlikely to undo it.
Corporate Governance changes? It will never happen as hoped. Instead,
the proposed legislation has already been watered down and companies are
free to decide whether they even care what shareholders think. This is
much the same as the International Financial Reporting Standards (IFRS)
rules for local companies, that were watered down some years ago, and
where as of last month, only 106 public companies were actually using IFRS.
As will be obvious from the above, Abenomics can only work if PM Abe
brings himself to overhaul the system itself. And given that as one of
the elite he is a product of the system and that the other beneficiaries
of this system are still obstructively alive and well, any substantive
change is highly unlikely. The effort needed for Abe to fight to
dismantle the system and bring about real change would be Herculean -
indeed, former-PM Koizumi was referring to this very challenge when he
famously threatened to wreck the (LDP) party in order to bring about
change. You can remind yourself of the vested interests in 2001 (and
these players are still alive and well in 2016) to understand the
So our conclusion is that Abe is not the man for this job. Instead, he
can only kick the can down the road by taking savings from the public
(QE) and collectively transferring assets to government ownership
(financial stimulus through stock and asset purchases) to keep the whole
shell game going. Instead, once things will get seriously worse, someone
more committed than Koizumi will be thrown up by popular vote and he/she
will do what needs to be done.
When will that happen? Well, as proved by the bureaucrats' collective
blockage of the DPJ party when it tried to go after special interests,
it can only happen if Japan is weakened badly enough to tip the balance
between the regular voting public and the vested interests. At the
current rate of deterioration, this could be several decades from now.
In the meantime, the LDP will use every trick in the book, including yen
devaluation, rural voting imbalances, xenophobia, and scare mongering,
to avoid core reform.
Everyone should get used to that idea and stop talking about Abenomics
as if it's for real.
...The information janitors/
- Tuna goes from shortage to glut
- Pension Fund may have lost about JPY5trn
- 2015 census results show extent of national aging
- Consumer prices down in May
- Japan to buy US$40bn of jet fighters from US?
=> Tuna goes from shortage to glut
While the long term survival of bluefin tuna as a species may still be
in doubt, for now, anyway, the Japanese fishing industry is experiencing
a tuna boom driven by record quantities of the fish being landed at
major fishing ports around the country. According to the Japan Fisheries
Information Service Center, catches are up almost 50% thanks to fine
weather and warmer waters - being ideal for the development of the fish.
In June 684 tons of bluefin tuna were delivered to Tsukiji fish market
in Tokyo, up 8% over 2015 and the largest volume since 2008. As a result
the average price per kilo for tun has fallen about 50%, to JPY1,000.
***Ed: So, warmer ocean temperatures means more tuna? That's
interesting.** (Source: TT commentary from nikkei.com, Jul 02, 2016)
=> Pension Fund may have lost about JPY5trn
Although the final numbers are not in just yet, it appears that the
Government Pension Investment Fund (GPIF) in FY2015 may have lost up to
about JPY5trn. Seesawing stocks meant a big loss in the first two
quarters of last year, then a gain for the Oct-Dec quarter, but now for
the Jan-Mar quarter of 2016, it looks like another big loss. The actual
results will be announced on July 29th. ***Ed: US$50bn may be a lot to
you and I, but for the world's largest pension fund it's part of the
normal course of doing business - especially when your government tells
you to jump into a goosed up (Japanese) stock market rather than
following more conservative instincts.** (Source: TT commentary from
the-japan-news.com, Jul 02, 2016)
=> 2015 census results show extent of national aging
The internal affairs ministry has released the results of its 2015
5-yearly census, showing that now 26.7% of the national population of
127m is now over 65. This is 3.7% up on the 2010 census, and at this
rate, there will be just 55.61m people of working age by 2030, about
12.4% less than there are now. The main reason for the big increase in
retirees is the baby boomer bulge. ***Ed: Retired, but perhaps not for
long. We've been seeing a lot of older folks re-enter the work force,
partly for lack of retirement funds and partly for mental stimulation.**
(Source: TT commentary from theguardian.com, Jun 30, 2016)
=> Consumer prices down in May
You have to admire the LDP and BOJ for their consistency. Even though
May household spending was down again 0.4% from May 2015, both entities
are still assuring the public that it's temporary and things will soon
start to improve. Right now the setback is being blamed on Brexit, while
previously it was the lack of salary increases from tight-wad employers.
The consumer spending gauge ignores fresh food, but does factor in
energy, education, housing, and travel - all of which received less
spending than normal. ***Ed: This article mentions a WSJ interview with
Abe adviser Koichi Hamada, stating that the tight labor market should
[over the next few months] drive up wages and thus consumer spending.
What he ignores is that the bulk of Japan's domestic companies are in
financial difficulty and are in no mood to increase wages. Rather, most
of the trillions of yen being hoarded in corporate Japan's cash pile is
with exporters and finance firms, who also have little interest in
expanding their operations or their costs in Japan. So if there are to
be higher wages it will go to the workers of exporters who only account
for 16% of GDP. The other 80%+ of GDP is with SME companies and they are
unlikely to answer a call for wage increases any time soon.** (Source:
TT commentary from marketwatch.com, Jul 01, 2016)
=> Japan to buy US$40bn of jet fighters from US?
You have to wonder if Japan is trying to placate the U.S. over its yen
devaluation moves or something. Or, maybe Abe is just in a hurry to have
a show down with the Chinese. Whichever it is, Japan is planning to
launch a huge tender for about 100 advanced F3 fighter jets, to be
co-manufactured by a foreign firm and the prime contractor, Mitsubishi
Heavy. Although the tender is open to the Europeans as well, the smart
money is betting on either Boeing or Lockheed Martin. ***Ed: One wonders
why Japan doesn't just go all out and make a 100% domestic fighter. They
seem to have the technology and capability... politics?** (Source: TT
commentary from reuters.com, Jun 30, 2016)
NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.
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+++ TRAVEL DESTINATIONS PICKS
=> Cherry Season in Yamagata
Picking sweet red bundles of sakuranbo in Murayama
There is definitely something both therapeutic and rewarding about
fruit-picking. My first experience picking, sorting, and pitting
cherries was at Murayama in Yamagata Prefecture. Yamagata is famous for
its juicy, sweet, glossy cherries, and the prefecture is responsible for
approximately 70% of Japan's entire cherry production.
My first time helping with cherry farming, I was given the task of
categorizing the freshly handpicked cherries into those to be sold to
customers, to be given to friends, or to be made into jam. The cherries
are handled with great care, and workers have to wear gloves to prevent
body heat from affecting the fruit. We checked each berry for scratches,
mold, and any other imperfections. The perfect cherries were packaged
and shipped to customers, cherries with minor scratches were boxed up
for friends, and cherries with detaching stems were pitted for jam.
=> Nordic-style Farmer's Market in Shibuya
Every Saturday and Sunday there is a "Farmers' Market" at the United
Nations University in Shibuya, which you can enter at no cost. As the
market is relatively close to Shibuya station and the big department
store Hikarie, it is not at all hard to find. Just keep your eyes open
for the white tents. The place is booming, with small shops selling
fruits, juices, and generally a ton of things that make you feel like
you came to the healthiest place in all of Tokyo. However, the weekend
spanning June 25 to 26 brought along something different this year.
The extra twist was a "Nordic Lifestyle Market", setting up a
differently-styled market alongside the already popular Farmers' Market.
Being from Denmark, I had an urge to see how Japanese people view Nordic
Lifestyle. The main differences were that the Nordic Market included
furniture, tableware, and various interior design articles - such as
simple porcelain and antique wooden chairs. As a person from a Nordic
country, I think they were not far off at all.
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+++ ABOUT US
Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)
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