Trading on Abenomics

Trading on Abenomics

Japan needs to stop worrying and learn to love imports.

Jan. 27, 2014 11:58 a.m. ET

News that Japan in 2013 notched its biggest trade deficit since 1985 is shaking a country long accustomed to being a big-time exporter. Much of the angst is overdone. But there are some important lessons in the data for Prime Minister Shinzo Abe as his economic revival program enters its second year.

The merchandise trade deficit for the year came to 2.4% of GDP, despite some decline in December. Exports started to pick up a bit as anemic recoveries in Europe and the U.S. grind on and trade ties with China rebuild after political tensions over territorial disputes. The key point is that the eye-grabbing headline numbers are mainly an artifact of Mr. Abe’s weak-yen policy. This helps explain the increase in exports and imports, although not in the way many suppose.

Conventional wisdom holds that a weaker yen allows Japan Inc. to boost export volumes by cutting its foreign-currency prices and gobbling up market share abroad. Yet Japanese companies have instead booked higher yen-denominated profits on a falling volume of exports. Note that while exports in 2013 fell 1.5% compared to 2012 when measured in units shipped, measured by value they increased 9.5%. The weak yen also boosted the value of imports, which increased some 15% when measured by yen-denominated value but grew only 0.4% in volume.

That is not to downplay the significance of the yen-denominated trade deficit. The quantity of yen Japanese are earning and spending matters, not least to the Japanese themselves. But understanding the monetary aspect of the trade data explains why Mr. Abe’s monetary policies won’t fix the economy, and what he should be doing instead.

On the corporate side, companies have enjoyed a weak-yen windfall over the past eight months, and the central bank’s Tankan survey suggests managers are starting to believe the yen may remain around its current level for the longer term rather than rebounding to its pre-Abe strength. That would normally encourage companies to invest in new capacity.

But managers also recognize that manufacturing is an increasingly dicey proposition in Japan. Costs remain high, and in the case of imported inputs are rising thanks to yen weakness. An aging population coupled with strong popular resistance to immigration suggest manufacturing labor will be ever-harder to come by.

This helps explain why, while corporate investment has picked up somewhat in recent months, companies are holding back and are reluctant to commit themselves to wage hikes. Despite more generous one-time bonuses, nominal wages are more or less stagnant.

That means real wages are falling, thanks to the inflation Mr. Abe’s monetary policy is starting to create, as evidenced by the run-up in import values. Households also face a three-percentage-point hike in the consumption tax come April. Little wonder that consumer confidence has fallen significantly after an initial bout of enthusiasm when Mr. Abe launched his revival plan.

The trade deficit by itself isn’t worrying. An aging society such as Japan’s inevitably will import more than it produces, while exporting capital to earn returns that allow it to pay for its imports. But the growing gap between Abenomics and reality is a problem.

The weak yen was supposed to stimulate exports, which was supposed to stimulate corporate investment and wage growth, which was supposed to stimulate domestic consumption. That chain hasn’t materialized. Instead, companies are earning more today but still worry about their future amid weak export volumes, while households are saddled with inflation fears.

Mr. Abe might instead try “leaning in” when it comes to the trade deficit. His most important proposal to date would do precisely that: If Japan signs on to a Trans-Pacific Partnership multilateral trade deal, it will open the economy to an unprecedented amount of imports. The new competition will stimulate more of the corporate investment Japan needs in long-sheltered and highly inefficient domestic-facing service industries.

This might be a tough sell for a public long accustomed to thinking of Japan first and foremost as a high-tech factory for the world, and for investors with a similar mindset. But the recent run of trade deficits is a reminder that change will come to Japan one way or another. Mr. Abe’s real challenge is to align economic policies to reality before reality strikes back.

 

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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