Why Abe’s Tokyo election debacle may create ripples beyond Japan
William Pesek says a weaker yen as the Japanese prime minister tries to shore up support may spark a currency tussle with China, and invite the ire of Donald Trump. Abe would be wise to tap the momentum of his EU trade deal
Is Japan finally about to add more to Asian growth than its deflation subtracts? Prime Minister Shinzo Abe’s sealing a giant trade deal with the European Union is one reason to bet on increased GDP. But the real boost may come from his comeuppance in recent Tokyo elections. Abe wasn’t on the ballet, but his Liberal Democratic Party took a pounding. It was the first opportunity for voters to punish Abe for a spate of scandals and unpopular policy moves, and they did.
Abe seemed to get the message. His team is buzzing about accelerated structural upgrades, closer trade ties with China and South Korea, and even a change in the Bank of Japan leadership. Abe also chatted with US President Donald Trump at the G20 in Hamburg last week about more open and active trade. To Ed Rogers, head of Tokyo-based Rogers Investment Advisors, Abe’s sliding support rates are a “wake-up call” to get serious about reform and a buy signal for yen assets.
What might all this mean for Asia? Obviously, Asia’s No 2 economy generating demand and outward energy for the first time in decades would be highly welcome. There’s a good chance, though, that Tokyo’s tactics will shake up the neighbourhood in ways that irk China and pull Trump into the fray.
The problem: the yen may be about to fall significantly. For a Group of Seven economy, Japan has a decidedly developing-world mindset on exchange rates. Abe’s LDP has spent the 25 years since the bubble economy burst battling speculators.
In 2004 alone, for example, Tokyo spent the annual GDP of Indonesia in giving exporters a break. That’s why it surprised no one that Abenomics was launched in 2012 with a 30 per cent yen devaluation.
Nor should it shock anyone when Tokyo sends the yen lower again. It’s telling that, 250 days before his term ends, BOJ governor Haruhiko Kuroda is being warned he may not get another. Last week, two Abe advisers declared that the central bank needs fresh thinking and greater urgency. Kuroda, of course, was hired to be that bolt of new energy in 2013. His shock-and-awe quantitative-easing blasts got the world’s attention, until the magic wore off and the yen stopped falling.
The dump-Kuroda narrative is code for: the BOJ had better regain that awe among currency traders. We saw a hint of that last week, when the central bank intervened to cap bond yields. Next, Tokyo may turn its beggar-thy-neighbour predilections up to 11. That would get Xi Jinping’s (習近平) attention, perhaps leaving the Chinese president tempted to weaken the yuan. China is getting less traction from pumping fresh credit and debt into the financial system. The search for economic tailwinds is sure to lead Xi back to exchange rates. A weakening yen may get Xi back there even quicker – and Trump on Twitter soon after.
Currencies have a special place in @realDonaldTrump’s heart, as Xi, Abe and companies like Toyota have found out the hard way. It could catalyse Trump to make good on his threat to impose 45 per cent tariffs on Chinese imports, a move that could devastate Asian growth.
The wild card here is that Abe surprises the world. “Abe desperately needs to put some points on the board,” says Nicholas Smith, strategist at CLSA Japan. Smith notes that, on a recent trip to Tokyo, former US Federal Reserve chairman Ben Bernanke counselled greater monetary and fiscal policy coordination. It’s even more important, though, for Abe to redouble efforts to loosen labour markets, inspire a start-up boom, empower women and lower trade barriers.
The EU trade deal, should it come off as planned, would be a good down payment on this last goal. Abe would be wise to tap this momentum and resurrect the Trans-Pacific Partnership deal that Trump scrapped – and perhaps even pull China in.
But the election drubbing sustained by Abe’s party may leave less political capital for huge reforms. The desire to change the narrative, and fast, could push Abe into devaluation mode. That would be unfortunate, as it would rob Tokyo of the best chance it has had in 20 years to revive growth. It also could shake up the neighbourhood, pull America’s Twitter-troll-in-chief into the mix and make for a chaotic second half of 2017.
William Pesek is a Tokyo-based journalist and the author of Japanization: What the World Can Learn from Japan’s Lost Decades. Twitter: @williampesek