From the outside looking in (Archived)

Those with a yearning for stability could do worse than choose Japan in 2017, according to BNY Mellon’s Miyuki Kashima.  The year ahead looks bright for the world’s third largest economy, she says.

 T4826 Kashima BNYAM 427 001

For international investors, Japan can be something of a paradox. On the one hand, it has suffered from two decades of stagnant growth and yet it remains the world’s third largest economy. It has one of the fastest ageing populations of any developed country but remains a sounding ground for world-beating technology and robotics. It has a domestic economy that accounts for around 85% of its GDP but is often viewed by international investors as primarily an export or currency play.

For Miyuki Kashima, head of Japanese equity investment at BNY Mellon Asset Management Japan, while these popular perceptions of Japan are important, they miss a wider point. Having experienced its own asset bubble and crash in the late 90s – as well as a quarter century of sluggish growth – Japan, she says, has important lessons for policy makers in the rest of the world as they come to terms with the ongoing fallout from the global financial crisis.

Take the question of fiscal stimulus. In Washington and elsewhere – and as the efficacy of quantitative easing is increasingly called into question – policy makers are beginning to ask whether infrastructure spending could be the key to reviving demand. The US has already spent some US$48.1bn on infrastructure, via the 2009 American Recovery and Reinvestment Act, and an additional US$73 billion is slated to be added to that.1 But the question is, does this spending work?

Here, says Kashima, Japan has its own story to tell. Between 1991 and late 2008, the country spent US$6.3 trillion on construction-related public investment2 – a mind-bending sum which critics say has contributed to Japan having the highest level of public debt among developed economies; it has also made the country less – not more – dynamic.3

Yet, says Kashima, thanks to that same spending programme, Japan’s infrastructure now ranks fifth-best globally, while its train infrastructure (now privately owned and funded) ranks first in the world.4 More importantly, she says, is the question of whether and how much this splurge on infrastructure served to bind society through some difficult times. She explains: “For me it’s one of the great unknowns. How would our society have looked if all those jobs hadn’t been created? What would have happened to social cohesion? It’s easy to criticise the sums spent but would Japan have enjoyed its current high levels of social and economic stability in their absence? I believe it’s an extremely relevant question for other countries in the post-global financial crisis world.”

A similar theme – a sense that Japan has been there and done that – extends to the political sphere. Here, says Kashima, the 2013 return to power of prime minister Shinzo Abe was a milestone. It marked the first time a former Prime Minister returned to office since 1948 and was all the more remarkable, given that, between 2006 and 2013, Japan had no less than seven prime ministers; more than one a year. It also marked a return to form of the ruling Liberal Democratic Party (LDP) after three years in the wilderness; only its second absence from power since the end of the Second World War. Explains Kashima: “There’s a sense that after the economic doom and gloom of the early 2000s the Japanese electorate wanted to try something different. They broke with the past by electing the Democratic Party of Japan as an alternative to the LDP; didn’t like it and have now reverted to the established party. From the outside looking in, it’s maybe not too much of a stretch of the imagination to say something similar is happening with politics in the rest of the world. In this sense, Japan offers an oasis of stability amidst the current global political turbulence.”

In the meantime, Abe’s landslide re-election offers him a mandate to continue with Abenomics, the economic reform programme that bears his name. Kashima notes that despite negative coverage to the contrary, Abenomics is delivering on at least some of its promises. Recent data paints the Japanese economy in a positive light: Nominal GDP has enjoyed 13 consecutive quarters of year-on-year growth. Jobs and industrial output data has also been encouraging.5

This isn’t to say Abenomics is without its problems, however. Says Kashima: “Yes, you can argue the government is missing its growth targets or that companies are not investing enough. But that’s to miss the wider point. Just the fact that the government has committed to a growth target – for the first time since the 1960s – is remarkable in itself and I’m surprised it’s not more of a talking point with investors. It takes a lot of courage for a government to come out with an official growth target because anything they do now will be measured against it. The main thing for me is that it makes sense to aim high. Even if we don’t reach the target there’s quite a good chance the government will do whatever it can to prevent GDP declining again.”

Looking forward, Kashima remains bullish on the prospects for the Japanese economy.  She notes that while a strengthening yen may have been at the forefront of most investors’ minds,it is only a small part of the story. She concludes: “Investors who focus on Japan as a currency play are missing a far more important truth: a domestic economy that is performing well on its own terms and is home to companies offering attractive returns to international investors, regardless of how the currency performs.”

What to watch in 2017

  • Improvements in nominal GDP.
  • Positive jobs data.
  • Strengthening yen.

1. City Journal: ‘If you build it…’, Summer 2016
2. The New York Times: ‘Japan’s Big‐Works Stimulus Is a Lesson’, 5 February, 2009
3. City Journal: ‘If you build it…’, Summer 2016
4. World Economic Forum: ‘Competitiveness Rankings’, 26 September 2016
5. Japan Macro Advisors, Trading Economics, 24 October 2016