The double edge of Abenomics

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The double edge of Abenomics

“The morale is high among Japanese entrepreneurs. It’s a back to business spirit,” the chief executive of an auto parts manufacturer in Tokyo said. He runs a small automotive parts business in the ailing Ota district in Tokyo. Orders in supply industry only surge when business improves for large manufacturers. The vibrant mood in the district is a definite business indicator for Japan. The uplifting power of so-called Abenomics - the much-hyped economic growth strategy of Prime Minister Shinzo Abe - has trickled down to reach the more humble industrial strata.

The Ota district upholds Japan’s proud manufacturing legacy based on the “monozukuri” philosophy - the unique Japanese dedication to craftsmanship and details that led to innovation and technology prowess during Japan’s economic and industrial peak. At its heyday, the district was home to 9,000 companies. Today, the corporate population has been reduced to 4,000. But all boast one or two world-class technology patents.

Abe, zealous to revive the Japanese economy and end its deflationary spiral, pays special interest to the industrial hotbed in the capital. Fostering small and mid-sized enterprises is part of the “third arrow,” or structural reform, of his ambitious economic growth strategy. The two earlier arrows - aggressive monetary and fiscal stimulus - have been followed by plans to breathe life into the moribund technology manufacturing industry. Abe frequently visits the small business sector. He invited 10 entrepreneurs from the Ota district for a dinner at the prime minister’s residence.

Some of the early enthusiasm and hopes for Abenomics effect have fizzled. His growth program announced earlier this month was met with disappointment and criticism, and was dismissed as a recycling or paraphrasing of policies from past governments, including his own. Financial markets have turned jittery. The government is planning to announce backup plans on industrial promotion. In an interview with NHK, Abe said he will unveil part two of his growth strategy, which includes tax incentives for capital investments.

The Tokyo government is planning an investor relations presentation in London next week, possibly headed by the architect of Abenomics, Koichi Hamada of Yale University. Tokyo wants to say that Abe’s growth plan has a solid core and is not a populist stunt. Stocks on the Tokyo Exchange, however, fell further on Wednesday. The U.S. dollar also recovered to near 95 yen.

The reversal of the upbeat mood on financial markets that first greeted Abenomics is beginning to make the government anxious. The first arrow - unlimited quantitative easing - could miss its target if it does not improve corporate competitiveness by inflating asset values and stimulating consumer and industrial activity. The monetary policy was aimed at buying time for companies to regain competitiveness. But there’s not much time left for that.

The president of a big investment company pointed to the problem of a time lag between the immediate signs of assets rising, like a stock revival, and the greater length of time needed for true economic structural improvements. Smaller companies that have not made investment during the economic slump cannot easily come up with innovation and explore new markets with outdated equipment and technology. While they adapt to the more hopeful environment, the government and policies may change, he said.

And anyway an inflation in assets - through stock and currency gains - may not be entirely helpful to the corporate sector. Exporters are immediately helped by a weaker yen, but higher energy import costs has pushed up the price of raw materials. Yasushi Kimura, president of the Petroleum Association of Japan, said in late May that rises in oil prices would be inevitable.

The effect on industries has been mixed. Following stock gains, real estate prices also rose, helping construction and rental business. An official at the secretariat of the Real Estate Companies Association of Japan said there had been signs of recovery during the slump of the last two decades, but the general mood in the market was different this time.

The automobile industry was first to pick up among exporters. Thanks to Abe’s cheaper yen campaign, Toyota Motor Corp. ended the 2012 fiscal year with a six-year high in revenue and net profit. It expects net income will increase more than 42 percent to 1.37 trillion yen ($18.37 billion) this year.

The electronics sector was helped less. Because many electronics companies moved production out of Japan to save costs, the weaker yen doesn’t help. Cutting-edge technologies like semiconductors and smartphones require prior investment and their competitiveness cannot be immediately helped by a weaker currency. The benefits of a weaker yen depend on whether manufacturing is done in Japan or overseas, said Koo Bon-kwan, senior fellow at Samsung Economic Research Institute. The petrochemical industry also felt a blow due to higher imports cost in petroleum and gas. The same goes for the transport and airline industries.

The mixed effect translates into differences in bonus checks during the summer season. According to the Keidanren, the interest group of Japan’s largest companies, bonuses this summer at big companies increased 7.4 percent on average from last year. Bonuses in the automobile sector jumped 14.2 percent while those at information and technology edged up just 0.3 percent. Rises in shipping and chemicals were less than 1 percent, while the textiles and pulp industries plan to cut back from last year.

Abenomics serves as a double-edged sword. The Korea Institute for Industrial Economics and Trade researcher Sakong Mok was unsure if Japanese companies would use the profits from the weaker yen to invest or to raise wages. Atsuto Sawakami, chairman of Sawakami Asset Management, said deregulation and tax cuts to boost corporate and consumer spending must take place before the positive effects of Abenomics evaporate.

*The author is an editorial writer of the JoongAng Ilbo.

By Nam Yoon-ho
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