Asia (Page 2,469)

TOKYO – No Japanese leader wants to preside over a bad milestone — like your economy dropping from No 3 to No 4 globally.

Welcome to Prime Minister Fumio Kishida’s hellish 2024. Barely six weeks in, Kishida’s Liberal Democratic Party is struggling to spin Japan’s falling behind Germany’s gross domestic product (GDP) in US dollar terms and the LDP’s culpability for this symbolic changing of the guard.

Kishida’s party is also giving Chinese leader Xi Jinping something of a much-needed soft power win. At a moment when Beijing is struggling to tame a property crisis, head off deflationary forces, restore confidence in the stock market and address record youth unemployment, news that it is pulling further ahead of arch-rival Tokyo sure is making for a welcome positive news cycle.

Japan, meanwhile, entered 2024 in recession. GDP contracted an annualized 0.4% in the October-December period after a 3.3% retreat in the previous quarter. “Japan’s economy is in poor shape,” says Stefan Angrick, senior economist at Moody’s Analytics.

Yet that’s true, too, of the longer-term trajectory as Germany surpassing Japan indicates.

Granted, this change in the league tables might rock Tokyo a bit less than China blowing past Japan’s annual output. Depending on which data set you use, that happened in 2010 or 2011, somewhere between the premierships of Naoto Kan and Yoshihiko Noda, and set the stage for the LDP’s return to power in 2012.

At the time, premier Shinzo Abe didn’t exactly sell his return to power as a beat-China mission. But so-called “Abenomics” was indeed a reformist retort to China becoming the world’s No 2 and Japan relegated to third place.

Sadly, the Abe era prioritized weakening the yen over reviving Japan’s once-vaunted innovative spirits. That failure, 11 years on, did more than anything to enable Germany to put Japan in the rearview mirror.

Adding insult to injury is the “sick man of Europe” narrative now plaguing Chancellor Olaf Scholz’s economy.

Germany’s once-fabled growth model has lost its groove. China’s slowdown and Russia’s war on Ukraine have become headwinds for Germany. So is softening global demand for autos, machinery, chemicals and other vital German industrial products.

At a moment when Europe is desperate for growth engines, Germany is looking at its second year of post-pandemic economic disappointment.

“At this point, economic underperformance of the German economy and the whole Eurozone is the key risk to the downside to our forecasts,” says Juraj Kotian, an economist at Erste Group Bank AG.

Economist Daniel Kral at Oxford Economics says “it’s clear that Germany was the worst performer among the major eurozone economies last year.”

In other words, it’s debatable whether Germany overtook Japan or Tokyo ceded the road to its fellow Group of Seven member. And this gets us back to Kishida, who’s now fighting for his political life.

Kishida ended 2023 with a 17% approval rating largely because inflation has been outpacing top-line growth and wage gains. On top of a host of political finance scandals afflicting his party, Kishida is now struggling to finesse the second bad milestone of recent months.

The other: China overtaking Japan to become the globe’s largest exporter of automobiles. Those headlines brought back that 2010-2011 feeling that Japan has little choice but to accept China’s rising dominance in Asia.

But might this latest wake-up call be the one that jolts the LDP from its legislative slumber?

Since October 2021, Kishida telegraphed a series of promising ideas to take control of the economic narrative. One was a “new capitalism” that redistributes wealth to middle-class families to boost consumption. Another was catalyzing a startup boom to disrupt Japan’s top-down and rigid economic system.

This latter scheme seemed particularly promising. It entails opening a path for the $1.5 trillion Government Pension Investment Fund, the world’s largest such entity, to help finance entrepreneurs and provide incentives to pull more overseas innovators Japan’s way.

But just as during the 2012-2020 tenure of mentor Abe, Kishida’s 28-plus months in office have been maddeningly unproductive from a structural reform perspective. In fact, Kishida has put virtually no upgrades on the scoreboard.

Falling to No 4 globally seems as good a reason as any to get busy. What better way to get Kishida’s approval ratings back toward 30% than clawing back Japan’s global economic status?

Were economic time travel possible, imagine where Japan might be if Kishida’s party had acted boldly since 2012. If only it had moved more assertively then to reduce bureaucracy, increase innovation and productivity, alter the tax code in favor of startups, empower women, lure foreign talent and remind global CEOs and investors that Tokyo is as good a place to be as any.

Yet the second-best moment to launch a financial “big bang” is the present. First, though, Kishida and his party have to move beyond the weak yen crutch on which they have been leaning.

An undervalued exchange rate and hyper-aggressive Bank of Japan policies took pressure off government officials and corporate chieftains to do the hard work of recalibrating growth engines or taking risks.

Now, Tokyo’s weak yen-centric strategy is backfiring. The reason? The “cheap Japan” strategy of recent years is increasingly diminishing Japan’s global relevance in GDP terms.

This characterization has been popularized in recent years by economist Hideo Kumano at Dai-Ichi Life Research Institute. Since at least 2019, he’s been warning that reducing Japanese purchasing power in the long run is a risky way to boost GDP in the short run.

The costs of this complacency can be seen in Kishida’s abysmal approval ratings but also in how Japan is essentially walking in place as even troubled Germany steps forward.

Meanwhile, India is setting the stage for the next round of surpassing-Japan headlines that Tokyo must explain to the next generation of voters. Being surpassed by South Asia’s biggest economy would be another big blow to the collective Japanese psyche.

Of course, the magnitude of headwinds facing Germany is a source of keen debate. At Davos in January, German Finance Minister Christian Lindner dismissed the “sick man” label.

“I know what some of you are thinking: Germany probably is a sick man. Germany is not a sick man — Germany is a tired man after a short night,” Lindner said, arguing that the economy just needs a “cup of coffee” to regain momentum.

Japan bulls make a similar point as Tokyo stocks rally to the highest levels in 30-plus years. “We remain bullish on Japan equities which are our largest overweight recommendation in our coverage universe,” says strategist Jonathan Garner at Morgan Stanley MUFG.

The Nikkei 225 Stock Average is currently over 38,000 and “now seems likely to break near term the all-time high of 38,916 which was set as long ago as December 1989,” Garner says.

“In our view, the major turning point for the Japanese equity market came in late 2012 – when the Nikkei was below 9,000 – with the launch of the three arrows of Abenomics and [the BOJ’s] initiation of an innovative policy approach to combat deflation,” he says.

Amundi Asset Management strategist Eric Mijot argues that Japan’s stock market “remains attractive.” As economic headwinds intensify, he says, “this robust performance is unlikely to be replicated with the same strength in 2024, but the outlook for the market remains favorable.”

Sadly, though, all Japan is proving in 2024 is that 1980s-style “trickle-down economics” works no better today.

Abe did indeed take steps to strengthen corporate governance, setting the stage for record profits and share buybacks. But none of these tweaks translated into significant wage increases or broad-based efforts to increase productivity and innovation.

At the same time, everything BOJ officials thought they knew about 2024 is going awry. “The Bank of Japan will likely now become even more cautious about any policy change,” says economist Min Joo Kang at ING Bank.

Just six weeks ago, it seemed a foregone conclusion that BOJ Governor Kazuo Ueda would end quantitative easing (QE) and raise rates as soon as next month. Now, economists are scrambling to walk back those expectations.

A similar whiplash is confronting Fed watchers in the US as the economy confounds the skeptics.

“While pricing for the March [Fed meeting] has been trimmed to negligible levels, there’s still latent upside fuel for the US dollar in pricing for FOMC meetings beyond that,” says strategist Richard Franulovich at Westpac. “We assume US resilience can extend well into 2024 … and will make for a bumpy disinflation last mile.”

In the meantime, as the “cheap Japan” problem ruins Tokyo’s year, the race is on to see what drops faster: Kishida’s approval numbers, Japan’s GDP – or any remaining hope that Japan will ever regain its position as a top-three global economy.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek

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