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 AOYAMA VIEW

Minister scandal distract, economy slow down, Kuroda rides for rescue
He did it after all! And the other one made it against all expectations. The commotion around the sudden resignation of Economy Minister Amari and the unexpected move by BOJ Governor Kuroda to adapt negative interest rate for commercial banks' deposits at central bank has disappeared from the news by the time this column comes out, but the impact from these actions will set new undertone for finance and politics in Japan now. First signs of economy and business slowing down also shift ground for new business moves in the corporate sector that has just woken up to action from New Year celebrations.

Amari showed remarkable recovery of memory in his 45 minute speech in Parliament listing his every move day by day, minute by minute in connection of the alleged bribe, obviously with some assistance from his lawyers. After concluding at the end that his only crime was not following up his secretaries' work better, he surprised all by announcing he would anyway resign "not to harm Prime Minister's important work" railroading the FY2016 budget and the TPP deal through the legislature.

It was right conclusion, of course, as the opposition had already used past two weeks attacking him and Abe for the scandal and vowed to do their best to defeat or at least delay the two items in forthcoming debate. In true samurai spirit, PM's faithful foot soldier removed himself from the stage and pre-emptied opposition plans. His disappearance from the leader's side, however, will also make for new troubles as there is no good substitute. The selection of Nobuteru Ishihara, a veteran party bureaucrat with little economic knowledge, best known for his famous father, shows well how thinly spread talent is in Abe's close chore who share his political agenda. If anything, the nomination will enforce the image that all things are increasingly controlled from Kantei, the Cabinet Office, instead from respective ministries.

It also remains to be seen how the case will impact Abe's popularity. The first signs say not at all as a poll last week showed it was rising further instead of decline. The opposition remains unbelievably weak and completely disunited: DPJ seem to still hold on to superiority complex from its 3 years in charge 2009-2011 despite today's dismal voter support below 10%. So far, it has rejected all proposals from Communists for planning tactical alliances in local districts to combine votes as well as rejected approaches for merger from Tokyo chapter of Isshin no To (Reconstruction Party), who parted ways with their Osaka brethren.

Kuroda's move to charge banks money for the big deposits they keep at the central bank was another master stroke from the old trickster who managed to surprise the markets around the world once again. Pushing the cash out to the market for active use - more loans, investments and, hopefully, salary rises has been his credo all along. Same time, cutting back the recent rise in JPY value will help profits from exports and boost JPY value of repatriations from overseas business for the book closings end March. It should help maintain growth in face of China trouble, create inflation as well as help government finances: the 10 year JGB yield fell below 0,1%, even down to 0,05%. In short, Kuroda, too, served his PM loyally by giving him again time for the much needed reforms despite all rumors of break up between the two. Maybe, it will serve as the necessary push for action with message "Look, I did my part again. Now it's your turn."

It did not come easily - the BOJ board vote went 5-4 with all those voting for said to be Abe nominations - and it was not anything new in the world. ECB and several other European central banks have imposed similar "punishment" for banks' unused funds since 2014. In Sweden's Riksbank, the negative rate is whopping 1,1%. It was also mitigated to apply only for new deposits so that it would not make any immediate damage to banks, yet it was first time for BOJ and came timely to cool the market turmoil in Japan, even elsewhere. The global concern, of course, is now how other central banks will respond to it. For what we know, ECB will step up its action in March while US Fed looks now unlikely to push up the rates further contrary to its earlier indications.

Fresh economic data confirm that slowdown is already on its way in Japan. Consumer spending fell 4% in December, average incomes fell 3% with less overtime pay and official inflation rate dipped to 0,5% even if prices excluding energy kept rising 1%. It is clear that the rise in food prices, both imported with lower JPY and domestic thanks to adverse weather conditions, combined to unsatisfactory rise in income, have forced Japanese consumers dish out more of their available money for food leaving less for other spending. December retail sales declined 1% from year earlier and big ticket items like cars have been declining already for long time: in January they were 4,6% below one year ago. Combined to tanking exports to China, the industrial output fell 1,6% and probably will fall more this month now that all Toyota production lines will take one week off due to explosion damage at Aichi Steel, its 33% owned daughter company, who supplies most of its special steel for engines and chassis components.

The property boom that has helped to lift up the numbers shows some signs of slowing down, too. Hi-rise towers keep still coming up in central Tokyo but apartment transactions fell 31% during the second half 2015, commercial property even 60%, both wiping out the gains that still continued during 1H.2015. Foreign investors, who were keen on Tokyo prices when China, Hong Kong, Singapore and Sydney multiplied beyond reality, are now withdrawing in wait for sumptuous price falls at home. The boom in Tokyo office rents that has lasted past 4-5 years has come to end again, they say.

The incredible rise in inbound tourists seem to have slowed down, too, as Chinese consumers are not as confident as before and are further troubled by the 10% change in CNY/JPY rate. Their Japan wave hit its top in August with 690,000 arrivals, but slowed down to just 380,000 in December. According surveys, Chinese are cutting back their travelling overall and look for cheaper destinations and those who plan to travel to Japan say they will be more careful with their spending. As you might recall from the previous column, their spending here went last year up to USD 30 billion - as much as Japan's exports of car parts or semiconductors - so a 20-30% cut there could mean a lot for retailers this year. Let's wait for news how the business turned out during the Chinese New Year next week.

All this explains how, despite positive annual numbers, everything was slowing down already at end last year making companies unwilling for as big spring salary rises as 2014-15 and why the BOJ move was highly welcome for the overall economy. Some big industries are winding down their estimates for FY'2015 sales and profit that ends March 31 despite strong showing over past 9 months and take action to strenghten their position by structural moves. Steel industry, in crisis all around the world, even in Finland, for China dumping its huge overcapapacity is one. Nippon Steel, Japan No.1 and world No.2, who already merged Sumitomo Steel in 2012, announced this week merger with Nisshin Steel, Japan No.4, to look for new cost savings and capacity closures. It announced its sales were 11% and 40% profit down for fighting cheap Chinese imports. Meanwhile, Japan No.2 JFE Holdings cut its profit forecast already for third time and Korea痴 Posco, another global giant, reported smallest ever annual profit.

Toyota, world car maker No.1 again last year and expecting record profit but always looking for ways to do even better, announced last week that it will make its 51% affiliate Daihatsu fully owned, something that will help reduce material costs for its minicars by up to 10% according to estimates. Observers are now waiting if it will make similar move for Subaru, the highly successful SUV maker that Americans call "Japan's Volvo", where it holds today 16% share. It might also look for new synergies with Suzuki, the minicar specialist who has been highly successful already 35 years in India, where Toyota and others find going hard. Practically privately owned Suzuki, just freshly divorced from its unhappy six year marriage with VW, could be interested in better mannered Japanese suitor, who could provide it with its hybrid engine technology. The question is how Toyota would match cooperation with Suzuki together with its main competitor Daihatsu it already owns.

Meanwhile, Toshiba is said to contemplate splitting off even its flagship nuclear power business as separate company in Japan, who would then be married to its US subsidiary Westinghouse. As per last column, Toshiba already has plans to offload its white goods, television, PC and semiconductor businesses, so you start wondering what will be left. As for Sharp, Japan's other problem child in electronics business, Foxconn's CEO Terry Guo sounded very convinced after his visit here last week that his USD 625 billion offer will win shareholders and banks over Japanese government fund's USD 300 billion offer. According him, the decision should come "in one week's time", however I would not be surprised if it takes longer and will end up in some sort of compromise for all parties. (In fact, Sharp CEO announced three days after I wrote this, that it will take one month more time to make a decision.)

At non-manufacturing side, the "sogo shosha" giant trading companies are said to face an abyss at end of the year forced to take a new round of write downs for their big investments into energy and materials businesses around the world. One year ago, the five Big Ones took asset impairments for their oil wells, gas fields and coal mines mounting up to several billion dollars in total. With global business volumes and prices of energy and raw materials tanking even more last year, it is now rumored that write offs this March end will spread to USD 13 billion. While Mitsui and Mitsubishi, the two original zaibatsu companies, have always dominated over their younger and smaller rivals, it is now rumored that Itochu, who has the smallest exposure to energy and materials business in its portfolio, will be the profit winner first time ever. If so, at FCCJ, we would naturally be proud for our new member company, who invested big money in Finland two years ago.

In much smaller business, closer to our wallets as consumers, McDonalds Japan, is looking to unload part of its shares to outside investors - possibly US fund Bain's Capital - to gather financial strength and business wisdom for recovery from the 20-30% sales decline that followed when customers repeatedly found strange things like plastics, even human teeth, in its products premade in Thailand and China. Such change in ownership would be a return to the roots of Golden Arches here as for its 30 first successful year it was 50% owned by legendary businessman Den Fujita. It might be wrong to say that the problems started immediately after the US parent made Japan 100% owned subsidiary, but for some time now the company has been in serious trouble. Bain's seems to me a likely alternative as it already owns the Skylark chain with a good track record turning it back to profits.

If you did not know McDonalds Japan history, you might neither know that another international fast food business Subway has been 100% owned by Suntory here ever since it beached in 1991. Now the Osaka based drink company, also privately owned in practice, wants to focus on its USD 16 billion takeover of Jim Beam and sells 65% of its holding in Subway Japan to the global brand owner Subway International from Netherlands. However, it is said Suntory will remain involved in its day-to-day operations so guess you won't be able to order Coca Cola or Kirin with your sandwich even in future.

American president election campaigning has been, to say it politely, colorful to follow. A note-so-polite, well-known American observer described the circus more sanguinely: "Every time you think that our political discourse can't get any worse, it does. The Republican primary fight has evolved into a race to bottom achieving something you might have thought impossible: making George Bush look like a beacon of tolerance and statesmanship." True, the Rep candidates on offer range from bad-to-worse with no experience in governance nor understanding of the world outside while at Democrat side, the one who has track record to show, seem to struggle for sufficient credibility with the domestic voter base. Like many other foreigners, I do fear what will come of the USA once one of them will be in charge, especially when the US legislature already has so clearly been devoid of any reason and 100% focused on domestic inter-party fight already for years.

One embarrassing example of the disconnection between US politicians and the reality outside their world came up last week when another Yokosuka-based US Navy destroyer made what Americans call FONOP ("Freedom of Navigation Operation") past one of the far away islands built by China to emphasize again that UNCLOS (United Nations Convention on Laws of the Sea) does not qualify such man-made fortifications for 12 mile national water zone as real islands do. The US Foreign Office and military have been touting this repeatedly over past 2 years, yet, it turned out this week that USA itself has never ratified the agreement. Concluded in UN way back in 1982 and signed by President Bill Clinton in 1994, it has been rejected time and again by the bloody-minded US senators for "being against US interests"!

This does take off big chunk of the US credibility, even if theoretically China, one of the first underwriters of the agreement, can be pinned down to it. On the other hand, bet you that as much as US has been making case for it, such news have never penetrated public media in China. As result, millions of Chinese are as anxious to start a war against USA as some of the US prez candidates are against China or just about anybody. "We will nuclear bomb Syria so that the desert there will glow for million years", promised one of them.

As always, finishing with sports. Petite Sara Takanashi, now 19 year old but already 3 year veteran on ski jump World Cup tour, took already her seventh straight Cup win last week. If anything, the margin to No.2 was even more overwhelming than before so that you can put a big question mark for the meaning of the whole tour if only she can stay out of any injury. I would not be surprised if FIS will come up with some new rules about the length of skis in relation to the size of the jumper or similar for next year. Those of you who follow this Nordic sport, will recall that such change was done some 20 years ago in men's competition rules when small sized Japanese jumpers seemed too good. Those who don't follow, can see Sara in Seven-Eleven commercials his father is one of the 10,000 franchise shop owners.

For men, must add that it is almost as incredible that 43-year old veteran Noriaki Kasai still keeps close to the top of men's World Cup with two recent 4th placings. In fact, reading the result scroll at the end of the last broadcast, realized there were 5 Japanese in Top 20 and 10 Japanese in World Top 40. In contrast, I saw only one Finnish jumper on the whole list to represent our former glory with multiple World Champions and Olympic gold medalists. It is reported that Kasai's example has encouraged at least two Finnish veterans, Janne Ahonen, 38, and Toni Nieminen, 41, for come back to try correct this sorry state. They are surely welcome back here in Japan.

Timo Varhama  
Tokyo, 5 February, 2016   


Previous Columns

28 January 2016
"ABE: THE REALITY BEHIND ALL THAT TALK "

20 January 2016
"Bear Outlook for Monkey Year Grows, Taiwan Votes to Keep Distance from China, but Pop Group is More Important for Many "

12 January 2016
"NEW YEAR VIEWS - AND A LOOK BACK AT 2015"

17 December 2015
"Global Environment, Food Tax, National Stadium: Historical Decisions or Political Parading? "

8 December 2015
"Challenges in Paris Conference, Challenges Back Home in Japan "

27 November 2015
"Refugees, bombs, business and global warming - can we control them all? "

3 November 2015
"Japan, USA, UK or Germany - China Impacts Us All Today "

22 October 2015
"New Ministers, New Trade Deals, All Political Play"

7 October 2015
"Power games, ball games, trade deals and refugee misery"

25 September 2015
"Big Problems, Big Talk and Big Figures - Each in Their Own Way".

9 September 2015
"Challenges in Japan, Tougher in USA and Europe ".

1 September 2015
"Looking at Neighbors, Japan Seems Stable and Safe ".

19 August 2015
"End Summer, Ceremonies and Holidays Over, Back to Work for All".

6 August 2015
"Hot Weather, Hot Air in Politics - From War Anniversary to Whisky in Space".

23 July 2015
Greece, China, EU, Japan: looking for the lost reality

23 June 2015
World No.1 City? The Difficulty of Passing New Laws, the Easiness of Spending a Lot

16 June 2015
"Only in Japan?" - Somethings, Yes, But Others Are Same All Over

4 June 2015
Security and Finances: Pensions, Companies, Banks, Olympics, FIFA

21 May 2015
Economy Back on Track, Record Profits at Big Companies

11 May 2015
Spring Events: Odaiba Rock, Shibuya Sex, Capitol Hill, White Hall and Red Square

22 April 2015
Elections, Elections - Finland, Japan, Around the World

30 March 2015
Sakura: beautiful, but just for a short, fleeting moment

16 March 2015
Better late than never - Japan moves slowly

2 March 2015
Three struck out, three more in doubt - Abe's ministers under attack again

19 February 2015
Spring, Sibelius, Chocolate, Budget and Big, Bad Putin

5 February 2015
Reform Work Starts - Energy, Farming and Food on Wish List

26 January 2015
Terror strikes, plenty work, sad memories wait

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014



About the Columnist

The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.

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