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 AOYAMA VIEW

Markets in turmoil, economy in decline, challenges grow for Abe
Strong wind from south brought spring like weather to Tokyo over the weekend. Even stronger winds have blown through the financial markets making mockery of predictions that BOJ's negative rate policy would stabilize markets and keep JPY value down. In fact, it's been the worst week since the 2008 financial crisis for Japanese stocks and the mighty BOJ looks like a hobbit being tossed around when the entire financial world is trembling and global investors are running for cover in panic. We are now deep into the bear territory and JPY, the eternal "safe haven" currency, has shot up to almost same level where it was two years ago spoiling end March book closings and adding further pain to the corporate profit decline reported last week.

Even if Japan seems impacted more than others - in stock values, currency rate, corporate sales and economic growth - it's clear that the whole world is now in turmoil. Instead of just pointing finger at China or oil price, the analysts are now talking about global fear and worry about serious problems for banks, especially in Europe, where the 2009 cleaning up was left half way, and in Japan, where banks are holding big piles of government bonds that now give them negative interest rate. There's also concern that central banks' powers are no more sufficient against the market panic. The gigantic pile of debt, a good part of it probably bad, in China's state bank system is a story of its own proportions. Investors are rapidly reducing their credit risks and the economic outlook for 2016 is not any more just "slowdown" but likely "recession" or "stagnation" at least. Even the all-knowing Goldman Sachs has been forced to admit 5 out of its 6 "safe bets" for 2016 have already proved wrong, among them strong USD, well performing US banks and rising US inflation.

For Japan, all this comes when the economy and business was already slowing down. As analysts expected the Oct-Dec GDP data published today showed the economy declined 0,4% from the previous quarter, which means decline at -1,4% annual rate. As feared, early notes say this came mainly from sluggish consumer demand, while corporate investment remained positive. Still waiting for further analysis at the writing moment, for example on exports and imports, but it certainly does not look good for Abe government, who has put so much emphasis on its economic focus recently. In fact, despite all Abenomics, the economy has not taken traction but been swinging wildly quarter by quarter. After three years of campaign, the track record for Team Abe stands now 7-5 between growth and decline.

There seem to be no clear driver for positive growth left anymore and even Kuroda's bazooka seem to be shooting blanks in face of global turmoil. Comments like "magic formula lost its power" and "there's no excitement any more" have led investors to leave Japan disappointed at Abe's poor performance in reform front, his crucial "third arrow". With the outside world looking almost equally mean, the outlook for Japan's corporate sector that depends so much on it, seems increasingly sour. Analysts expect that the sudden business slowdown in last quarter will continue this quarter and cut 20% off the hitherto strong earnings in March book closings for many industries. Add another 10% cut for overseas repatriations at the new higher JPY value.

Fresh news are confirming earlier estimates: among big traders Sumitomo cut its profit forecast to just half after booking JPY 111 billion impairments for Oct-Dec quarter in iron ore and nickel while Mitsui slashed its profit forecast by 21% to JPY 190 billion (USD 1,5 billion) prophesizing that the slump in mining business is likely to last until 2020 delayed by China recovery. Softbank slashed almost all of its JPY 189 billion operating profit for the quarter to write down at least part of its US Sprint purchase and will face difficult times ahead to refinance its USD 100 billion debt. These downgrades were dwarfed by Toshiba, the problem child No.1, who widened its full-year loss forecast to JPY 710 billion (almost USD 6 billion), something that only drew sneers that "without clear information of its restructuring moves" the figures were "rather difficult to trust".

In comparison, it was comforting to read that Toyota indeed booked record profit for the first 9 months of the financial year and could become the first ever Japanese company to earn JPY 3 trillion (USD 26 billion) in annual operating profit. Always playing down its outlooks the Nagoya company kept its FY2015 forecast unchanged at JPY 2,8 trillion with sales up just 1% when, in fact, they have been so far up 6,5%. Excellent demand in USA based on economic recovery, good employment, low gas prices and generational shift, has served well Toyota and other global automakers - except VW. In fact, the total US car sales reached a new record 17,5 million surpassing the old record from year 2000 for the first time. The worry is whether such good demand will continue now.

The speed of events in outside world, surprised Abe government also otherwise. After huffing and puffing that Japan will shoot down North Korea's ballistic missile if it ever crosses over Japan area and mobilizing Patriot defense missile batteries even in Central Tokyo with media fanfare, the government was caught unprepared with Patriot batteries still on their way to the actually projected track in Okinawa when Mr. Kim launched his missile. SDF could only see a glimpse of its white trail high in the sky when it passed over and fell to Pacific somewhere close to Philippines as planned. Whether it carried a satellite to space as the Norths again claimed - nobody has ever heard a beep from this one nor from the previous launchings - is beside the point which is that it was another step forward in the erratic family dynasty's plan to develop a ballistic missile that carries its nuclear bombs all the way to Continental USA.

For Japan, who is well in the reach of North's medium range missiles, the new ballistic weapon would not change much, but the global power game and six party talks of aid or sanctions could change dramatically. Once Los Angeles, New York and Washington are in Mr. Kim's sights, the talks will change from US and UN demands "You do what we say or there will be sanctions" to Kim stating to the world: "You keep that aid coming or..."

That Japan, Korea, USA and United Nations still demand denuclearization of Korean Peninsula is today as much pretentious political posturing as SDF's close range Patriots claimed to shoot down ballistic missiles (unless they happen to approach spot-on). North Korea's nuclear weapon technology is now "a fact on the ground" as much as China's man-made islands in South China Sea and neither of these powers are likely to ever give up on them. On the contrary, they will keep strengthening their assets and building up more while the opponents just keep talking about "their worries" and crafting "strong statements of condemnation". China again showed patience to support its uppity "little brother", but its lack of response to calls from South to talk North off its plans has ruined its newly gained friendship with Seoul. Thoroughly embarrassed President Park has now asked USA to supply ROK with a long range anti-missile system, an unpleasant surprise to China as it will also reach far into China. This is a big turnaround as just four months ago Park was hugging Xi at the Beijing military parade as the only Western guest. And if Korea is going to have such anti-ballistic missile defense system, then there is no bars for the always careful Japan to augment its Patriots and Aegis destroyers with something more far-reaching as well. From there on, the next natural step would be the unspeakable: Japan and South Korea to have their own nuclear weapon to counterbalance that of North. Such hitherto unheard move would totally tip over the current regional imbalance tilting to China's favor. No wonder Beijing and its state owned media have already declared that South's defense idea is bigger security threat to the region than North's nuclear bombs and ballistic missiles!

As per last column, Abe's right wing cohorts are also stepping up their media control that threatens to turn Japan less open and free than what the PM loves to talk about. In the latest attack, Communications Minister Takaichi, one of Abe's closest supporters, informed Parliament that TV-programs that "present politically biased views" that "harm public interest" can be stopped by government and their broadcasters can get their license cancelled. Such statements are prone to lead to slippery ground: who is to decide what constitutes such supposed violations? The rightwing minister herself, one of those who claim that Nanjing and comfort women are just distortion of history? Or another future government who might think just opposite? And will the demands stop at public broadcasters? Why not demand same conformity from other media as well?

Well, at least free internet seem to be important for Ms. Takaichi as she has repeatedly refused to dwell into right wing web sites that are full of venom and twisted information claiming that "would endanger free word". Same time, not only dolphin hunt protesters are turned back, but so was United Nations' ombudsman for free speech scheduled to come here to check what's going on. He is allowed to come now, presumably following pressure from US Embassy. Another recent refusal involves an American war movie about a strong willed US POW surviving torture by a sadistic warden in Japanese prison camp, that struggled to get shown here as major theater chains were scared of far-right demonstrators. It finally found its way to a small art theatre here in Aoyama so you can go check out yourself if it is as bad and anti-Japan biased as they say. Universal's normal distributor claimed that its rejection was purely commercial as nobody would come to see so bad movie, but I find this hard to believe as the director is super popular Angelina Jolie and earlier similar movies, where war-time Japan is painted negatively, have had no problems in gaining popularity here. One very similar example that comes to mind is Nagisa Oshima's classic "Merry Christmas Mr. Lawrence" where Beat Takeshi tortures poor David Bowie burying him neck deep in hot sand for ants to feed upon. It was done 30 years ago and still gets shown regularly in TV despite all cruelty. I refuse to believe that Japanese audiences have really changed so much from that.

As it is, Japan remains one of the few advanced countries without law forbidding hate speech on ethnic grounds and when it comes to writing on political and social issues, major news outlets are kept under control with the press club system, where misbehavers can be denied access to firsthand information from ministers and officials. Such developments placed Japan at 61st position behind Korea and Nigeria on World Press Freedom Index rating by Reporters Without Borders. It's still far off totally black North Korea ranked 179th and China 176th out of total 180 countries in the list and noticing that even UK, France and USA, who often tout their "free word", are rated at 34th, 38th and 49th respectively, gives further consolation for Japan's low posting. But coming from Finland who claimed the No.1 spot for the fifth year in row, I find all this "freedom promotion" rather self-serving. (For other global indexes where Finland has recently ended at top or near it, please turn to Embassy home page as my modesty forbids me to use precious space here.)

With such strains on main media here, we should be proud of the mass selling weekly magazines, who cover freely all subjects that interest general public from pop stars to politics, from changes in economy and society to corporate scandals and nude models. In fact, one of these irreverent publications printed on cheap recycled paper, Shukan Bunshun, has been behind all biggest topics in the country this month: Amari money, SMAP split-up, Becky love affair, Kiyohara drug bust and now the latest case with a young MP, who pretended to be "ikumen" fighting for father leave and other support for family life, but in fact was an "ikemen" playboy and fornicator having extramarital sex tryst when wife was in hospital giving birth. This time the ruling party machinery acted rapidly and ruthlessly forced him to resign Parliament, but the question remains why Mr. Miyazaki was allowed to play his game while all colleagues surely knew his true character?

We remain on the wait what will be the next public scandal that Bunshun and other weeklies will expose as much as to what happens in the financial markets this week when China comes back from New Year holidays. Will MOF/BOJ resume old intervention policies they have not used in years to keep the yen's rise in check? How will Finance Minister Aso explain to international colleagues in Shanghai G-20 finance meeting how Japan will tackle its troubles? As interestingly, of course, how China, USA and EU will solve theirs?

All this is just babble in comparison to the crucial EU top meeting next weekend where European leaders have to finally make decisions on a number of big issues central to the continent's future. Their challenge is not only financial markets and banking system, but how to put an end to the continuing refugee inflow, how to tackle the crowd of a million or so now in asylum homes waiting permission to stay, how to carry on with the financial aid and reform of Greek economy and, last but not least, how to avoid Brexit or UK's possible exit from the community?

Any one of these issues would be enough for one meeting - how in the world the EU leaders think they can solve all on their list? The outcome of the meeting will give part of the answer to the growing concern that Angela Merkel is losing her grip on German voters and, consequently, her position as "de facto" leader of whole EU. It will be difficult to think how the feuding family of nations will keep together without her patient, but strong "motherly" leadership.

Timo Varhama  
Tokyo, 15 February, 2016   


Previous Columns

5 February 2016
"Minister scandal distract, economy slow down, Kuroda rides for rescue "

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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