Scorching heat, super heavy rains, typhoons and thunderstorms, it's been quite a summer again – and it still continues. Especially typhoon No.11 dumped unforeseen amounts of water across West Japan. Half a million people were ordered to evacuate away from overflowing rivers and dangerous landslides, weather reports changed to hourly rates from their usual daily measurements and over the 3-4 days it took for the storm to pass, large areas were drenched with more than 2 meters of rain. And the rains, flooding and landslides still continue in West. Once again, the economic damage has been enormous, but human fatalities have been kept limited in scale, thanks to well-built infrastructure, timely preparations and hard-working local emergency centers.
"Obon" week saw the usual throngs of millions crowding roads, rail and air on their way to homesteads, family graves and beaches as well as the annual reminiscence of the tragic events in August 1945, the two atomic bombs and the national surrender, end of WW2 and start of New Japan, the world's only constitutionally pacifistic nation. Pledges were made again to maintain and promote the peace that has lasted for 69 years even if new rules are same time being set for the country can defend itself better amidst growing concerns. Prime Minister and almost all of his cabinet members chose to stay away from the controversial Yasukuni shrine this time not to raise bad feelings at the two neighboring countries, yet the chorus of criticism from Beijing and Seoul was much the same as before.
Storms are raging also in Europe and Middle East. Across the latter, Arabs are killing each other with renewed vigor with Iraq in full war again and the long time fight in Syria just getting worse. The target of new group of Islamic jihadists, who have taken over big parts of the two countries and murdered thousands at will to impose their strict Koran rule, is no less than totally wipe out the two states into one Islam Caliphate with other Arabian countries possibly to follow on the list. They have a fertile ground for this as today's national borders on Peninsula were drawn by Western colonialists after their WW1 defeat of Turkish rule there and do not reflect the tribal or sectarian separations undermining unity among the populations. Without strong ruler in Iraq and the Syrian dictator pinned down, the door was wide open for the new extremists to walk in the hen house. Much against his will, US president decided to get US forces re-engaged in Iraq to stop the onslaught causing immediate panic in world financial markets. Japan and other countries dependent on Arabian oil and gas follow the outcome of all this with anxiety. Adding human aspect to the concerns here is that the IS fighters now hold one Japanese man as prisoner. What will they chose to do with him?
Things are not much better where ever you look in the Arab world. In Libya, where Western countries helped locals to get rid of their despotic ruler, those liberated are now fighting each other and all Westerners have escaped out. In Egypt, the old military rulers have retaken power to prevent the country from falling down similar path. In neighboring Gaza, Israel Army has used heavy hand to stop Arabian attacks with consequential tragic civilian casualty. Afghanistan is the next case just waiting for the Westerners to leave so the locals can get to each other's throats again. Meanwhile in Africa, the rapidly spreading ebola epidemic raises new global concerns that cannot be stopped by guns, only medicine and care, which both are in short supply today.
In Europe, the relations with Russia have now got ice cold, just a step from old Cold War as President of Finland realistically described the situation. After EU finally stepped up the economic measures against Russia, Putin unexpectedly answered them with his own countermeasures. Remarkably, he has sidestepped any responsibility for the Malaysian airliner tragedy and continued to meddle in Ukrainian infighting. While his policies will no doubt cause economic problems for Russian citizens, his popularity just keeps soaring, something unbelievable.
First casualty in Putin's new line of fire were exports of Finnish milk products with outbound trucks and trailers turned back from the border within hours of Moscow's declaration. There was little further delay to Finnish dairy giant Valio announcing lay-off of 800 staff. Reports say that numerous trucking companies engaged in the lucrative trade, many debt-driven family operations, will also find it hard to find substitute jobs. Meanwhile, Finland's leading department store Stockman reported 90% profit collapse as Russian buyers stayed away from shops in Russia and in Finland following 30% decline in value of their roubles.
Further show of how entangled Finland economy is with Russia, is that Russian companies are now major owners in Finland's next nuclear power plant project and in its biggest shipbuilding company with special know-how in ice breaker technology. In the new situation, Finnish politicians are now ventilating whether to give go-ahead for the NPP project while in case of the shipyard, still a national pride with its wharf in center of Helsinki, Finland's leading bank was forced to cut off finance to its projects as part of the new EU measures. Sounds hardly logical inside a small country.
All together economist calculate the Russian problems will make for EUR 400 million annual dent in Finland economy that was suffering already before. No wonder, opposition parties plan to summon the new EU-focused PM to explain in Parliament how did we come to this. The PM himself seem to realize the seriousness of the situation as he took time off another triathlon that he was scheduled to participate in last weekend. Finland's president, ex-EBC banker, certainly took it all seriously and travelled to personally talk with Putin, then followed it up with meeting the Ukraine president. We'll see how it all will turn out for Finland.
In fact, the economic situation across the whole Europe looks pretty bad even without any Russian problems. The latest bad news is that GDP growth turned negative even in Germany, the "locomotive" that was supposed to pull whole EU out of its recession. Many expect ECB to soon take another step toward real monetary easing like its counterparts in USA and Japan have done.
In Japan, too, new challenges are rising in economy and politics, even without any Russian problems. The April-June GDP sank 1,7% from the preceding quarter, which means 6,8% slide down annualized. While shocking to some, for others this was just as expected after pre-tax consumer boom lifted January-March GDP up almost as much. As earlier stressed many times, what really matters is how strong the recovery will be in July-September. Some expect that could turn around 4% up annualized leading to the annual growth for whole 2014 settle down between 1% and 1,5%. The 3Q data is especially important as it will make the base for government's final decision on the second VAT rise to 10% scheduled for April next year. World Bank and IMF are pushing Japan to stick to the road into reduction of its huge public debt, but political pressures are rising at home front against following the course.
June trade deficit rose to JPY 6 trillion (USD 60 billion) raising more financial concerns. As earlier, the exports just don't seem to grow anywhere as much as the import bill due to structural change of outsourcing Japanese production overseas and reducing capacity at home as well as due to big increase in energy imports. The gap in physical trade caused this time a sizeable current account deficit at JPY 400 billion (USD 4 billion), four times more than preceding six months all added up. As discussed, capital flight is more serious for Japan than physical trade as erosion in the capital base at home will eat into industrial investments at both home and overseas as well as into domestic finance of the huge government debt. Analysts must be now all anxiously looking forward to see how data for trade and finance balance turn out next few months.
No relief can be expected at least from the fuel bill as it has turned out it will take several months more before Kyushu Power can come up with the additional safety measures requested by NSA for the restart of the company's Satsuma-Sendai nuclear plant. This is likely to push other NPP start permissions even later. Continued mishaps at Fukushima No.1 - latest is failure with the hi-tech "ice wall" to stop leaking of the contaminated ground water - will add pressure on NSA to remain strict in its dealings with the old power monopolies.
On consumer front, it just might be that confidence on Abenomics to pull its magic through is starting to wane. The financial tricks set out in the first and second arrows hit their marks, but the reforms of the third arrow just don't not seem to be happening with expected speed and scale however many pledges Prime Minister keeps making. It is said that the patience of the nation – voters as much as investors - could run out coming autumn unless concrete reform progress is achieved. Same time, recent weakening in Prime Minister's position, is ebbing on his opponents to step up stand against the reform policies, no matter whether in agriculture, taxes, employment, foreign relations, military defense or whatever.
The rising pressure, especially from inside his own party, is pushing Prime Minister to focus this month on the renewal of his minister line-up, on the agenda for the autumn parliament session and on forthcoming local elections. The choice of new ministers - together with the choice of which old ones to keep – is critical for Abe's continued support as LDP party leader when his two year term comes to end next year. As there are 18 minister seats and 6-7 "heavyweights" like Vice PM Aso, Economy Minister Amari and Spokesman Suga are likely to keep theirs, there will be 11-12 empty seats to fill with new names. Yet, at last count, there was 59 senior party members, who felt they are "entitled" to have his or her minister seat this time, so whoever he chooses, Abe is likely to make almost 50 party colleagues bear grudge against him for not being selected. While he was supposed to clear the party re-election easily based on his successful reign, "it ain't necessarily so" any more as the song goes.
Back from grueling 5 nations, 6 days tour of Latin America, where he had to follow footsteps of China president, who had passed through same places just days before promising the host countries billions worth of investments and imports - even establishing the BRIC alternative to World Bank, a welcome present for Putin - Abe looked tired and unfocused at the annual commemorations of Hiroshima and Nagasaki atomic bombs. In live television and in front of international dignitaries including US Ambassador, his speeches were gutless readings from written notes and, to add insult to injury, were soon exposed almost identical to what he had said on the same podium year before.
In contrast, the two city mayors, both well-known peaceniks as can be expected in such places, strongly challenged government's new defense rules in their speeches. They also challenged the Nobel peace prize winning US president to come and see what destruction his Air Force achieved in Japan 69 years ago, probably not something the US Ambassador expected to hear. Maybe such clear politics were "unsuitable" for such solemn events, but it left us with impression that Prime Minister did not think much about these events even if, after all these years, they still rate close to the nation's heart. It added to the drama in Hiroshima, that the last surviving member of Enola Gay, the B-29 that dropped the bomb, had passed away at his home in USA the week before maintaining to the end his belief that the US choice of action was right and saved more lives than killed.
We are off to an interesting autumn season.
August 20, 2014