The sun rises again in Japan

Investors must remain bullish on Japan and India should stay engaged and strengthen its engagement with Japan.

This columnist had the opportunity to attend the lecture delivered by Japanese Prime Minister Shinzo Abe in Singapore on Friday. It was his first public speech after Liberal Democrats won elections to the upper house. The cavernous ballroom at the Ritz Carlton Hotel was overflowing with people. Investors and others were looking for some good news out of Asia now that both India and China are floundering and Indonesia is not too far behind in joining them.

 

It was a feisty speech. Repeated use of the words coercion and democracy was the feature of the speech. Abe said that reviving economic growth had become important since the two-decade long stagnation had enfeebled national pride, blunted Japan’s diplomacy and also threatened its security. He said that without growth, neither fiscal reconstruction nor social security for the aged was possible. That was interesting and a reasonable explanation of why he had to go for a massive monetary stimulus for reviving growth. As long as the world judged nations through the narrow prism of economic growth (Amartya Sen should take note), even demographically challenged countries had no option but to pursue economic growth.

Now that his party has a majority in both the houses of Parliament, he discussed some specific growth initiatives to be implemented in autumn. There would be decisions on investment tax credit for reviving corporate investment and a special session of the Diet would be convened to pass new laws on deregulation and corporate restructuring. In particular, regulatory reforms would focus on electricity, agriculture and medical services. He suggested that Japan’s technology combined with the infrastructure expertise and experience of companies such as Ascendas of Singapore could come in handy in creating the estimated $8 trillion of infrastructure that Asia is estimated to need. Japan has been a big investor in the Association of Southeast Asian Nations (Asean) countries. He reminded the audience that Japan stood by Asean during the Asian crisis of 1997-98. The US thwarted the idea of an Asian Monetary Fund mooted by Japan at the height of the Asian crisis.

He took particular pride in the fact that Japan and Singapore worked together to bring that “beacon of democracy”—India—into the East Asia Summit. He said that Asia was not known for coercion but for interaction based on mutual respect and being at ease with one another. He concluded this segment of his speech with an expectation that he looked forward to having amicable conversations with top Chinese leaders.

Japan’s attempt at reviving its economy could not have come at a more opportune time for Asia that is now looking for good news on the economic front. It is frustrating that the post-2008 crisis narrative has turned into one of instability, volatility and economic slowdown in emerging economies and relative stability and booming asset markets in the debt-laden Western world. It could not have been spontaneous.

It is in this context that efforts by Japan to end its pacifist constitution to develop a combat army of its own and to revive its economy should be welcomed by Asia and other developing nations. Of course, Japan is unlikely to emerge as a rival to the US either militarily or economically. But, the course of history does not change in a matter of few years. It takes time.

It is too early to pass a verdict on the success or failure of Abenomics. However, the early signs are promising. Annual change in manufacturing and mining, in investment and capital goods are beginning to claw back into positive territory after years of stagnation. It means that industrial production in these categories have seen sequential growth in the past few months. It is not an accident, perhaps, that the turnaround in industrial production has occurred since April when Abenomics began to grow roots.

There is a danger that a weak yen—one of the cornerstones of his economic strategy—erodes the purchasing power of an ageing population. Equally, given that Japan has a very large net international investment position, to the extent of over 60% of GDP, the yen’s weakness translates into larger yen values of the foreign investments of Japanese households. The strategy here is that a corporate sector nursed back into health and greater confidence would venture overseas, acquire assets, earn profits and send back its investment income to Japan to support the domestic economy.

Abe’s speech, while it stressed de-regulation, openness to foreign investment and an open economy was silent on creating an open society that welcomed immigration. Further, it is not clear if his efforts to revive Japan would succeed or be allowed to succeed by other nations. But, a world that is burdened by the contrived dominance of the West, especially in the last two to three years, needs Japan to succeed. It makes sense for investors to remain bullish on Japan and for India to remain engaged and strengthen its engagement with Japan.