Two of the world’s three largest economies are sorely in need of something to get their economies back on a path of growth.
Many American companies with huge cash positions still aren’t investing and hiring for the future.
These captains of industry, technology, and finance seem to prefer buying back company stock and waiting for the uncertainty to pass. America’s “animal spirits” remain dormant.
For the first time in 35 years, American business closings now outnumber business startups. Funding for American startups fell 25% from the fourth quarter to $13.9 billion, the largest quarterly decline on record since the 2000, according to data from Dow Jones.
Trouble in the Land of the Rising Sun
For Japan, it’s a bit more complicated, since we really need to go back almost three decades to when its real estate and stock market bubble burst.
I went to Tokyo as an exchange student in the early 1980s out of curiosity and an eagerness to learn about the sources of Japan’s tremendous economic achievements. What I learned is that Japan’s success was due to a combination of cultural factors that fostered great cooperation and national effort together with economic fundamentals: a cheap currency, steady increases in productivity and investment, a protected home market, and always prioritizing exports over consumption.
But complacency leads to the mighty being humbled.
As Japan approached the bubble bursting in 1989, the new generation wanted and was getting consumption. Speculation and financial engineering were crowding out capital investment, international pressure was pushing up the value of the yen, and overconfidence and complacency led to bank lending practices being greatly relaxed.
But the surprising point is that since the early 1990s, Japan hasn’t been able to regroup and reform to get economic growth back on track.
There are a number of reasons for this.
- The hunger and national unity that drove postwar Japan isn’t there anymore.
- Demographic headwinds are getting stronger. The average age in Japan is 46 years (almost 20 years more than in Indonesia), and among farmers, it’s an astounding 70 years.
- China’s rapid rise was eating away at what was left of Japan’s competitive advantages, and Japanese politics faced paralysis.
Japan has suffered through several lost decades, zombie banks, anemic growth, and lower expectations punctuated by fruitless attempts to jumpstart the economy through infrastructure spending programs and pumping liquidity into the economy.
The last time Japan had a significant surge was in late 2012 when Prime Minister Shinzo Abe was running and promising to conquer deflation, bring the yen down to spur exports, and enact structural reforms. These promises, together with a cheap market, drove the Nikkei up 25% in six months in dollar terms and 46% in yen terms.
In early 2013, on bright prospects for then-candidate Prime Minister Abe, I recommended the “Merrill Lynch of Japan,” Nomura Holdings Inc (NYSE:NMR), and the stock jumped 135% in just four months.
This rocket fuel lasted only so long. Unfortunately, Japan’s entrenched business and political interests continue to stymie Abenomics’ third arrow of meaningful structural reforms meant to unshackle the moribund Japanese economy.
On the reform table were initiatives such as freeing up the health sector, opening immigration, allowing more foreign investment, giving shareholders more power, and reforming agriculture.
The result of this failure is that Japanese government debt now sits at a staggering 235% of gross domestic product (GDP), and 75% of these bonds have negative yields.
The strategy of pushing down the value of the yen to spur exports seems to have run its course. So far this year, the yen has appreciated 8.7% against the greenback, while Japanese economic growth is anemic.
But don’t give up on economic and political reform in Japan. After all, during the Meiji Restoration, which began in 1868, Japan’s leaders pushed aside feudalism, opened the country to the world, and set out on a course to rapid industrialization.
In my Asia portfolio of country ETFs, I moved out of Japan at the end of 2015, shifting the proceeds to both South Korea and Hong Kong, though the iShares MSCI South Korea Capped (NYSE:EWY) and the iShares MSCI Hong Kong (NYSE:EWH), respectively.
I suggest you do the same until Japan gets its mojo back.
Good investing,
by Carl Delfeld