Japan's Prime Minister Shinzo Abe has declared victory in the weekend election after winning a majority in the parliament’s upper house.
Japan’s economy has been a damp squib for decades, and successive governments have hailed the arrival of various schemes and tactics to breathe life into it. None of them have really boosted economic activity in the far eastern state.
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Abenomics kicked off in 2013 and has been the most dramatic of all attempts. It consists of a massive “bazooka” of QE money printing, one of the most aggressive such programmes the world has ever seen.
But it’s failed to get inflation really going – a key aim of the policy, since inflation is such an important metric of an economy’s health. “It is worth remembering that Japan has been in chronic deflation for decades so even low inflation is good,” says Darius McDermott of Chelsea Financial Services.
Prime Minister Abe has admitted that the job of Abenomics is only half done, and it's likely he’ll table more changes.
One of the biggest problems with Japan is corporate culture. Hierarchical, fusty and inherently averse to innovation, it’s the attitude of big business which has help keep Japan locked in the status quo. “There are a number of industries which remain quite traditional, where vast profits are controlled by sleepy incumbents… It’s what we call ‘old Japan’”, says Praven Kumar, fund manager at Baillie Gifford.
Prime Minister Abe recognises this, and made shaking up boardroom behaviour part of his “third arrow” of Abenomics.
Improving shareholder returns in a bid to inspire a more dynamic, Western-style corporate culture has been a big focus.
Major robotics and automation company Fanuc was once “the exemplar of unfriendliness” towards shareholders,” says Kumar.
“The founder of the company didn’t believe in shareholder returns. He said any profits generated were the worker’s, as it was their blood, sweat and tears that went into it.”
JOINING THE CLUB
This began to change with the launch of a stock market index dedicated towards showcasing the companies with the most shareholder friendly policies. Called the JPX Nikkei 400, there’s been jostling among major companies to improve their practices and make the final 400.
“I was very sceptical about this but there’s no disputing the fact that companies want to be in the club,” says David Coombs, fund manager at Rathbones Unit Trust Management. “There’s evidence of much better behaviour and looking after shareholders.” An official corporate governance code was also implemented in Japan.
Even Fanuc has got with the programme. It’s now offering up 50-60 per cent of its earnings as a dividend and has set up an investor relations department where previously there was none.
“The once staid and conservative boardrooms of Japanese corporates have already embraced large-scale reform on governance issues,” says Louise Dudley, portfolio manager at Hermes Investment Management. “However, the reality is Japan remains a conservative society and companies will need the support of government to push through further effective reform.”
Given the pace of change has been glacial, it’s a wonder so much has happened at all, and in a short space of time too. Now there needs to be a trickle-down effect, where smaller companies begin aping the larger ones in their improved practices.
“It will be interesting to see whether small and medium sized companies follow the lead of the large companies and go beyond the minimum ‘comply or explain’ level requirement to make real changes,” says Dudley.
While economists debate whether Abenomics has failed and the utility of more QE in an economy that’s already been pumped to the rafters with it, it’s worth remembering that turning around a super-tanker takes time.
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“Japan has been in chronic deflation for decades so even low inflation is good,” says Darius McDermott of Chelsea Financial Services.
Abenomics wasn’t just about QE and achieving 2 per cent inflation. Japan’s a complex economy, a multi-faceted beast, and Abenomics is a mixed bag of policies targeted at so many different areas. Taken together, they’re meant to revolutionise society.
Other achievements of Abenomics so far include higher rates of corporate profits, which bucks the trend of businesses being very wasteful in Japan. Women are being encouraged back to work, improving household incomes, and tourism has more than doubled – all of which should be positive for Japan’s fortunes.
“It was never one big policy, but a series of them and change won't happen overnight – there will be setbacks. It takes a lot to change the mindset of a generation, which is what Abe is trying to do,” McDermott says.