During his recent state visit to Washington, Prime Minister Shinzo Abe declared that “Japan is Back.” Noted Japan strategist and investor, Alexander Kinmont, examines this proclamation closely along with the factors driving the apparent sudden shift in Japan’s political and governmental positions on economic and diplomatic policies:
After re-considering the degree to which Japan actually “went away”, I examine first the timing of the apparent policy volte-face performed under PM Abe and now known as “Abe-nomics”. This timing appears to be primarily attributable to the strategic imperative imposed upon Japan by China’s pressure on the Senkaku Islands. The best and certainly most pacific, least controversial, riposte Japan could make would be to grow again – in nominal terms. Over the longer run, a more robust military posture requires wealth. At a more general level, it would appear that Japanese politics gains coherence under an external, geo-strategic, constraint (up to 1989, the Cold War, for instance) leading to less bad economic outcomes (amongst other things). It seems likely that an external constraint has been re-imposed and that this has engendered, as its first fruit, a genuinely pro-growth evolution of macro-economic policy for the only time in the post-1997 period. Second, I examine whether aggressive monetary and fiscal stimulation might “work”, and find that it probably will based both on history and theory (if maintained for long-enough). Perspectives which emphasise that “Japan has tried this before and failed” are not supported by the facts. This mistaken view leads to exaggerated concerns about the fiscal position – which has worsened not because of out-of-control spending but because of collapsing tax revenues, a consequence of deflation. Higher interest rates arising out of renewed nominal growth would probably be consistent with a more, and not less, sustainable fiscal balance. Fourth, I make some remarks about so-called “structural problems”, suggesting that there are none so serious as to be an obstacle to recovery. This view implies that “structural reform” was always an unnecessary political gimmick and that expectations towards it now are equally unnecessary and misplaced. In particular, a special circle of intellectual hell should be reserved for “demographic” determinism – which makes up in spurious precision what it lacks in explanatory power. This line of interpretation entails conclusions such as that the Trans-Pacific Partnership is strategic in origin and intent and carries few implications for the economy. Fifth, I highlight that Japan’s real problem (from the perspective of an investor) is poor quality corporate management in the large company sector. Following some attempts to quantify how great an economic drag this factor represents, and to identify whence it arises, I conclude that Japan is more likely to “restructure” by allowing the “non-salariman” segments of the corporate sector to grow as a proportion of the economy than through aggressive levels of restructuring at larger companies. With these provisos, then, I conclude that Japan really is “back”.
About Alexander Kinmont:
Alexander Kinmont is currently the Chief Executive Officer (CEO) at Milestone Asset Management Co. He began his career at Dai-Ichi Securities in 1985. Subsequently, he worked for Credit Lyonnais (now CLSA) in 1988 as an analyst covering real estate and related sectors (railways, housing, etc.) before joining Morgan Stanley. In 1993, he became Morgan Stanley`s Japan Investment Strategist. Between 2005 and 2009, he managed funds investing in Japanese real estate and real estate securities at Prospect Asset Management and Babcock & Brown. In November 2008, he became a non-executive director of Milestone Asset Management, and in March 2009, he re-joined Morgan Stanley, as Chief Japan Strategist. He retired from Morgan Stanley in July 2011 and became CEO of Milestone in August 2011. Mr. Kinmont is widely quoted in the Japanese and foreign media. He graduated from Oxford University with an MA in Litterae Humaniores (Greek and Latin Literature & Ancient History) in 1985..
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Is Japan “Back”? with Alexander Kinmont Powerpoint Presentation