The Democratic party took office in Japan last year as the result of an overwhelming rejection of the ruling Liberal Democratic party by Japanese voters.
The Democrats’ platform was a hodge-podge of different policies, to me anyway, with the one connecting element in the pledge that the government would be run for the Japanese people, rather than for special interests–namely, the government bureaucracy, export-oriented manufacturing companies, and multi-generational political “machines” spawned by the long rule of the LDP.
One of the pleasant surprises of Prime Minister Yukio Hatoyama’s cabinet has been the presence of seventy seven-year old Hirohisa Fujii as finance minister.
Mr. Fujii made early waves by announcing that the new government intended to let the yen settle where the currency markets led it. In other words, it did not intend to adhere to adhere to the LDP policy of intervention to help smooth the profits of exporters. Mr. Fujii also earned praise from domestic economists for his efforts to craft a government budget that tried to set limits to new bond issuance. But his efforts appear to have earned him the enmity of long-time political fixer and one-time leading light of the LDP, Ichiro Ozawa, who is now the secretary general of the Democratic Party.
In late December, right after the budget had been set, Mr. Fujii checked into the hospital, suffering from high blood-pressure and fatigue. Reports differ on whether Mr. Fujii is actually ill, or (more likely, in my view) whether this was a conventional signal of his disagreement with party policies.
Mr. Fujii tendered his resignation a few days ago and has been replaced–not by his assistant and fellow budget hawk, Yoshihiko Noda–but by one of the founders of the Democratic Party, Naoto Kan, who has little financial expertise.
Almost immediately, Mr. Kan announced that the government was considering intervening in the currency markets to weaken the yen in order to enhance the results of exporters.
What’s wrong with that?
It sounds like a return to the failed policies of the past twenty years and the cycle of self-reinforcing economic weakness that has gripped Japan over that period. The steps: discourage companies from becoming profitable on their own, so that they become dependent on government assistance and produce little economic growth. Avoid outright deflation by public works construction projects. But no growth and the threat of deflation keep nominal interest rates near zero, so the government is not overwhelmed by sharply rising interest expense and can continue to issue new debt. Citizens continue to buy government bonds, since there aren’t other viable investment opportunities.
Great for political fixers, great for the establishment, bad for citizens who believed the Democrats’ campaign promises.
Mr. Hatoyama has rebuked Mr. Kan publicly, but so far Mr. Kan appears unrepentant. Stay tuned.
Without structural change, I think Japan will remain a marginal stock market. There will be very focused small-cap investment opportunities, but it seems to me these stocks will be swimming against the tide. Given that they will stand out so starkly from the overall bleak economic background, such stocks may end up trading at much higher multiples than they would elsewhere. The ideal strategy for them, then, would likely be to raise capital in Japan and invest it elsewhere–sort of a non-hedge fund carry trade.
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