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COLUMN-Japan confuses appearance and reality: James Saft
February 12, 2013 / 8:02 PM / 5 years ago

COLUMN-Japan confuses appearance and reality: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Feb 12 (Reuters) - A government which sees its role as driving stock market rallies is one suffering sad confusion about the difference between appearance and reality.

Japan’s economy minister, Akira Amari, said on Saturday the government will increase economic efforts in order to drive Tokyo’s Nikkei index up another 17 percent by the end of March.

“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year,” he was quoted by Japan Times as saying in a speech. Japan’s fiscal year ends March 31. “We want to continue taking steps to help stock prices rise.”

The Nikkei has already skyrocketed 28 percent in the past three months, pushed along by an effective devaluation in the yen which itself was brought on by new policies advocated by the newly installed Liberal Democratic Party government, including a doubling in the Bank of Japan’s inflation target to 2 percent.

The theory, and it is correct as far as it goes, is that higher stock prices may lend animal spirits to the economy, encouraging consumers to spend and businesses to invest.

It is also, in some respects, like slapping a Bentley sticker on a Smart Car and thinking the trunk space will increase.

First, let’s be clear: Japan’s government probably can and will make this happen, and very likely by driving down further the value of the yen, thereby improving the competitiveness of Japanese exporters. Other industrialized countries won’t be that happy about it, but other than talking down their own currencies and encouraging their own central banks into increased stimulus, there isn’t much they are likely to do.

The LDP has been outspoken in calling on the BoJ, to which Amari serves as a sort of liaison, to be more active in buying assets, and so we can probably expect more of that, which may include direct purchases of stocks or moves sufficient to drive down the yen further.

“A weaker yen has been by far the most effective tool to generate Nikkei outperformance and it is very reasonable to ask the question how much further JPY weakness has to go to fully unwind the underperformance of the last few years,” Steven Englander, head of G10 foreign exchange strategy at Citigroup, wrote in a note to clients.

“We stress the Nikkei both because of its wealth effects and because translation effects for Japanese firms make them far more profitable and on the margin are as good as fiscal policy to encourage them to invest. From a political perspective, the Nikkei-JPY relationship is too much a good thing for Japanese policymakers to give up.”


First, there is just something addle-pated about a senior government official calling for a specific and spectacular jump in a major global equity market. It comes across as either naive or cynical.

Japan does have a series of problems having to do with deflation and balance-sheet recession, and yes, generating activity by generating paper wealth will, on the margin, do something to oppose those forces. Japan’s malaise is not simply the result of a deficit of animal spirits, it is driven by demographic issues and, to judge by the example of Sony, an inability to allocate money to the best ideas.

This mal-allocation of money is demonstrated by the banking system, which still these many years down the line is loath to cut off credit from its weakest clients. Artificially driving the Nikkei up does nothing to make Japanese corporations and banks better at allocating capital. The products Japan already produces will be cheaper in dollars or euros, sure, but there are reasons to worry about the long term.

A jump of 13 percent in the Nikkei will actually simply shelter Japanese corporations and their shareholders from the consequences of their decisions, allowing those that are among the walking dead to continue among us that much longer.

Of course it is easier to magic up stock market gains through monetary alchemy than it is to reform the banking system, or to address demographic issues through immigration reform, so this is where we spend our time.

And it has to be noted that this is exactly the same thing which is happening in the U.S., though perhaps in slightly less obvious ways. It is clearly the object of U.S. monetary policy to increase asset prices and thereby revive the economy.

So, don't bet against asset-price gains or currency moves, in the case of Japan a weaker yen. Just remember that the short-term gains seem pretty slight, to judge by the results globally, and the long-term costs are potentially high. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at (Editing by James Dalgleish)

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