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 AOYAMA VIEW

Fog of uncertainties ahead: Japan, Britain, China and USA, each in their own way
NOTE: This column was written on the 12 of July!

The global financial turmoil from Brexit looks to cost billions for Japan's carmakers and other big companies, yet it helped PM Abe and his party to win the Upper House election last Sunday. The terrorist murder of seven Japanese development aid workers in Bangladesh, his tax rise cancellation, poor economic news, North Korea's ballistic missile shoots and China's new aggressions helped him further to paint the outside world in crisis and Japan economy under pressure. His message that Japan needs now steady, firm hand that only LDP can offer to sail through safely seemed to go well down with the voters. Many voters said they did not like Abe's policies, but voted for LDP as it's still the best show in town.

It was not a landslide for LDP as some headlines said. That happened already in 2012 ande 2013 elections. This time, most parties added on to their Upper House seats at cost of the wretched Democrats and small fringe parties. Proportionately the biggest winners were Buddhist Komeito, Osaka Ishin and Japan Communist Party with voters again looking for alternatives to both old main parties, not just DPJ, who after all got 28% of the seats on offer this time despite just 8% public support according advance polls. Counting on the two first mentioned parties' support Abe can now think he has his coveted 2/3 majority to start talks for Constitution change, yet what should be changed is totally unclear between the ruling parties, even inside LDP, while majority of the voters remain against any change. It hurt him that LDP got only 56 new seats of its own to add to its old 65 non-contested and with 121 in total fell one seat short to have simple majority on its own.

The DPJ/JCP alliance for one unified candidate in 32 single seat districts succeeded in reducing old LDP/Komeito grip on these from 29 to 21. Two of the losses (Fukushima, Okinawa) were ministers in Abe cabinet, a disgrace that forces Prime Minister to renew his cabinet line-up immediately instead of normal autumn schedule. Iy's rumored that the Olympic Minister (from Yamagata) has to go, too and Abe might even get rid of his No. 2 Aso for opposing his views and fill the seats with his own "yes men"and hard-core rightists. As always, colorful and popular figures excelled: the biggest vote getter in Tokyo was DPJ's Renho, ex-minister, model and tv-announcer, while in Kanagawa it was LDP's Junko Mihara, an ex-pop singer,. It's an old truth that elections in this country are a popularity contest as much as competition based on political issues.

My guess is that Prime Minister will proceed carefully in the Constitution issue in Parliament's forthcoming autumn session and could also stay away from other sensitive matters like confirmation for the TPP trade deal, maybe the ready-negotiated EU-Japan trade deal, too. Despite getting already third mandate from the voters for his economic policies the long awaited reforms might also end up on "stay away" list of controversial issues as Abe's return to economic fundamentals will focus on new massive extra budget for public spending that could go up to JPY 10 trillion (USD 100 billion). Makes you think nothing has changed from the old LDP 20 years ago despite all talk about "Abenomics".

How badly hurt the economy and business are then really? Well, with a new giant step up in "safe haven" JPY value - it whirled overnight from 10% up to 17% up against USD this year and even more against EUR and GBP - the share market remains down in view of diminished profit outlook from international business. The crucial foreign investment, already hurt by Abe's non-achievement, has been moving out from Japan. The first damage estimates are out indicating that the latest JPY rise will cut profit predictions for Toyota alone by USD 2 billion while Nissan, Canon and others will follow in same line, even more if heavily exposed to Europe with all uncertainty and new growth concerns there. Yet, it's no end of the world for the behemoths: the analysts' estimate for Toyota profit still remain at average USD 16 billion. This should do still very well for anybody, thank you.

Also, the JPY rate started cooling down on Monday when traders heard about Abe's big spending plans, uet there are many who worry it will stay strong in current global turmoil. On other hand, of course, this is all welcome news for any type of import business, from oil or gas or food to, say, timber and log houses from Finland.

What is not welcome news is that with Prime Minister himself painting the country in crisis, salaries sagging and stock values down, the consumer demand is dropping off. Average monthly wages fell in May for the first time in almost one year, especially for part-timers but also for overtime and bonus for regulars. The gap between the two groups is now huge - average JPY 342,000 for regulars and JPY 95,000 for part- timers - and with almost all new jobs coming in only at the part-time sector for already many years, this is impacting the overall demand. Total retail volume fell 2% in May and consumers' constant search for discounts drove some big retailers into red figures for Jan-March quarter. For instance the No.1 Aeon group reported JPY 6,3 billion (USD 60 million) loss, its worst quarter in eight years. Consumer price index excluding fresh food sank - 0,4% in May and many retailers from Aeon to Uniqlo see that from now on cutting prices is the only way to keep up the targeted sales volumes. As things look today, BOJ's 2% inflation target is as far off as sustainable growth under Abenomics Even government now estimates that the GDP growth for FY2016 will be only 0,9% instead of 1,7% it earlier claimed. No wonder, LDP and the bureaucrats are already busy preparing the huge bout of public spending while BOJ board meeting end this month might introduce some new tricks for the financial sector. Yet, think Governor Kuroda must feel battle scarred and tired for Abe's failure to keep his own part of their pact with necessary reforms.

What's good for both government and economy is that interest rates remain super low, if not outright negative. Following BOJ's decision to charge commercial banks for the money they keep at the central bank and don't put into market, the government debt that is widely used as market reference rate turned negative, too. Today, the 10 year JGB costs -0,275% and even 20 year JGB is now negative for the first time. For borrowing money for 30 years Japan's government must pay now measly + 0,015% so you cannot really blame Abe for even adding to the central government's debt load even if it was the highest in the world. Especially when most of the new issues are bought by the central bank who now owns 60% of the total debt.

If some people feel it is high time to renew the Constitution written by US military government in 1946, many others feel it is also time to change the Status Of Forces Agreement, also written by Americans same year, which control Japan's military guests, the 50,000 strong US armed forces in Japan, during their time outside the bases. Yet, neither Abe government nor any one before it has shown any guts to take up the issue with the US. After repeated crimes from burglary and drunken driving to murder and rape raised new strong resistance in Okinawa, finally a miniscule first change was agreed last week to SOFA rules to placate the local population's ire. From now on, the CIVILIAN contractors that are NOT directly paid by US Government, will be exposed to normal Japanese police control once caught out of the base area on their free time. Yet, the civilians paid by Washington, all military and generally everybody, who is out of base on official duty, will remain "untouchable". It's hard to see that this kind of cosmetic change would placate any Japanese and you can expect that US military's behavior will continue unabated causing embarrassment for the Japanese officials and US Ambassador Kennedy, who must explain and apologize every time something happens. It's amazing that the usually highly disciplined military cannot get its people under control.

Yet, with China's steadily increasing aggression the continued US military presence in Japan is only getting more important. The long awaited verdict by International Tribunal of Arbitration on China's claim to entire South China Sea and its man-made island bases will be out this week and Chinese media is already abuzz with denials of its authority and threats of military action. "We will not swallow bitter pill of humiliation and rightly reject infringement into our internal matters... determined to safeguard our sovereignty and territorial integrity against US push to internationalize the issue", wrote China Daily. President Xi himself added "we will never compromise and are not afraid of trouble" before ordering last week mobilization of Chinese naval forces in the area for a massive exercise. Meanwhile, US Navy has brought in a second carrier force from Middle East to augment USS Ronald Reagan based in Yokosuka, so all elements are ready for an explosion and some analysts think China is ready to risk some kind of confrontation to keep its face and tough talk in front of its own people. In my opinion, the situation here is much more acute than in the Baltics with Russia that was last week subject of a top NATO meeting that even Finland's president attended.

To confuse the issue further China has stepped up activity in East China Sea, too, to bring its customary "enemy" Japan into the mess. Its aerial intrusions have three doubled and first time ever it brought Navy ships to Senkaku waters to add weight to its Coast Guard's steady intrusions claiming they should have unobstructed passage through Okinawa Strait to the Pacific. It also claimed last week that the International Tribune was rigged because a Japanese veteran lawyer was its president 3 years ago when Philippines filed the case. Then, China refused to co-operate and participate in the process and as result, the court's president had to appoint all five judges for the case, four of whom are now European. They hardly represent their country, just their own legal opinion, yet it gave China another excuse to complain how all is set up against it. The Japanese ex-president, now 79, is long retired, yet China government spokesman blasted again Japan for "disgraceful track record in the issue" and "stoking tensions in the region and discord among Asian countries ...anxious to see the world in disorder." Sometimes it's difficult to see any difference between China Foreign Ministry's language and North Korea's colorful threats to destroy all those opposing its actions.

China has also continued to drag its feet in finalizing the long discussed military communication protocol with Japan that should help avoid misunderstandings between air forces and naval units crossing each other daily out there and establishing a hotline and regular meetings to talk out any differences between the two countries. Maybe that, too, would be seen as weakness by China's masses after all the brainwashing they have received over the years.

In many ways, China has painted itself into a corner where it sees itself encircled by hostile forces, not unlike Russia in its European front. Despite Putin's tough talk there, I think he is a cold calculating gambler, who knows the rules of his card game and maintains strong grip on his Army. I am not that convinced about China's leadership and its control on Army, Navy or Air Force. Let's hope nothing serious happens in the coming days and weeks here.

While NATO meeting in Poland made some headlines, the Big Play in Europe is the political shambles that Britain has now sank in following its Leave vote and the resulting confusion around Europe. First, Boris Johnson, the Trump-like leading challenger to his old school mate Cameron and all other boisterous Brexit leaders disappeared from the crime scene in a whiff. Then, party vote for a new leader-cum-prime minister was set for autumn between two lady ministers, neither one of whom was proponent for leaving the EU community. Then, one of them also disappeared into thin air after badmouthing her competitor in a private matter. Yesterday, Prime Minister, who had insisted to stay on another three months, suddenly announced he will go, after all, this week and we will have a new female British PM, first one since Margaret Thatcher in the 80's, appointed practically out of blue and completely undemocratically through machinations of a few Oxford chums You would never expect this in a country, who takes such pride as 1000 year old cradle of democracy, more like CCP or some Banana republic putz.

We others are lost on what will happen next. Until now the word has been that UK would not announce its resignation and start negotiations with EU for its terms until next year - if even then. Theories have been thrown around how the new leader could overturn the vote result perfectly legally and politically acceptably: just by ignoring the non-binding vote result or through new elections next year or some other way. The fog of uncertainty of what the future will look like for the country and the whole continent seems thick, pretty bad for running orderly business. With GBP value abruptly down, exports from UK and travel to UK look attractive for the time being and thanks to that the London equity market has made strong recovery, yet a recoil from rising import costs and suspended investments are likely to follow soon. How the new trading and banking terms with the EU and rest of the world will impact UK would only come later. For us other Europeans, the expected loss of UK from the community and the continued uncertainty around it, is poisonous.

It seems you can only expect more bad news for economy and politics next few weeks. For instance USA will go through its "Trumpocalypse" or the Republican Party convention that will confirm a deceitful businessman and a racist bigot as US presidential candidate while in Japan we have LDP shamefully maneuvering in another grey bureaucrat for Tokyo Governor instead of its own highly representative and decisive lady Yuriko Koike, who dared to take initiative of her own upsetting the old guard. She will now run as independent and the split of the traditional LDP vote in two could make it possible for another pop "talent" or outright weirdo to get the job. Thought we already had our share of comedians, writers and dreamers in charge of our city..

Look for some reprieve from the sports news shows no avail. The Euro Cup soccer that ended on Sunday did offer some uplifting matches and unexpected results - like great runs by Iceland and Wales as well as Portugal's unexpected final win - yet somehow the overall feeling from the long program with 32 teams was not as good as in the past. Maybe there were too many teams or the play these days is too technical and careful lacking individual flash or maybe it was just the awkward broadcast times in Japan through the night, but it all left me discontent. Perhaps we should be just happy that no terror attacks or serious crowd violence took place after the early trouble with Russians and English fans. Luckily both teams were ousted at an early stage. Moreover IS focused on Istanbul, Baghdad and Bangladesh this time instead of France..

Waiting for new Olympic Games should always provide excitement, too, yet this time it seems that best we can expect from Rio is that not too many participants and tourists will get sick from the filth and virus, robbed or raped by the local thugs or simply lost in the transport mess reported there. When Rio Governor himself is lifting his hands in despair and local police is greeting tourists at airport with banderol "Welcome To Hell!" we should really be careful in our expectations from there.

OK, at least the Japanese tv-times will be better than with Euro Cup.

Timo Varhama  
Tokyo, 12 July, 2016   


Previous Columns

24 June 2016
"UK Splits, shakes EU, even Japan"

30 May 2016
13 June 2016
"Rainy season: it's pouring on Prime Minister "

30 May 2016
"Obama is a Class Act, G7 Meeting Was for Japanese Audience "

8 May 2016
"With More Headaches at Home, Abe Takes Golden Week Europe Tour "

23 April 2016
"Dramatic Giant Quake, Business Slowdown, Election Mode in Politics"

7 April 2016
"Tokyo Great City, Japan hmmm...Colorful People "

22 March 2016
"Spring energy, child care and train travel "

11 March 2016
"Five Years from Japan "3-11" - Making Best Out of Gigantic Recovery Task "

28 February 2016
"A Dig Deeper into Politics: Ignorance, Camouflage, Chicanery "

15 February 2016
"Markets in turmoil, economy in decline, challenges grow for Abe"

5 February 2016
"Minister scandal distract, economy slow down, Kuroda rides for rescue "

28 January 2016
ABE: THE REALITY BEHIND ALL THAT TALK "

20 January 2016
"Bear Outlook for Monkey Year Grows, Taiwan Votes to Keep Distance from China, but Pop Group is More Important for Many "

12 January 2016
"NEW YEAR VIEWS - AND A LOOK BACK AT 2015"

17 December 2015
"Global Environment, Food Tax, National Stadium: Historical Decisions or Political Parading? "

8 December 2015
"Challenges in Paris Conference, Challenges Back Home in Japan "

27 November 2015
"Refugees, bombs, business and global warming - can we control them all? "

3 November 2015
"Japan, USA, UK or Germany - China Impacts Us All Today "

22 October 2015
"New Ministers, New Trade Deals, All Political Play"

7 October 2015
"Power games, ball games, trade deals and refugee misery"

25 September 2015
"Big Problems, Big Talk and Big Figures - Each in Their Own Way".

9 September 2015
"Challenges in Japan, Tougher in USA and Europe ".

1 September 2015
"Looking at Neighbors, Japan Seems Stable and Safe ".

19 August 2015
"End Summer, Ceremonies and Holidays Over, Back to Work for All".

6 August 2015
"Hot Weather, Hot Air in Politics - From War Anniversary to Whisky in Space".

23 July 2015
Greece, China, EU, Japan: looking for the lost reality

23 June 2015
World No.1 City? The Difficulty of Passing New Laws, the Easiness of Spending a Lot

16 June 2015
"Only in Japan?" - Somethings, Yes, But Others Are Same All Over

4 June 2015
Security and Finances: Pensions, Companies, Banks, Olympics, FIFA

21 May 2015
Economy Back on Track, Record Profits at Big Companies

11 May 2015
Spring Events: Odaiba Rock, Shibuya Sex, Capitol Hill, White Hall and Red Square

22 April 2015
Elections, Elections - Finland, Japan, Around the World

30 March 2015
Sakura: beautiful, but just for a short, fleeting moment

16 March 2015
Better late than never - Japan moves slowly

2 March 2015
Three struck out, three more in doubt - Abe's ministers under attack again

19 February 2015
Spring, Sibelius, Chocolate, Budget and Big, Bad Putin

5 February 2015
Reform Work Starts - Energy, Farming and Food on Wish List

26 January 2015
Terror strikes, plenty work, sad memories wait

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014



About the Columnist

The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.

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