Originally published on June 11, 2014
Big businesses in Japan are - or wait, were - practically giddy. They had good reason as they were happily floating on the Bank of Japan's rising sea of yen. And a sea it is. With the start of the fiscal year on April 1, 2013, the BOJ promised to print enough money to double the monetary base in two years. It now has delivered a 68% surge in just 14 months.
Purpose? Devalue the yen, buy up every Japanese Government Bond that isn't nailed down to impose an iron-fisted peg on yields (0.6% on the 10-year JGB), and make unlimited amounts of nearly free money available to the banks and by extension to Japan Inc. The moves benefited the largest corporations. They get to translate their overseas sales and earnings - from exports, but more often from production overseas - into devalued yen, thereby adding a lot of artificial glitter to their financial statements. And they're getting drunk on liquidity.
The Abe administration is also doing just about everything in the book to bolster the fortunes of Japan Inc.: offering tax cuts, more public works, and stimulus packages, snatching the Olympics by hook or crook, and cranking up inflation. In April, prices for all items soared 3.4% from a year earlier, and goods prices a confiscatory 5.2%. Yet wages were stuck in the mire, and adjusted for inflation, they plunged. It's an ingenious gift from Abenomics, one of the most sought after in the corporate world: cheap labor. Overall, it has been one heck of a package.
Then came the consumption tax hike, a broad-based tax that impacts consumers and businesses across the economy. The months before the effective date of April 1, consumers and businesses binged to save that extra 3% in taxes on big-ticket items, and businesses rang up sales faster than they could count.
That binge stopped on March 31. Now a terrible hangover has set in which the Ministry of Finance has tabulated in its quarterly Business Outlook Survey. It covers 16,000 of Japan's one million corporations with capital of ¥100 million or more and includes all of the largest 1,000 corporations. Its key index, the Business Survey Index, measures the percentage of corporations that say that business conditions are "rising" from the prior quarter, minus the percentage that say that conditions are "falling." When conditions curdle, index values turn negative.
For the largest corporations with ¥1 billion or more in capital, the BSI plunged from +12.7 in the January-March quarter to -14.6 in the current quarter. But these big corporations are an optimistic bunch. In the prior survey, the index value measuring their outlook for the April-June quarter was -9.8. They knew the post-tax-hike era would be bad. But they didn't think it would be that bad.
For medium-size corporations with capital between ¥100 million and ¥1 billion, the index dropped from +8.5 to -19.5. They too had been overly optimistic in March about the April-June quarter (-15.4).
And small outfits with capital of ¥10 million to ¥100 million, oh my, they never got the Abenomics goodies that their big brethren got. They were never flush with money. They never felt loved and coddled. For them, everything continued to be a struggle. And they make up the vast majority of businesses in Japan. Their BSI score plummeted from an already dismal 0.1 in the prior quarter to -21.5.
It was the worst plunge of the BSI since April-June 2011, right after the Great East Japan Earthquake, tsunami, and nuclear disaster had nearly brought Japanese industries and supply chains to a halt.
The largest corporations retained their optimism about the next two quarters (+13.4 and +10.3 respectively). But the smallest ones remained bogged down (-3.6 and 1.0). All of them had been too optimistic in the prior survey about this quarter, and they're likely too optimistic about future quarters.
And sales? All corporations combined expected sales this year to increase 1% from 2013. Not exactly a glorious forecast, considering that inflation is currently 3.4% for all items and 5.2% for goods. Come to think of it, it's a terrible forecast. And profits this year? Well they'd drop 2.3%.
Clinging by their fingernails to positive aspects of this survey, the media pointed out that finally, after all these years, businesses were planning to spend again, that in fact this year, they'd raise their investment in software, plant and equipment, the only spending categories in the survey, by 4.5%. Indeed, good news. But that already happened before the tax hike! Investment plans for the first half jumped 14.9%, which included the miraculous January-March quarter. In the second half, investment in these goods is expected to grow a mere 3.1%, just when goods prices are increasing at a rate of 5.2%.
Prime Minister Shinzo Abe was apparently hoping that by elevating his economic ideas to a new state religion, calling it Abenomics, and getting the media to believe in it would allow him to walk on water and perform miracles. But for the moment, reality still rules. And reality is that Japan is simply trying to print itself out from under its mountain of debt, which no country has ever accomplished without wiping out much of the wealth of its citizens.
Even the soothsayers and spin doctors expected a downdraft after Japan's consumption tax was jacked up. But not this. Read... The Wrath of Abenomics: Sales Collapse, Inflation Soars.