To our shareholders and customers:
17 years ago, in the early days of deflation in Japan; The Economist magazine carried a cover story titled, “Japan’s amazing ability to disappoint (“JAAD”)” in its issue of September 26 1998. It was shocking and it even featured a comic picture of Kabuki actor falling down on the stage on its cover page. In April last year, Prime Minister Shinzo Abe quoted this in his speech at the Economist Japan Summit held in Tokyo. He said, “Japan is no longer “JAAD” but “JAAA” (Japan’s amazing ability to amaze), that is Japan triple-A.” I was quite impressed with his witty remarks.
As was widely predicted, the judgment of the people handed down in the general election at the end of last year was the continuation of the government led by the Liberal Democratic Party. However, this did not necessarily mean that Prime Minister Abe’s strategy for economic growth was given a passing grade. There is a joke which goes that the score for the three arrows of Abenomics, i.e. easing monetary policy, aggressive public spending and strategy for economic growth which stimulates investment in private sector was A, B and E, respectively. It probably suggests that the Bank of Japan’s monetary easing was the only action taken. If you can grow the economy merely by implementing a monetary policy, no one will have a problem.
The regulatory reform is particularly important among the third arrow. Above all, if the government makes a serious effort in the areas of Agriculture, Medical and Employment to slash away the strong vested interests, it will hit the nail on the head. As a result of pouring a tremendous amount of public spending in the areas protected by vested interest groups and avoiding competition which provides dynamism, it was a matter of course that the economic growth stagnated and the fiscal deficit piled up to more than double of GDP. In my opinion, the original goal of Abenomics is to get out from this situation and to implement the regulatory (structural) reform as means to achieve such goal.
It will probably boil down to a debate over big vs. small government. A big government is likely to spend extravagantly and vested interest groups flock like parasites. Once increased in size, extraordinary efforts are required to reduce the size of government. I am a supporter of a small government. If you prefer a big government, you should accept to pay higher taxes on personal income and properties as well as much higher consumption tax. Increasing expenditures go hand-in-hand with increase in revenues. We should refrain from saying no to higher consumption tax while demanding improvement in social security system at the same time.
What is true at the micro level becomes untrue at the macro level. It is referred to as the “fallacy of composition”. In an extreme argument, the prolonged deflation and a huge amount of fiscal deficit, both appear to be the fallacy of combination resulting from the government’s improper use of paternalism. The objectives of the Council for Regulatory Reform are the elimination of such paternalism and the promotion of private sector activities by the easing of regulations, which was revived in the Abe administration. Let’s keep our eyes for a while on whether the Abe administration would become serious about this.
Let’s change the subject to this year’s capital markets. I would like to just touch on the issue of inflation, which is likely to come someday. The slogan “from savings to investments” has not been successful because there was no need to take risks in making investments for retail investors. The most effective investment strategy under the deflationary economy is to hold cash and deposits. It only makes sense as the monetary value in the future will not decrease as compared to now. The amount of money in the market did not increase as much as expected although the Bank of Japan increased the country’s monetary base greatly under its massive JGB purchase program. Not surprisingly, interest rate is not rising and there is no sign of prices going up at all partly due to the recent decline in oil prices. We are not sure if the 2% increase target can be achieved. In short, the deflation has not come to an end yet.
Deflation is scary because everybody loses motivation to work, but I believe inflation, especially inflation without income growth, i.e. stagflation, would be much scarier. Because inflation is invisible tax increase, when it happens the people will bear a burden not comparable to that of higher consumption tax, resulting in an extraordinary widening of economic discrepancy. Japan will be excluded from the investment universe of international investors, the value of the yen will fall beyond our imagination and Japan will become one of the poorest countries in the Far East.
I don’t think that “fleeing the country if hyperinflation occurs” would be a solution. A mindset of each individual will be important. People outside Japan often say “the Japanese have the originality which comes from its long history and culture. Above all, you are diligent, yet we can’t understand why you have to be so self-deprecating.” My answer is always; “It is only because we are very patient.” With regard to The Economist’s “Japan’s amazing ability to disappoint,” some people read it as a different joke: “Japan’s amazing disability to be disappointed.” I think we should interpret this joke positively rather than negatively. Not to be disappointed has the same meaning as not giving up.
By the way, there is an impressive phrase by Mr. Konosuke Matsushita, a founder of Panasonic, which is “A person without obsession gets an idea from the difficulty while a person with obsession gets an idea from the possibility”. Virtue is praised by all, but practiced by few, but I would like to ponder the meaning of these words again.
My motto for this year continues to be: “Bon Courage” (meaning “let’s gather the courage to challenge” in French). Your continued support is greatly appreciated.
President & CEO
Matsui Securities Co.,Ltd.