Analysis-Japan's Kishida championed 'new capitalism' but was undone by yen

Analysis-Japan's Kishida championed 'new capitalism' but was undone by yen

By Yoshifumi Takemoto and Mariko Katsumura

Fumio Kishida pushed through Japan's biggest wage increases in decades, but it was not enough to make up for the impact the battered yen has had - or keep him in his job as prime minister.

Kishida on Wednesday succumbed to months of woeful public support numbers and said he would step down next month. While his tenure was marred by scandals, including one involving party slush funds, the weak yen was arguably his undoing.

The currency's long slide to an almost four-decade low against the dollar last month has driven up prices of food and fuel and badly hurt consumer confidence in an economy just emerging from years of deflation.

It is not clear who will succeed Kishida. But whoever does will face the pain of trying to tame higher prices from the yen.

"The advent of exchange-rate inflation really, really hurt the prime minister," said Michael Cucek, a professor specialising in Japanese politics at Temple University in Tokyo.

The currency - under pressure from a wide gap between ultra-low Japanese rates and those in other major economies - ultimately blunted the impact of wage increases, the central plank of Kishida's "new capitalism" policy. He repeatedly called on companies to increase pay, saying it was needed for broader economic growth.

Big companies duly listened, delivering the largest annual increase in three decades this year at 5.1%, with smaller companies averaging 4.5%, according to the Rengo union group.

The numbers do not include wages at many non-unionised, smaller companies where increases have been more modest, and in some cases non-existent.

Yet real wages, which are adjusted for inflation, have barely moved, meaning that people were earning far less than headline numbers suggested once prices were taken into account. In June real wages rose for the first time in 27 months, by 1.1%.

The government must continue to promote wage growth, Kishida told a press conference on Wednesday as he announced his resignation. That would ensure Japan could fully emerge from being a "deflation-prone economy" he said.

Japan ranks well below the OECD average for annual wages, at around $43,000.

END OF AN ERA

"Wage increases were the notable achievement of the Kishida administration and I hope the next government will continue that," said Takeshi Minami, chief economist at Norinchukin Research.

"The era where a weaker yen leads to increased exports and a higher GDP has come to an end. I think we're now at a stage where we just want to see the exchange rate stable."

The weak yen was a boon during Japan's high-growth years, as it made exports cheaper in foreign markets and fattened the bottom line of companies, such as Sony and Toyota, when they brought earnings home.

But Japanese companies manufacture more overseas now, which reduces the currency effect, and policymakers are more concerned about the yen exchange rate's impact on households given the fragile economy.

During Kishida's term the central bank increased interest rates for the first time in 17 years. Its second raise, at the end of last month, helped spark a recovery in the yen that roiled global markets.

From the perspective of households and consumers, though, the currency remains weak.

"Yes, Kishida wasn't popular, but will his successor be able to better handle Japan's economy? Nobody knows," said Tatsunori Kawai, chief strategist at au Kabucom Securities.

Still, one should not forget the relative importance of some of the changes that took root during Kishida's tenure, economists say.

While wages could not keep up with inflation, the fact that Japan saw any increases in pay was significant, given it had spent years battling deflation.

"You have to commend it," said Koji Nakakita, a professor at Chuo University, about Kishida's wage policy.

The question now is whether Japan will speed up reforms or revert to its characteristic stop-start policy change.

"What the market wants to see and what is good for the macroeconomy in general is that we see a 'new wind'," said au Kabucom's Kawai.

"Someone who is willing to make a big change in Japan."