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2020 look ahead: Japan's economy is in trouble

Trump, trade war and panicked stimulus all bode ill for Abe's government

| Japan

The best thing you can say about the Japanese economy's 2019 is that, mercifully, the year will soon be over.

Growth plodded along only modestly. Exports had fallen every month in 2019 at time of writing, while wages dropped in seven of the first 10 months. Far from an overwhelmingly expected tapering in 2019, where the Bank of Japan reduces purchases of bonds and other assets, monetary policy remained trapped in negative interest-rate purgatory.

And yet this performance may be the best we can expect as the global trade war marches into 2020 with no end in sight. Three dynamics are coming to a head in ways that spell trouble to come.

One, the export decline is accelerating. The 7.9% year-on-year drop in November, the 12th straight monthly decline, flashes recession warnings. Shipments to China, Tokyo's biggest customer, fell 5.4%, down for the ninth month. Two, Tokyo's rush to throw $122 billion of fresh stimulus at the economy smacks more of panic than fine-tuning. Three, that wild card named Donald Trump.

It should worry Prime Minister Shinzo Abe that U.S. President Trump is hinting that a full China trade deal may be delayed until after the November 2020 election. His suggestion that a deal is contingent on his winning a second term may validate something political observers have long suspected: Trump wants the trade fight with China more than he wants a deal. If so, Asia is in for a chaotic 2020.

Instead of a deal, Trump may very well double down on tariffs, dealing new blows to Japan's vital export engine. It raises the specter, too, of him making good on threats of 25% taxes on imports of cars and auto parts.

These odds increase as Trump's impeachment troubles at home prompt him to lash out abroad -- both to placate his base and change the news cycle. Atop tariffs, Trump could weaken the dollar or expand the list of banned Chinese companies. It is all about maximizing pain. Last month, Trump seemed to revel in his belief that he has "broken" China's supply chains "like an egg."

China's supply chains are really Asia's, though. Japan Inc. is already suffering considerable blowback, making CEOs even less likely to boost wages in 2020.

The answer, of course, is for Abe to get serious about the deregulatory reforms he pledged back in 2012. The failure to curb bureaucracy, modernize labor markets, stimulate innovation, empower women and boldly address an aging workforce has left Japan uniquely vulnerable to the trade war.

Abe deserve kudos for the giant Japan-EU trade deal that went into effect in February. The same goes for a bilateral pact with the U.S., one Japan's parliament ratified this year.

Yet with the vital export engine sputtering, there may be even less scope for upgrades in 2020. The year-end stimulus push, for example, is the latest indication of how Abe has "rewound the clock a few decades by focusing on what could disingenuously be dubbed pork-barrel spending on trophy projects that lack a clear economic rationale," says analyst Udith Sikand of Gavekal Research.

One short-term explanation is that he wants to offset the fallout from an ill-timed sales tax hike. Just as an earlier one in 2014 caused a mild downturn, the October bump to 10% from 8% is warping consumption. At the moment, it is creating false hope -- an upward revision in third-quarter growth from an initial 0.2% year-on-year to 1.8%.

Shoppers went on a spree to front-run the increase. That portends a weak fourth quarter as households spend less and trade-war worries spook businesses.

It may also mean a year of regret for Abe. In October, he became Japan's longest-serving prime minister -- only to get tripped up by his administration's latest scandal. This one involves an opulent, taxpayer-funded cherry blossom-viewing party arranged in Abe's honor.

The real scandal, though, may end up being how Abe's friendship with Trump backfires on Japan. The trade war is tipping the nation toward recession, while Trump's professed "love" for Kim Jong Un, and his tolerance of North Korea's short-range missile tests, make Japan less safe.

Put all this together and Abe's remaining days could be fewer than investors realize. The year ahead could indeed be his last as economic setbacks and a failure to meet reform pledges collide with a Trump bromance gone awry.

There is an obvious paradox here. The stock market is buoyant, offering false hope. But just like his pal Trump, Abe may soon confront the limits of trickle-down economics. Investors are gleeful that the Bank of Japan is keeping the liquidity tap running. Tapering in 2020 seems no more likely than in 2019.

Unless average workers feel the magic, though, Abe is creating a tale of two economies -- one for the uber-wealthy asset-owning class, one for the vast majority of Japan's 126 million people.

At some point, dimming economies catch up with asset rallies. In Trump-adjusted terms, that point could come sooner than anyone expects. It could be a brutal 2020 for that splashy marketing campaign known as Abenomics -- and the man behind it.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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