The economic policy of President Trump will have both positive and negative influence on Japanese economy. As the BOJ has just upgraded its forecast for this year, Japanese economy will certainly merit, at least for a short term, from the possible economic boom in the United States as a result of Trump’s economic policy such as radical tax cut, increase in fiscal spending, and drastic deregulation. The Abe administration already seems to try to gain Trump’s gratitude and find business opportunities for Japanese companies by encouraging and helping Japanese business to invest more in the States. For a long term, however, a robust U.S. economy may have destructive impact on Japan.
After four years of Abenomics, Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda maintains that they have successfully recovered the economy and created a situation where “Japan is no longer in deflation.” But the alternative facts are that the annual growth rate of Japanese economy in the last four years were +1.36% in 2013, -0.03% in 2014, +0.54% in 2015, and +0.51% in 2016. The inflation rate for the respective year were +0.34% in 2013, +2.76% in 2014, +0.79% in 2015, and -0.16% in 2016. (The figures are taken from the IMF database. The 2016 figures are estimated values.) It is clear that Kuroda failed to keep his pledge in April 2013 to realize two percent inflation rate in two years. When Abe and Kuroda started their economic and monetary policy four years ago, the trajectories of Japanese and the U.S. economy were both stagnant. Today, the U.S. economy is projected to go through relatively strong path organically. To the contrary, Japanese economy will grow only slowly supported by the modest recovery of global economy. According to the IMF’s forecast for 2017 and 2018, the U.S. economy is expected to grow 2.3% and 2.5% per annum, whereas Japanese economy will grow 0.8% and 0.5%. President Trump’s aggressive economic policy will further expand the divergence between the two economies. Stronger U.S. economy means higher U.S. interest rate and stronger dollar, thus weaker Japanese yen. Even if President Trump requests Japan to manipulate the monetary policy to make yen strong, it will be difficult for the BOJ to raise interest rate as Japanese economy will continue to be far from strong. Abe and Kuroda will inwardly welcome weak yen which pauses inflationary pressure. But they will soon realize that further weakening of home currency from here would have more negative than positive impact on Japanese economy. Furthermore, higher U.S. interest rate may push the interest rate of Japanese Government Bond whose balance amounts to almost 838 trillion yen, or 7.3 trillion dollars. According to the recent government projection, the primary balance in the fiscal year 2020 will be negative 8.3 trillion yen or 72 billion dollars if Japanese economy grows nominally three percent per annum—impossible prerequisite. The higher rate will make the situation even worse. Ministry of Treasury also estimates that one percent rate hike of JGB would cause the Japanese financial institutions latent loss equivalent to 13.5% of the GDP. The only way left for Kuroda will be to allow the BOJ to buy even more JGB. The result will be the impairment of central bank’s balance sheet. “America First” economic policy will inherently deprive the profit of the rest of the world. Trump’s coercively inducing both the American and foreign corporations to invest in the States will be more often than not inconsistent with the most efficient corporate strategies. The execution of the TPP agreement is certainly a loss for the twelve economies, including the United States. Trump says he will negotiate with respective trade partners to make new bilateral trade deals. But I wonder if “Free” Trade Agreement is ever possible with this protectionist administration. We should also note that the downturn of the global economy could bring a backlash to the U.S. economy as it is unable to grow independently from the rest of the world. If the U.S. economy suffers, Japanese economy will also lose momentum and sink in deflation again. In that case, no effective economic and monetary policy is left for Abe and Kuroda. Monetary policy is unprecedentedly loose, and the further expansion of the public spending will worsen the already serious fiscal condition.