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BOJ turns activist investor to revive economy

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By Tomo Uetake

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The Bank of Japan, which already owns about half of all Japanese ETFs

Yup. That's normal.

... Kuroda and ... Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation.

Better economic stewards would identify policy missteps on their own part that this failure can be put down to, rather than calling on companies to just do as they had hoped all along, anyway. Being able to admit one's failures and correct them is a trait of good leadership.

their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank’s zero interest rates and a weak yen.

So, a reasonable conclusion to make would be that it isn't record profits, zero interest rates, or a weak currency that actually broadly incentivize companies to invest, and that there must be more to an attractive business environment.

Someone in the Abe camp should come to this realization, before the Abe administration is toast. Bring back the original "3rd arrow". 3 years have been largely squandered, but it's not too late to start.

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Government insinuating which areas of the corporate Japan should receive easy money is a double-edged sword. It works in the early stage of industrialization when investment goals are so clear. In a mature economy like Japan's, its grassroots economic participants usually know better where to invest and how to invest to be efficient. I know this government is acting out of desperation but my sense is this will lead to a creation of nice-sounding ETFs that misallocate funds with at best mediocre results. The funds will further skew the economy to favor big businesses that dominate domestically but uncompetitive internationally. That's how Japan keeps sagging.

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"...it isn't record profits, zero interest rates, or a weak currency that actually broadly incentivize companies to invest, and that there must be more to an attractive business environment."

Yes, I feel so sorry for those poor corporates. The cold, unsympathetic govt is forcing them to rake in record profits, while allowing them to refuse to share the bounty with their workers. Those corporations are surely struggling through nightmare, as they sit on their growing cash piles.

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But, JeffLee, companies belong to "shareholders", not that labour that they employ.

The proper way for the government to get shareholder-owned companies to pay workers more, is to make for an attractive, competitive business environment.

Businesses will pay more to retain and attract staff when they NEED TO, in order to sustain (and grow) their operations. Because their interests would be aligned with the interests of their workers.

Even if Abe did have the power to command shareholder-owned companies to pay workers "more", it wouldn't be long before undesired consequences (such as business shutdowns, investment going elsewhere) resulted, because central command isn't a sustainable way of managing an economy.

And, all the above is before I even mention the oft quoted statistic of 70% of Japanese companies paying no corporate income tax, because they make zero profits.

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"But, JeffLee, companies belong to "shareholders", not that labour that they employ."

And those shareholders have made a killing under Abenomics, with rocketing share prices and dividend hikes, while workers wages haven't budged much. So tell me again why the shareholders are being short-changed?

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"But, JeffLee, companies belong to "shareholders", not that labour that they employ."

And those shareholders have made a killing under Abenomics, with rocketing share prices and dividend hikes, while workers wages haven't budged much. So tell me again why the shareholders are being short-changed?

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While they're at it, hopefully they should invest in start-ups too??

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Although in a utopia it might be otherwise, just because Abenomics involved enriching shareholders, doesn't mean that it suddenly makes economic sense for companies to hike workers' wages.

It's not that shareholders are being short-changed. It's simply that companies just hiking wages in the absence of economic signals to do so is likely to hinder ongoing, sustainable investor returns. Investors will take their money elsewhere if gambling on Japanese businesses no longer looks as attractive relative to the alternatives.

I found myself late last year in just this position, dumping my meager exposure to Japanese equities, no longer being able to justify giving Abenomics the benefit of the doubt. Without actual execution of policies to foster real economic growth here, it's better to look to overseas markets where lots of places have seen stock prices hit historical highs, while Japan's market still flounders at around half the level of it's bubble peak. Abenomics has shown that devaluing the currency will only go so far.

I think Abenomics did well in it's infancy, because the "3 arrows" were a bit of something for everyone - more government spending for those who think that's great for the economy, much more central bank "printing" for that crowd, and promises of structural reforms for my crowd.

I don't know what percentage of investors fall into each camp, but whatever it is, my crowd have been disappointed. To pick up the extra slack, the government and central bank will have to do more to keep the other two camps excited if they want to keep the show going.

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If the goal of central bank intervention is to make the citizens of Japan feel wealthier, then just cut every citizen a check for $1000 US dollars and let them spend it into the economy. Borrowing money, printing it out of thin air, then buying the Nikkei 225, surely pushes up the price of stocks. Remember though, that the largest owners of the stocks are corporate insiders, who have options, and have gotten the stock at a much lower price than the public. So it's great if you want to distort the free market, prop up companies through artificial stimulus, and make the 1% even richer but the unintended consequences of fooling with free market forces are always around the corner. A central bank produces nothing. It redistributes wealth, from printing money.

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