Why Abe Is So Nervous Ahead Of His Meeting With Trump

From reports that Japan"s giant pension fund, the GPIF, will invest in US infrastructure, to promises that Japan will present a "package" to create 700,000 US jobs, there is a distinct smell of appeasement and nervousness oozing out of Japan Prime Minister Shinzo Abe"s every pore two days before his summit meeting, golf game and dinner with Donald Trump on Friday (it is unclear who will pay for Abe"s trip, and it could be an issue).

The reason for that is simple: the promises to help create U.S. jobs and bolster Japan"s military are meant to persuade Trump to turn down the heat on trade and stand by the decades-old alliance. But of all his concerns, Abe"s biggest worry is for Trump to not accuse - or act on - Japan relentless currency devaluation, which is the bedrock of Abenomics, and without which Abe"s career is doomed and he knows it.

For the clearest indication of just how much Japan has intervened against its currency, look no further than the BOJ"s balance sheet. As Nikkei reported today, the Bank of Japan"s holdings of Japanese government bonds has now topped 40% of the outstanding balance for the first time, the central bank said Wednesday. The BOJ has been snapping up JGBs in large quantities since it implemented drastic monetary easing measures in April 2013, the primary purpose of which is to keep pressuring the Yen lower. Statistics released by the bank show that its JGB holdings stood at about 358 trillion yen ($3.19 trillion) as of the end of January, or about 40% of the outstanding total of some 894 trillion yen.

While last September, the BOJ switched its policy focus from quantity to interest rates, aiming to keep long-term rates at around 0% to achieve its inflation target, the BOJ"s JGB holdings continue to rise, with the bank sticking to its annual target of 80 trillion yen for JGB purchases

An ill-fated attempt at launching negative rates last year led to disastrous results, and a prompt strengthening of the currency, which has left bond monetization as the only recourse for the Bank of Japan, and for Japan"s prime minister. Of course, a Trump crackdown on Abenomics will merely accelerate the inevitable: with the amount of such bonds circulating in the market declining, Nomura calculated that "the bank will reach the limits of its bond purchase program as early as the first half of 2019." In other words, Abe has at most two more years before the endgame, whatever it may be. However, he certainly does not want that timeframe truncated.

Trump on Jan. 31 blamed the U.S. trade deficit on money supply policies in foreign countries, singling out China and Japan as guiding their currencies lower. "If the money supply continues to increase due to the BOJ"s large-scale JGB purchases, Trump may step up his criticism of Japan," said Yasunari Ueno of Mizuho Securities.

Ealrier today, Abe"s fears about a Trump crackdown on Japanese monetary policy was confirmed by Japan"s Kyodo which reported that Abe will an understanding from Trump that Japan’s monetary easing policy is meant to escape deflation and not influence the yen, which of course is ridiculous, and explains the attempts to appease Trump with promises of jobs and investments.

And while Trump may be placated, he will still have to explain Japan"s role as the second biggest contributor to the US trade deficit. As was revealed earlier this week, Japan accounted for $68.9 billion of the U.S. goods trade deficit in 2016, re-emerging as the second-largest US trade deficit contributor for the first time in three years - a potential flashpoint during the Trump-Abe meeting. 

The goods deficit with Japan remained roughly flat and accounted for 9% of the U.S. total. However, the deficit on motor vehicles and parts - an area in which President Donald Trump claims Japan engages in unfair practices - jumped to $52.6 billion from $48.9 billion in 2015, making up nearly 80% of the total American deficit with Japan.

It"s not just monetary policy and trade that are making Abe nervous.

Japanese officials have been soothed by security assurances from Defense Secretary Jim Mattis and others. But they worry Trump may go off script when the two leaders meet, first for a summit in Washington on Friday and then for a round of golf near the "Winter White House", Mar-A-Lago in Florida, Reuters notes. Some in Tokyo even worry that Trump, a global businessman and author of "The Art of the Deal", might eventually make some sort of pact with rival China that leaves Japan out in the cold. During his election campaign, Trump complained that Tokyo and Seoul were not sharing enough of the cost of the U.S. security umbrella.

"What we want to know is Mr. Trump"s attitude towards China," said Yukio Okamoto, a former Japanese diplomat with ties to the government. "If it becomes only an economic one, then a deal might be made at some point without the consideration of security issues in the region."

Japanese politicians are also concerned that Abe might make hard-to-keep promises when the two play a round of golf that has echoes of one between Abe"s prime minister grandfather, Nobusuke Kishi, and President Dwight Eisenhower in 1957. U.S. newspapers then dubbed the golf game a "triumph of diplomacy" between the former World War Two enemies. Three years later, Kishi had to resign because of a public furor over the 1960 U.S.-Japan security pact.

"The symbolism of playing golf is very important to the Japanese," said Dennis Wilder, a former National Security Council official. "Abe is very proud of his grandfather and has worked hard to fulfill his unrealized dream of building a full strategic partnership with Washington."

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So how does Abe hope to placate the irascible US president?

As we reported last week, Abe, who will be accompanied by Finance Minister Taro Aso and Foreign Minister Fumio Kishida, will bring a package of steps Tokyo says could create up to 700,000 new American jobs through private-public investment in infrastructure such as high-speed trains, government sources say. Speculation is also simmering that Japanese manufacturers like Toyota, whose president Akio Toyoda met Abe last week, could time announcements about investment - either already planned or new - to coincide with the summit. Additionally, Japanese display maker Sharp may start building a $7 billion plant in the United States this year, a person with knowledge of the plan said on Wednesday.

As the FT amusingly adds, Abe is pushing companies and investors to hand over details of their US investment plans so Shinzo Abe can deliver a “tweetable” figure to Donald Trump when they meet. Executives at three top Japanese companies said officials had been in touch asking for investment numbers. Public investment institutions say the prime minister is also leaning on them to pledge tens of billions of dollars to US infrastructure projects such as high-speed rail.

“The most important thing is to reconfirm the importance of the US-Japan relationship in politics, economics and security,” said Sadayuki Sakakibara, chairman of Japan’s Keidanren business federation. Given friction over trade and the yen, Mr Sakakibara urged Mr Abe to tell the president about the $400 billion of direct investment and 1.7 million jobs that he says Japanese companies support in the US. “We’re contributing to the expansion of US exports and want to let him know that,” he said.

That said, some companies have pushed back: “Just because Donald Trump has been elected doesn’t mean we immediately change our business plan,” said one senior executive at a large Japanese manufacturer. “We can only invest in factories we actually need.”

Taking his preparation to the extreme, hoping to update what Japan believes is Trump"s outdated image of Japan forged in decades-old trade wars, Abe will also be armed with data, showing, for example, that Japanese firms are the biggest direct foreign investor and foreign employer in the United States second only to Britain (see chart above).

Meanwhile, to address the gaping trade discrepancy Trump, who abandoned the 12-nation Trans-Pacific Partnership (TPP) trade pact championed by his predecessor Barack Obama, wants to open talks on a bilateral free trade deal with Tokyo. He also wants to renegotiate the North American Free Trade Agreement (NAFTA) binding Mexico, the United States and Canada, the basis of many Japanese firms" investment plans. Abe prefers multilateral trade deals, but has left the door open to talks on a bilateral pact - despite misgivings by some officials that Tokyo would come under intense pressure to open further politically sensitive sectors such as agriculture, while gaining scant economic benefits.

"I don"t think Mr. Abe will say "no" to the bilateral option but I don"t think he will say it is a good idea, either," one Japanese official said.

All throughout the meeting, markets will be keenly watching to see whether Trump repeats his criticism of Japan for using money supply to devalue the yen to boost exports. As noted above, Japanese sources have made clear Tokyo will push back on any attempts to bind its hands on a hyper-easy monetary policy central to "Abenomics" growth prescriptions. Should Trump "go there", the yen will surge. However, if Trump avoids any mention of the weaker Yen, it is possible that the USDJPY will spike higher, although it will be contingent on what, if anything, Trump says about his interest in a weaker dollar.

Finally, there is the question of the disputed islands in the East China Sea, which were the source of much geopolitical sabre rattling in 2013.

Abe will be eager for Trump to repeat assurances that his administration will adhere to Washington"s commitment to defend disputed East China Sea islands under Japanese control but claimed also by China. The islands are called the Senkaku in Japan and the Diaoyu in China.  Abe is likely to reassure Trump that Japan is willing to play a bigger regional defense role and beef up its military capabilities. A pledge to boost defense spending, however, could be contentious at home in view of Japan"s huge public debt, Reuters cautions.

Finally, despite all of Abe"s preparations, there is the biggest wild card of all: Donald Trump himself. 

Some experts cautioned that too subservient a response by Abe, such as a
government-inspired jobs creation package, risks confirming Trump"s
view that old-style Japan bashing works. "It"s a very difficult line to walk to satisfy Trump at the same time not giving the impression that it"s Japan Inc all over again," said Jun Okumura, a former trade negotiator who is a visiting scholar at the Meiji Institute for Global Affairs.

Others, though, said Japan has little choice. As the Japanese official put it, "We have no choice but to ride with the United States, whoever the president is."

And Trump knows it very well, which is why Abe is so very nervous.

An Angry Japan Responds To Trump's Toyota Taunts

After Trump"s Thursday morning twitter taunt targeted Toyota, when the President-elect warned Japan’s biggest carmaker that it will face heavy penalties if it chooses to make cars for the US market in Mexico, writing  "Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax", a tweet which sent shares of Japanese carmakers sliding on Friday with a 1.7% fall for Toyota, 2.2% for Nissan and 3.2% for Mazda, an angry Japanese government and corporate establishment pushed back against Trump’s criticism of Toyota as the attack on the country’s most powerful corporate name sent shockwaves across "Japan Inc."

As the FT notes, CEOs of Japanese companies including Sony’s Kazuo Hirai and Nissan’s Carlos Ghosn weighed in, while analysts feared the president-elect’s targeting of Toyota would lead to a broader fallout on Japan-US trade relations, similar to concerns about an escalating trade war between the US and China.

“Toyota is responsible for large employment at US plants such as in Kentucky. It’s questionable whether the new US president has a grasp of how many vehicles Toyota builds in the US,” said Taro Aso, Japan’s finance minister.  Hiroshige Seko, minister for trade and industry, added that the Japanese government would do its part to explain to the US administration about the contribution of the country’s car industry to the US economy.

“Toyota is equivalent to Japan as a whole, so Mr Trump’s criticism could be interpreted as a message to the Japanese government,” said Koji Endo, motor industry analyst at SBI Securities, expressing concerns about the impact on bilateral trade negotiations once Mr Trump is officially appointed later this month.

Analysts said Trump’s focus on Toyota, after Ford this week announced that it would pull plans for a $1.6bn Mexican plant, is not surprising but ironic for the Japanese carmaker who was the latecomer among global rivals in shifting production to Mexico. They noted that Toyota, which has an existing manufacturing facility in Baja to build the Tacoma pick-up truck, only made about 6% of 2.2m vehicles sold in the US in Mexico during the January to November period, compared with 33% for Nissan and 47 per cent for Mazda, according to SBI Securities, both of which companies are said to be far more exposed to Trump"s future ire than Toyota.

As the FT adds, in 2015, Toyota announced plans to spend $1 billion building a new facility in the central state of Guanajuato that will make Corolla vehicles from 2019.

The decision was a symbolic one for Akio Toyoda, Toyota’s chief executive, as it marked the lifting of a three-year moratorium on plant construction. It also underscored the company’s recovery since Mr Toyoda faced a US congressional grilling in 2010 in the wake a massive recall of spontaneously accelerating Toyota vehicles.

Having experienced the US recall crisis and the subsequent political backlash, analysts say Toyota may eventually adjust its strategy in Mexico, either by reducing the planned number of vehicle production or increasing the capacity of existing US plants in Texas or Mississippi.

“The company will carefully try to avoid taking action that would leave a negative impression on the new US administration,” said Masahiro Akita, analyst at Credit Suisse. “Considering how Toyota has operated in the past, it wouldn’t be surprising if the company makes a policy shift.”

In response to Trump’s tweet, Toyota has said no US jobs would be lost as a result of its planned new plant in Mexico. CEO Toyoda also said the company would “see what policies the incoming president adopts” before deciding whether to take action.

Still, Mr Akita said a complete reversal of Toyota’s plan to construct a new plant in Guanajuato was unlikely considering Mr Toyoda’s concerns about the impact on employment and the regional economy.

* * *

Then again, the Trump twitter effect may soon fizzle according to Reuters Breakingviews, which noted that Toyota’s day in Donald Trump’s crosshairs "could mark peak Twitter-Trump."

On Thursday, the U.S. president-elect threatened tariffs on the Japanese carmaker, if it sold Mexico-made Corollas in the United States. Yet a 2 percent fall in Toyota’s Tokyo-listed shares looks muted considering Ford and General Motors performed as poorly or worse on New York trading. That’s because it quickly became clear Trump had all his facts wrong. The more that happens, the less impact his tweet storms will have.

Trump’s bully pulpit, both online and at rallies, can certainly be effective. General Motors, Lockheed Martin and Boeing have all scrambled to respond. This week Ford ditched a plan to build a new plant in Mexico that Trump had slated.

In Toyota’s case, a 35 percent import tax on 200,000 Corollas built annually at its new plant in Mexico would add $1.4 billion to their overall cost, assuming a $20,000 sticker price per car. That’s around 10 percent of this year’s expected earnings, which either Toyota or customers would have to swallow.

That’s never going to happen, though, for one very simple reason: Toyota’s new plant would replace one in Canada, not America. All Corolla production for U.S. sales remains in the company’s Mississippi factory. The plant is also in Guanajuato, not Baja, as Trump asserted.

Getting such basic facts wrong might not bother Trump’s supporters. But shareholders are more likely to get wise to such antics and start focusing on more concrete issues.

Contrast Toyota with Constellation Brands, the $30 billion alcoholic drinks firm. Its shares dropped more than 7 percent on Thursday, despite strong earnings. The maker of Corona and other Mexican brews faces higher costs if tax breaks are scrapped for overseas costs. That’s a central tenet of tax reforms sought by congressional Republicans and Trump. And these would be easier to put in place than long-term cross-border tariffs, which break trade agreements.

None of this means Trump’s ability to micromanage via social-media bullying is over. But the more his punches fall wide of the mark, the more inclined investors will be to ignore him.

While that may eventually pan out, for now the market (and various Trump tweet scanning apps) is far more transfixed by what Trump tweets in his daily social media sermons than even statements made by many if not all Fed members.