Japan's Ishiba Needs China To Thrive To Survive

Many economists agree that this is just the beginning of China's stimulus efforts.“This is a step in the right direction,” says Julian Evans-Pritchard, head of China economics at Capital Economics.“But it will probably be insufficient to drive a turnaround in growth unless followed up with greater fiscal support.”

Economist Larry Hu at Macquarie Group adds that this week's“policy announcements are more positive than expected, although this alone may still not be enough to end the longest deflationary streak since 1999.” It's clear, he notes, there's“rising urgency among top leaders to fight deflation in China.”

Scott Rubner, managing director for global markets at Goldman Sachs, sees the stimulus barrage as a boon for Chinese assets.“I really think this time is different for China,” he says. Being underweight China, he notes, is the“largest consensus trade” in global markets. That means the upside is big.

Billionaire investor David Tepper tells CNBC he's buying more of“everything” China-related now that Beijing is hitting the gas on stimulus.“I thought that what the Fed did last week would lead to China easing, and I didn't know that they were going to bring out the big guns like they did,” notes Tepper, founder of Appaloosa Management.

Team Xi, meantime, huddled with the Communist Party's 24-man Politburo, which pledged to make this year's 5% growth target. A key focus is that the property sector“stop declining.” This suggests increased support as data showed new-home prices in August falling at the fastest pace in a decade.

Politburo members reportedly homed in on alleviating headwinds from the property sector, weak domestic consumption and high youth unemployment.

“Some new situations and problems have emerged in the current running of the economy,” the Xinhua news agency argued in an editorial.“We must view the current economic situation comprehensively, objectively and calmly, face difficulties squarely, and strengthen confidence.”

Japanese stocks are getting a lift, too, from reports that Xi's inner circle is being directed to“face up to difficulties, strengthen confidence, and earnestly enhance the sense of responsibility and urgency of doing economic work well.”

Reuters reports that Xi's Ministry of Finance might soon issue 2 trillion yuan (US$285 billion) of special sovereign bonds. Bloomberg reports that Beijing is mulling firing more than US$140 billion into the largest state-run banks. It would mark the first such capital injection since the 2008“Lehman shock.”

The faster Beijing puts a floor under the economy, the more Japan's own prospects will improve – and the better the chances Ishiba will be prime minister a year from now.

China is by far Japan's
biggest trading partner. Having the top customer for your goods battling deflation is rarely a plus for economic confidence.

The good news in Beijing is that“the frequency and magnitude of policy rollouts have exceeded our expectation,” says Jing Liu, economist at HSBC Holdings.“The tide has turned; be prepared for more proactive initiatives.”

In Washington, too, the Federal Reserve is now in rate-cut mode. That, over time, could reap its own benefits as US households buy more Japanese goods.

“In the US,” says economist Louis Gave at Gavekal Research,“the world's largest economy, the central bank is now easing monetary policy, and January 2025 will most likely see another round of fiscal stimulus.”

That is“unless Kamala Harris wins the presidential election but is saddled with a Republican-controlled House of Representatives which proceeds to tighten government spending,” he adds.

In China, Gave notes,“the world's second largest economy, the government is now easing monetary and fiscal policies and actively looking to boost asset prices. A simultaneous easing of monetary and fiscal policies in the world's two biggest economies does not sound exactly deflationary.”

Average Chinese home prices slid 6.8% in August month on month, following a 7.6% decline in July.

“Bottom-out stabilization in the housing market will be a prerequisite for households to take action and break the wait-and-see cycle,” says Yue Su, China analyst at the Economist Intelligence Unit.

“This suggests that the policy priority is not to boost housing prices to create a wealth effect, but to encourage households to make purchases. This real estate policy is aiming at reducing its drag on the economy .”

The question, of course, is what's next from Team Xi.“Beijing seems finally determined to roll out its bazooka stimulus in rapid succession,” says Ting Lu, Chief China economist at Nomura.“Beijing's recognition of the severe situation of the economy and lack of success in a piecemeal approach should be valued by markets.”

How might the Bank of Japan value these efforts? On July 31, the BOJ hiked rates to the highest since 2008.

Since then, BOJ Governor Kazuo Ueda has stepped back from the hawkish rhetoric that accompanied that tightening move. The central bank was chastened in part by the violent reaction in world markets, and in part by Ueda being summoned to the parliament by anxious lawmakers.

Here, Ishiba's election could deepen the plot. He's a proponent of the BOJ tightening more assertively, warning that the weak yen is hurting both Japanese purchasing power and economic confidence.

Over
the
last 11 years,
the
BOJ hoarded government bonds and stocks via exchange-traded funds. By 2018,
the
BOJ's balance sheet
topped
the
size
of Japan's annual gross domestic product.

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The resulting plunge in the yen killed
the
urgency
for lawmakers to level playing fields, increase productivity and increase competitiveness. It also took pressure off corporate CEOs to innovate, restructure and disrupt.

On the flipside, it's not like Japan's economy is performing well amid sluggish household consumption. To hasten GDP, Ishiba's government must act fast to put some big reform wins on the scoreboard.

That will help to make sure his administration is around more than just 12 months. It will also validate the bullishness of investors driving the Nikkei 225 Stock Average to all-time highs this year.

Japan's stock boom has been driven by ultraloose BOJ policies and steps over the last decade to strengthen corporate governance.

Now that the first ingredient is in question, investors are starting to wonder if underlying fundamentals support today's lofty stock valuations. Some rapid actions to reassure the Warren Buffetts of the world rediscover Japan are in order.

So is a savvy plan for the outcome of the November 5 US election. The specter of a Donald Trump 2.0 White House – and an even more dangerous“Trump trade” this time – is keeping many Tokyo officials up at night. Preparing for a Trump or Harris administration will be a major preoccupation for Ishiba's fledgling government.

Tokyo's foreign policy is likely to be in an initial state of suspended animation until the US presidency is sorted out. If Democrat Harris wins, there's likely to be a high degree of continuity from the Kishida era.

If Trump, a Republican, returns to the White House, Ishiba's LDP must devise a plan to limit the collateral damage to Japan's economy.

Trump is certain to impose new tariffs on China and beyond. And he is also almost certain to resume his bromance with North Korean leader Kim Jong Un, a bond that still confounds the Tokyo establishment.

No doubt, Ishiba could make Asian geopolitics a lot more interesting should he take a more assertive line on China. Just so long as Ishiba remembers how much his ability to still be leader in a year is dependent on China.

Follow William Pesek on X @WilliamPesek

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