Published in Japan Forward 1/1/2023
2022 was a year when jarring shocks started to seem normal. It began with Russia’s invasion of Ukraine, which marked the first outright land war in Europe since 1945. In the middle of the year the world was shocked by assassination of Shinzo Abe, the most consequential Japanese political leader for half a century.
Remembering Shinzo Abe
Meanwhile, Covid-19 refused to disappear, though most governments seem to have abandoned the previous draconian social mobility restrictions as being more damaging than the disease itself.
The quadrennial Football World Cup usually makes for a bright interlude in the succession of crises and disasters that make up the daily news. This year’s World Cup was less pleasurable than it should have been, despite the high standard of football on display.
For a start, it took place in November / December instead of the standard July / August, when the baking heat of Qatar would have endangered the health of players and spectators. So why stage the tournament in such an inappropriate place? And what is to become of that huge stadium that so many imported workers died hurrying to build?
Stadium in the desert
FIFA, the governing body of international football, is a paradigm of the dysfunctional, secretive but always richly financed organisation that exists beyond the reach of democratic accountability.
Other examples are the International Olympic Committee – the Japanese police are still investigating corruption related to the Tokyo Olympics – and the United Nations, which once again proved its structural uselessness in its response to the Ukraine War.
Nonetheless, there was one unexpected side-effect of the Qatar World Cup that could prove extremely important in geopolitical terms. The Chinese public watching the football saw with their own eyes that spectators at the stadium were not wearing masks to protect against Covid.
In other words, the pandemic was no longer considered a serious threat in most of the world, and their government’s claim that its “Zero Covid” policy was the best course of action was no longer credible.
The result was a short, sharp burst of social unrest that, insofar as we can tell, was dealt with in an unusually lenient manner. For the first time, Xi Jinping appears to have backed down.
Scorecard for Last Year
Last year, our predictions were for a treble digit oil price, double digit inflation, a Taiwan emergency, takeovers of large Japanese companies by American money and a “return to reality” from the virtual “working from home” lifestyle that took off during the pandemic. The outcome was three wins and two losses, which we consider a narrow victory.
Inflation did reach double digits in 2022, and the price of a barrel of Brent crude was higher than $100 for most of the year. Oil is likely to remain at elevated levels into the medium term as supply has been limited by a decade of underinvestment, and renewables are still a minor part of the energy mix in many countries.
On the other hand, demand is visibly weakening as the central banks led by the U.S. Federal Reserve have overtightened and brought about a global recession.
Investment curtailed
Likewise, consumer price inflation topped 10% in many European countries including Germany, Sweden, Belgium and the UK amongst others. Financial markets are expecting inflation to decline rapidly from next year, and that is quite likely given the sharp decline in liquidity in the U.S. and elsewhere.
But we now live in a world where inflation is always a real threat, as opposed to the complacent pre-Covid era when many intelligent people convinced themselves that inflation could never happen. No doubt, there will be other waves to come when governments shift their priorities and start to worry about weak growth.
Meanwhile, non-virtual life seems to be back in fashion, judging from the surge in tourism and collapse in the stock prices of “stay at home” companies like Meta (Facebook), Zoom and Netflix.
The other two predictions, the Taiwan emergency and the boom in acquisitions, turned out to be wide of the mark. The Ukraine war has served as a wake-up call for many countries, not least Japan, but also, in a different sense, China. Precisely because the world is now sensitized to the cataclysmic risks of a Chinese move on Taiwan, it is significantly less likely to happen.
The Ukraine war has acted as showcase for the new generation of American weaponry, but more importantly it has demonstrated the damage that a comprehensive sanctions regime can do.
In his best seller Chip War, Chris Miller notes that China’s semiconductor imports are larger than Saudi Arabia’s oil exports. America’s destruction of Huawei as a global player is a tiny taste of what to expect in the case of an assault on Taiwan. Everyone would be hurt badly, but China would be hurt most.
The potential for large-scale acquisitions of Japanese companies by American capital still stands, despite the collapse in the stock prices of Tesla, Meta and others. Thanks to the strength of the dollar, the relative scale of Japanese and American stock market capitalization is hardly changed since this time last year.
Over the last ten years, U.S. market cap has risen from 48% to 63% of the global total, against a share of global GDP of just 25%. At some point, this imbalance has to be rectified. Perhaps the Year of the Rabbit will be the turning point, with a reversal in the dollar-yen rate being a key driver.
THE 2023 SCENARIOS
The Super-strong Yen
This time two years ago the yen-dollar touched 102. In the September of 2022 it briefly topped 150. Such a rapid slump is usually the result of an economic crisis, but there was no economic crisis in Japan. Rather, it was the unprecedentedly sharp rise in US interest rates that touched off a financial market riot.
Normally, you would expect the currency of the country with the lowest inflation to be strongest and the one with the highest inflation to be the weakest. That is not what happened this time. The result: a yen that was much too cheap on fundamentals, meaning purchasing power.
In 2023, the US Federal Reserve will be confronted with a much weaker economy and will be forced to abandon its tight monetary policy. Meanwhile, the new Governor of the Bank of Japan will gradually allow interest rates to rise towards the natural level, which is north of 1%. The combination of these two factors will drive the yen much higher.
Complaints by CEOs and media people about the currency’s effect on inflation will be replaced by complaints about the strong yen’s effect on the profits of exporters and fears of a return to deflation.
Change at the Top in Japan
Over the last 40 years there have been 21 Japanese prime ministers, which means that the average term in office has been just under two years. However, during that time there have been three prime ministers – Yasuhiro Nakasone, Junichiro Koizumi and Shinzo Abe – who had quite lengthy stints in office. Not coincidentally, all three devised their own policy agendas and made significant impacts internationally. If we exclude these exceptional leaders, the average term in office for “ordinary” prime ministers has been one year and nine months.
In other words, statistically speaking, it is more than likely there will be a change of prime minister in 2023. It would make things more interesting if the next Japanese leader were a determined and outspoken woman.
China Pivots to Pragmatism
Over the last few years, the Chinese government has taken down tech tycoons who it felt were getting too powerful, directed bellicose rhetoric and deeds towards other countries, and imposed draconian social control in the name of “Zero Covid”. The change in that last policy has been startling – not a gradual easing, but a sudden full-scale reversal.
The authorities are keen to stress that the new approach had been long planned and was not a response to social unrest, but it seems that officials charged with implementing Covid policy had no idea what was coming. The protests, starting with the mass walkouts at Foxconn’s enormous factories and ending with the “white paper” street demos, were crucial factors.
Here are some comments from Wang Zhi’an, formerly of state broadcaster China Central Television, now an independent journalist reporting from Japan.
The outrage and anger of ordinary people, mobilised during all these protests, show that the extent of grievances is unparalleled. In the end, the Party conceded. This is quite rare. In the ruling history of the Communist Party, there are extremely few occasions where they finally made concessions in the face of mass protest… the Covid measures in the past were indeed unpopular, and even many people within the government did not agree. In fact, some within the system were likely privately supportive of these young people taking to the streets to protest, leading to a change in policy.
Could this mark the start of a tilt from social control to growth? It would make sense since economic stagnation and loss of entrepreneurial dynamism is in the interests of nobody, including the leadership. The proof will be in the performance of the Chinese stock market which has been an awful performer for several years now.
ESG Backlash
The growth of ESG (Environmental, Social and Governance) funds has been one of the most striking phenomena in the financial world over the last decade. Assets under management of ESG funds have risen from $15 trillion in 2014 to $38 trillion today, and Bloomberg Intelligence expects further growth to $53 trillion by 2025, which would put them at one third of the entire funds total. The idea is “do well by doing good”, as Benjamin Franklin advised. What’s not to like?
Three problems have cropped up. The first is that ESG funds did well during the bull market of 2015 to 2021 which was led by giant tech stocks. These companies produce negligible emissions directly but their stocks underperformed when commodities and old economy stocks started to boom. How much profit are investors willing to sacrifice for virtue? Only now is the question coming up.
The second issue is the difficulty in ranking stocks for ESG, with specialist rating companies coming up with drastically different scores for the same stocks. In 2022, several European funds were found to have been guilty of “greenwashing” by the financial regulator, and in one case German police mounted a raid on the asset manager arm of a flagship bank. Campbell’s Law: any metric used for decision-making will be gamed.
The third problem is potentially the most serious. Although ESG is presented as a neutral technocratic procedure, it is highly political – essentially a way of engineering significant social and economic change without the inconvenience of going through the legislature. As such, it is certain to meet political opposition. This is already happening in the United States, where officials from nineteen states have criticized what is being called “woke investing”, and Florida Governor Ron DeSantis has pulled several billions out of ESG funds.
2022 was the first year ever in which ESG funds suffered net outflows. It won’t be the last.
Roubini Disappointed
Nourel Roubini, Professor Emeritus at New York University, has published a book called “Mega Threats: Ten Dangerous Trends That Imperil Our Future”. Adam Tooze, who teaches history at Columbia University, is equally pessimistic, declaring that we are in the midst of a “polycrisis”, meaning a number of disparate crises that interact and create one gigantic mess.
It’s enough to make your flesh creep, but there is another set of possibilities – that a kind of feedback loop operates and acknowledgement of the risks leads to steps being taken to avoid them. So China prioritizes its economic problems. Concern about a wider war leads to a ceasefire in Ukraine. Worried about a deepening global recession, central banks “pivot” to growth, taking stock prices higher.
A more optimistic thinker, Steven Pinker, Professor of Psychology at Harvard University, notes that the news is nearly always bad news. We pay close attention to natural disasters and horrible crimes and ignore slow, steady improvements in well-being and pleasant weather. It seems to be human nature to focus on the downside.
2022 was definitely a “Roubini year”, but 2023 could well be a “Pinker year”, which means one in which there is plenty to worry about and no doubt several new scares, but in the end nothing unusually terrible happens.
Japan the Giant-killer
Finally, an extra prediction in the field of sport. Samurai Blue, the Japanese football team, excelled themselves in the Qatar World Cup, emerging from the group stage with victories against two European giants, Germany and Spain, and narrowly losing on penalties to Croatia, who ended up as the third placed team in the tournament.
In 2023, it is the turn of the Brave Blossoms, Japan’s rugby team. They are in a tough group, containing England, Argentina and Samoa, as well as the lower ranked Chile. If they play to their full potential, they can rival the giant-killing exploits of the Japanese footballers.