February 19, 2014 6:49 pm


Washington regrets the Shinzo Abe it wished for

The US fears that Japan’s departure from postwar pacifism will provoke Beijing

Ingram Pinn illustration©Ingram Pinn


It is fairly easy to assess the relationship between Shinzo Abe’s Japan and Xi Jinping’s China. Neither likes the other very much. Both are using nationalism as a prop to further policy aims. Both conceivably find it useful to have a “tough man” on the other side, the better to push against.

Less easy to calibrate is the state of relations between Japan and the US. This ought to be far easier to decipher. Japan is, after all, the US’s most important ally in Asia, the “unsinkable aircraft carrier” that has hosted US fighter aircraft and troops since the end of the second world war. Now, in Mr Abe, it has a leader who, after decades of American prodding, is finally willing to adopt a more robust defence posture and revisit the “freeloaderdefence doctrine that pacifist Japan has long embraced. Yet having attained what it has long been after, Washington is showing signs it is getting cold feet.

One sign of that was its expression of “disappointment” after the December visit of Mr Abe to Yasukuni shrine, which is regarded as a symbol of Japan’s unrepentant militarism by China and South Korea. In the past, Washington has privately voiced its displeasure at Yasukuni visits, but has not publicly reprimanded Japan. Tokyo was taken aback by the use of the worddisappointed” – translated as shitsubo – which sounds harsh in Japanese.

There have been other signs of strain. US politicians have voiced concern at Mr Abe’s view of history. Virginia lawmakers ruled that school textbooks should also use the Korean nameEast Sea – for the Sea of Japan. Washington is concerned that, under Mr Abe, Tokyo’s relations have also soured with Seoul, another important US ally.

From Japan’s perspective, Washington did not back it up with sufficient vigour when Tokyo’s control of disputed islands was cleverly challenged by Beijing’s announcement of an air defence identification zone. Washington did show its displeasure by flying B52 bombers over the zone, but Joe Biden, US vice-president, did not make a big deal of the issue when he visited Beijing.

Many officials in Tokyo regard Washington as having virtually capitulated to China’s unilateral move. They also regularly bemoan the absence of “Japan hands” around President Barack Obama, who has tended to surround himself with people far more steeped in China. More than one official in Tokyo speaks of a growing sense that Washington can no longer be relied upon to support Japan.

There is an irony to all of this that will not be lost on Mr Abe. Ever since 1950, Washington has been urging Japan to rearm and to adopt the sort of defence posture Japan’s prime minister is now advocating. No sooner was the ink dry on the 1947 pacifist constitution, written under the orders of General Douglas MacArthur, than the Americans regretted forcing Japan to forever renounce “the right of belligerency”. John Foster Dulles, appointed to negotiate the end of the US occupation, urged Japan to build an army of 300,000 to 350,000 men. China had gone communist and the US was fighting a war in Korea. It no longer suited the US to have a neutered client state” in east Asia.

For years Japan resisted that pressure. Tokyo relied on the US nuclear umbrella and got on with the business of business. Its only concession was to form a Self Defence Force that was forbidden from fighting. Now, six decades later, Japan has a leader willing to take the US at its word. Mr Abe has the personal conviction, as well as the geopolitical pretext, to revamp Japan’s interpretation of its constitution or even to overturn pacifist article nine itself.

Now the moment has come, though, some in Washington are having second thoughts. John Kerry, secretary of state, according to one former White House official, regards Japan as “unpredictable and dangerous”. 

There is nervousness that Japanese nationalism will provoke a counter-reaction in Beijing. Hugh White, an Australian academic and former defence official, says the meaning is clear: “America would rather see Japan’s interests sacrificed than risk a confrontation with China.”

When Mr Abe went to Yasukuni, he may have partly been sending a message to Washington. It is a curiosity of the Japanese right that it has been the most ardent supporter of the US-Japan alliance while simultaneously being resentful of the postwar settlement imposed by Washington on a defeated Japan. Going to Yasukuni in defiance of US wishes is one way of signalling that Japan cannot always be relied upon to do Washington’s bidding.

Distaste in Washington for Mr Abe is by no means universal. In some ways, the Japanese prime minister is exactly what the US doctor ordered. He has a plan to reflate Japan’s economy. He is the first leader in years with any hope of solving the festering issue of US marine bases in Okinawa. He is willing to spend more on defence after years of a self-imposed limit of 1 per cent of output. Those policies, however, come with a price tag: a revisionist nationalism that many in Washington find distasteful.

“As China grows, Japan has more and more reason to be anxious about China’s power, and less and less confidence in America’s willingness to protect it,” Mr White says. The US, he argues, must either commit itself unambiguously to defend Japan’s core interests or help Japan regain the “strategic independence it surrendered after 1945”. Japan’s answer to that dilemma is to hold on ever tighter to America – and to pull away.


Copyright The Financial Times Limited 2014


Overshooting in Emerging Markets

Michael Spence

FEB 20, 2014
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Newsart for Overshooting in Emerging Markets


MILANUntil relatively recently, countries’ so-called middle-income transitions were largely ignoredin part because what was supposed to be a transition often became a trap. A few economies in Asia – particularly Japan, South Korea, and Taiwansailed through to high-income status with relatively high growth rates. But the vast majority of economies slowed down or stopped growing altogether in per capita terms after entering the middle-income range.

Today, investors, policymakers, and businesses have several reasons to devote much more attention to these transitions. For starters, with a GDP that is as large as the combined total of the other BRICS countries (Brazil, Russia, India, and South Africa) plus Indonesia and Mexico, China has raised the stakes considerably. Sustained Chinese growth, or its absence, will have a significant effect on all other developing countries – and on the advanced economies as well.

Second, the developed economies are out of balance and growing well below potential, with varying but limited prospects for faster growth on a five-year time horizon. By contrast, emerging economies, with their higher growth potential, increasingly represent large potential markets to tap.

Third, a majority of the large emerging economies (Indonesia, Brazil, Russia, Turkey, and Argentina, but not China) unwisely relied on large inflows of abnormally cheap foreign capital, rather than domestic savings, to finance growth-sustaining investments. As a result, their current-account balances deteriorated in the post-crisis period.

Now, with the onset of monetary tightening in the advanced economies, the imported capital is leaving, in a slightly panicky mode, creating downward pressure on exchange rates and upward pressure on domestic prices. The adjustment now underway requires launching real reforms and replacing low-cost external capital with domestically financed investment.

Market uneasiness reflects uncertainty about the duration of the growth slowdown that is likely to result, the implications for credit quality and valuations, herd effects, and the negative returns from bucking the trend. Moreover, there is concern that an overshoot in capital outflows could produce the kind of self-reinforcing damage to stability and growth from which it is more difficult to recover. These large emerging economies received an apparently free pass to growth: an ability to invest without pursuing arduous reform or sacrificing current consumption. But it is easier to take the detour than it is to return to the main road.

But this narrative is largely irrelevant to China, where excess savings and capital controls still limit direct exposure to monetary-policy externalities spilling over from advanced countries. China is not risk-free; its risks are just different.

Even so, amid growing concerns about emerging economies’ prospects, China is attracting attention because of its scale and central position in the structure of global trade (and, increasingly, global finance). As a result, risk assessment in China focuses on the magnitude of the structural transformation, resistance from powerful domestic interests, and domestic financial distortions.

In particular, there is considerable uncertainty about the Chinese version of shadow banking, which has grown in large part to circumvent the restrictions embedded in the state-dominated official system. Shadow banking has given savers/investors access to a larger menu of financial options, while small and medium-size enterprises – which play an increasingly important role in generating growth and employment – have gained broader access to capital.

The Chinese authorities need to address two issues. The first, establishing regulatory oversight, will be easier to resolve than the second: the potential for excessive risk-taking as a result of the implicit government guarantees that back state-owned banks’ balance sheets. The authorities need to remove the perceived guarantee without triggering a liquidity crisis should they let some bank or off-balance-sheet trust fail.

The list of other challenges facing China is long. China needs to rein in low-return investment; strengthen competition policy; correct a lopsided fiscal structure; monitor income distribution across households, firms, asset owners, and the state; improve management of public assets; alter provincial and local officials’ incentives; and overhaul the planning and financing of urban growth. Thoughtful analysts like Yu Yongding worry that the difficulties of managing imbalances, leverage, and related risks – or, worse, a policy mistake – will distract policymakers from these fundamental reforms, all of which are needed to shift to a new, sustainable growth pattern.

Little wonder that financial markets are feeling slightly overwhelmed. But the swing is excessive. Not all advanced-economy investors who were chasing yield have deep knowledge of developing-country growth dynamics. As a result, the trend reversal will almost surely overshoot, creating investment opportunities that were missing in the previous environment, in which asset prices and exchange rates were strongly influenced by external conditions, not domestic fundamentals.

The major emerging economies are adjusting structurally to this new environment. They do not need external financing to grow. In fact, since World War II, no developing economy has sustained rapid growth while running persistent current-account deficits. The high levels of investment required to sustain rapid growth have been largely domestically financed.

China’s challenges are idiosyncratic and different from those of other emerging economies. The structural transformation required is large, and the imbalances are real. But China has an impressive track record, substantial resources and expertise, strong leadership, and an ambitious, comprehensive, and properly targeted reform program.

The most likely scenario is that most major emerging markets, including China, will experience a transitional growth slowdown but will not be derailed by shifts in monetary policy in the West, with high growth rates returning in the course of the coming year. There are internal and external downside risks in each country that cannot and should not be dismissed, and volatility in international capital flows is complicating the adjustment.

The problem today is that the downside risks are becoming the consensus forecast. That seems to me to be misguided – and a poor basis for investment and policy decisions.


Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, and Academic Board Chairman of the Fung Global Institute in Hong Kong. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.


Person in the news

February 21, 2014 6:44 pm

Carl Icahn, obsessive activist investor

His decades-long war on corporate complacency has gone mainstream, writes Stephen Foley
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Steven Goldstone, when he was chief executive of RJR Nabisco, used to call the appearance of Carl Icahn “a rite of spring”. Year after year, the investor would show up to demand RJR split its snacks and tobacco businesses apart; year after year, he would fight to persuade fellow shareholders to approve his representatives for the board; and year after year his defeat would not deter him from trying again.

The remarkable persistence of Mr Icahn has been on show again this week. Partly because his four-year campaign of pressure on the drugmaker Forest Laboratories came to lucrative fruition in a $25bn sale to Actavis.

Mainly, however, because the Forest deal, coming two days after he turned 78, provided another opportunity for Mr Icahn to argue that activist investors are shareholders’ best defence against an entrenched corporate management class that is self-serving and feckless. It is an argument he has been making consistently since the 1980s, when he was one of America’s most notorious corporate raiders and an inspiration for Gordon Gekko, the fictional financier created by film-maker Oliver Stone, whose motto was “greed is good”.

The difference is that today mainstream investors are more attentive to activists’ arguments. Shareholders should be tickled to death when he shows up,” says T Boone Pickens, another veteran corporate raider and a friend of Mr Icahn. “He’s about as smooth as a stucco bathtub, he doesn’t pull any punches, but he is accurate about the analysis. You can judge a trapper by his pelts, and Carl’s got a lot of pelts.”

Mr Icahn had twice launched proxy fights for board seats at Forest since starting to build his 11.4 per cent stake and declaring that he had found another great company brought low by mismanagement.

It began as a personal battle: he made insinuations of nepotism against Howard Solomon, then chief executive; Mr Solomon denied the claims and accused Mr Icahn of “maximum distortion”. It became more co-operative when Mr Icahn’s representatives had made it on to the board. He said on Tuesday that the takeover, at a 25 per cent premium to the prevailing share price, was “a terrific result” for all shareholders. It is also good for Mr Icahn, who makes a $1.7bn profit on its investment. He made a 31 per cent return in his funds last year, and 2014 is also off to a good start.

Carl Celian Icahn was brought up in a hardscrabble neighbourhood of Queens, New York, the son of a singer and a teacher. A self-confessed obsessive”, he drove himself hard enough to earn a place at Princeton studying philosophy, and eventually rebelled against his parents’ wish that he become a doctor. He went into stockbroking, striking out on his own as a trader in 1968. He no longer manages money for anyone else but his $20bn fortune gives him more firepower than most activists.

Shareholders are keener than ever to hear what activists have to say. So Mr Icahn has taken to handing outmyth-bustingfacts and figures about the value of activist investors’ interventions, particularly his own. Investors who buy into a company when an Icahn representative goes on the board have on average outperformed the S&P 500 by 10 percentage points, he says.

None of which means he attracts fewer charges of being a bully. That was one of the insults that flew in a heated exchange on CNBC last year, when Mr Icahn took rival investor Bill Ackman to task for his bearish view of Herbalife, a nutritional supplements company in which the pair had taken opposing positions, calling him a “crybaby” and worse.

After the Forest deal, Mr Icahn penned yet another defence of activism. “The relentless insistence that shareholder activism is detrimental, notwithstanding the mountain of evidence proving that the opposite is true,” he wrote, in a note that he decided not to publish but passed to the Financial Times, “reminds me of those last few eminent doctors in the 19th century who continued to extol the virtues of bloodletting as a method of curing illnesses, despite the crushing amount of data proving that this treatment was killing patients.”

“I just sit down with a martini and I write,” he said of his caustic open letters to management.

Unlike many in finance, Mr Icahn starts his day late, rarely appearing in the office before 10am. He stays awake into the small hours, reading, doing puzzles and practising chess, while no one else is awake to interrupt him with calls.

Brett, 34, one of two children with his first wife (he later married his personal assistant), plays an increasingly important part in the business, taking the lead on his father’s $4bn Apple investment. But there is no doubt who calls the shots.

The Icahn offices, overlooking New York’s Central Park, are decorated with the relics of battles past, including deal trophies and framed letters of support.

Today’s battles are fought digitally, and Mr Icahn has learnt to wield the power of social media in support of his campaigns. A tweet from @Carl_C_Icahn can light a fire under a share price. Last August, he sent shares in Apple up 5 per cent with 140 characters: “We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.” That kicked off another running battle, this time to persuade the iPhone maker to return almost all its $160bn cash pile to shareholders. He failed to win support from shareholders, even for a more modest proposal for a $50bn return, but Apple has increased its share buybacks so much that he was able to retreat and declare victory at the same time.

But what is the difference between victory and defeat anyway? At RJR Nabisco, Mr Goldstone split the businesses in his own time and in his own way, but the position remains one of Mr Icahn’s most lucrative. The fact that investor activism has gone mainstream is the biggest victory of all.


The writer is the FT’s US investment correspondent


Copyright The Financial Times Limited 2014.