The Nikkei 225 Index just broke 40,000, surpassing the record high of 1989. The stellar stock market performance happened amid the fact that Japan's economy is officially in recession after two consecutive quarters of negative GDP growth.
If negative economic growth is not scary enough, Japan's 2023 inflation is the worst in 41 years, with the yen depreciating beyond 150 yen to the dollar. Moreover, the Bank of Japan will likely raise interest rates soon, which would be the first time since 2016.
Despite such negative economic news, the Japanese stock market has been sizzling. So why are investors optimistic about Japan's future? It's because Japan delivers results.
It might not be just a coincidence that the day the Nikkei hit a record high was the same day that TSMC (Taiwan Semiconductor Manufacturing Company) opened its first factory in the Japanese city of Kumamoto. Japan wants to reclaim its position as a world leading chipmaker. In 1989, NEC, Toshiba, and Hitachi supplied half of the world's DRAM chips, and now the Japanese government wants to restore its glory.
The good news for high-tech Japan does not end at chipmaking. Amazon Web Services decided to invest 2.26 trillion yen (535 billion baht) in cloud infrastructure in Japan. This investment project is estimated will add an additional 5.57 trillion yen to Japan's GDP and generate 30,500 full-time jobs.
Game-changing investment projects do not come cheaply. Obviously, the country must have the necessary infrastructure and human resources to support such operations. But incentives are also important. In the case of TSMC, Japan's government has vowed to provide 1.2 trillion yen to support the investment. And, probably because of smart generosity, a second TSMC factory is in discussion.
It is clear to me that investors are buying into Japan's glowing high-tech industry future and ignoring its unpleasant economic past.
While the Nikkei index is blooming, Thai's SET index is wilting like a flower that has not been watered for years. The Thai index plummeted 16% within a year, and there is no telling when it will rise again. So why are investors pessimistic about Thailand's future? Because the country delivers nothing but empty promises. I will call them "unachievable dreams".
Thailand does not just have one dream like Japan -- we have eight dreams! They include being a (1) tourism hub, (2) wellness and medical hub, (3) agriculture and food hub, (4) aviation hub, (5) logistic hub, (6) future mobility hub, (7) digital economy hub, and (8) a financial hub. These eight ambitious hubs are announced under the "Ignite Thailand" strategy. But there is little indication of how Thailand can achieve any of these lofty goals. With an unfocused plan filled with empty promises, investors take their money to Japan's stock market.
Before any dreams of being whatever "hub", the government needs to quickly improve Thai education quality, which is now ranked at 56 out of 64 countries surveyed by the International Institute for Management Development (IMD). In the survey, Singapore ranked number seven and Malaysia 39. It is obvious that all hub dreams require high-quality human capital to make them come true. The quality of human capital is the very reason why NVIDIA, the world's third most valuable company, is investing $4.3 billion (153.6 billion baht) in an AI data centre in Malaysia, not in Thailand.
There are also a few interesting issues I would like to discuss. Given limited space, I can discuss only three: (1) a silly interest rate debate, (2) unworthy cash handout scheme, and (3) shocking energy price bombs.
The first issue is the interest reduction debate between the government and the Bank of Thailand. There is a civilised, scientific way to settle the argument. Exchanging nasty words will lead to nothing. Experienced economists know very well that the effects of an interest rate reduction differ from economy to economy.
It is empirically shown to stimulate consumption in the US and UK but shown to harm consumption in Japan. So why not stop exchanging words and simulating econometric models to see scientific results?
The Bank of Thailand, Fiscal Policy Office (Ministry of Finance), and National Economic and Social Development Council all possess sophisticated econometric models which they use regularly for economic projections.
Just simply change the value of interest rate variable -- say lowering the rate by a quarter of percentage point, half a percentage point, and one full percentage point -- to see the reduction effects on GDP growth, inflation, and exchange rates. All three institutions could then sit down and professionally discuss the simulation results.
If the plus effects of interest reduction outweigh the minus effects, the Bank of Thailand should agree to make the cut with no mumbling about high levels of debt, capital outflow, and inflation. But if the results prove to be otherwise, the government should stop blaming the Bank of Thailand for not making the cut, but stand behind the Bank of Thailand's decision.
The next issue is the economic wonder of the 10,000 baht cash handout scheme. The scheme is most likely to be unworthy of taxpayer's money. A Bank of Thailand study concluded the fiscal multiplier of such a money transfer scheme is only 0.4. Therefore, the 500 billion baht spending (3% of GDP) would create only a 200 billion baht (1.2%) GDP increase. Where does the rest of the money (300 billion baht) go? It goes abroad.
Thailand's import value is equivalent to 68.1% of GDP as opposed to 25.4% of GDP in Japan and 14.3% of GDP in China. Our economy is highly dependent on foreign imports. Thais do not consume products that we produce, such as petrochemicals. We export them in exchange for consumable imports. If the government chooses to hand out 500 billion baht in cash, only 159.5 billion baht would be spent on domestically produced products in the first round.
The reduced effect of the cash handout programme is confirmed by the World Bank and the IMF.
The last issue is the energy price time bombs. In May, the nation might be shocked with a energy price hike. Current gasoline pump prices are heavily subsidised through the Thailand Oil Fund. As of March 3, the fund was 93.5 billion baht in red. I have heard that the fund's financial deficit is limited to 110 billion baht by law.
If that is the case, the fund could reach its deficit limit towards the end of April. By then, the government would have two choices: raising pump prices and/or reducing the gasoline excise tax, which would hurt government income. I believe it would be a combination of the two options.
The Electricity Generating Authority of Thailand (Egat) is much in the same position as Thailand Oil Fund. They have been subsidising electricity rates in lieu of the government. The subsidy burden was 137 billion baht at the end of 2023. The amount could exceed 150 billion baht around about now. Therefore, a substantial electricity rate hike for May to August 2024 is inevitable.
Lastly, may I give advice to the government. Nobody believes in aspiring words any more. They demand action plans and results. When China sets a 5% growth target for 2024 without clear action plans, investors dump oil in fear of China's receding demand and buy gold for security.