Finance

JPMorgan earnings fell short of analyst expectations as the bank built reserves for bad loans by $428 million.
The company’s shares fell in premarket trading after it said it would temporarily suspend its share repurchase program.
Chairman and CEO Jamie Dimon warned geopolitical tension, high inflation and waning consumer confidence could hurt the economy “sometime down the road.”

JPMorgan Chase said Thursday that second-quarter profit slumped as the bank built reserves for bad loans by $428 million and suspended share buybacks.
The actions reflect Chairman and CEO Jamie Dimon’s increasingly cautious stance. “The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy,” he said in the earnings release.

“But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road,” he warned.
With this outlook, the bank has opted to “temporarily” suspend its share repurchases to help it reach regulatory capital requirements, a prospect feared by analysts earlier this year. Last month, the bank was forced to keep its dividend unchanged while rivals boosted their payouts.
Shares of the bank fell 3.5% in premarket trading.
Here’s what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

Earnings per share: $2.76 vs. $2.88 expected
Managed revenue: $31.63 billion vs. $31.95 billion expected

Profit declined 28% from a year earlier to $8.65 billion, or $2.76 a share, driven largely by the reserve build, New York-based JPMorgan said in a statement. A year ago, the bank benefited from a reserve release of $3 billion.

Managed revenue edged up 1% to $31.63 billion, helped by the tailwind of higher interest rates, but was still below analysts’ expectations, according to a Refinitiv survey.
JPMorgan, the biggest U.S. bank by assets, is closely watched for clues on how the banking industry fared during a quarter marked by conflicting trends. On the one hand, unemployment levels remained low, meaning consumers and businesses had little difficulty repaying loans. Rising interest rates and loan growth mean that banks’ core lending activity is becoming more profitable. And volatility in financial markets has been a boon to fixed income traders.
But analysts have begun slashing earnings estimates for the sector on concern about a looming recession, and most big bank stocks have sunk to 52-week lows in recent weeks. Revenue from capital markets activities and mortgages has fallen sharply, and firms are disclosing writedowns amid the broad decline in financial assets.
Importantly, a key tailwind the industry enjoyed a year ago — reserve releases as loans performed better than expected — has begun to reverse as banks are forced to set aside money for potential defaults as the risk of recession rises.
The bank had a $1.1 billion provision for credit losses in the quarter, including the $428 million reserve build and $657 million in net loan charge-offs for soured debt. JPMorgan said that it added to reserves because of a “modest deterioration” in its economic outlook.
Back in April, JPMorgan was first among the banks to begin setting aside funds for loan losses, booking a $902 million charge for building credit reserves in the quarter. That aligned with the more cautious outlook Dimon has been expressing. In early June he warned that an economic “hurricane” was on its way.
Asked on Thursday to update his forecast, Dimon told reporters during a conference call that it hadn’t changed, but that the concerns had edged closer, and that some of the financial dislocations he had feared had begun to materialize.
The slowdown in Wall Street deals stung JPMorgan, which has one of the biggest operations on the Street. Investment banking fees fell a steep 54% to $1.65 billion, $250 million below the $1.9 billion estimate. Revenue in that division was impacted by $257 million in markdowns on positions held in the firm’s bridge loans portfolio.
Fixed income trading revenue jumped 15% to $4.71 billion, but that was still well below analysts’ $5.14 billion estimate for the quarter, as strong results in macro trading were offset by weakness in credit and securitized products. Equities trading revenue also jumped 15%, to $3.08 billion, which edged out the $2.96 billion estimate.
One tailwind the company has is rising U.S. rates and a swelling book of loans. Net interest income jumped 19% to $15.2 billion for the quarter, topping analysts’ $14.98 billion estimate.
JPMorgan said at the firm’s investor day in May that it could achieve a key target of 17% returns this year, earlier than expected, thanks to higher rates. In fact, the bank hit that level this quarter.
Shares of JPMorgan have dropped 29% this year through Wednesday, worse than the 19% decline of the KBW Bank Index.
Morgan Stanley also reported earnings Thursday and like JPMorgan, its results were shy of Wall Street’s expectations. The bank was hurt by a drop investment banking revenue.
Wells Fargo and Citigroup are expected to post their results on Friday and Bank of America and Goldman Sachs are slated for Monday.
This story is developing. Please check back for updates.

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Morgan Stanley reported second-quarter earnings and revenue that were below analysts’ expectations.
The bank’s results were hurt by a steep 55% decline in investment banking revenue.
The results confirm what some analysts had feared for Morgan Stanley, which runs one of the larger equity capital markets operations on Wall Street.

Morgan Stanley posted second-quarter results on Thursday that were below analysts’ expectations, hurt by weaker-than-expected investment banking revenue.
Here’s what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

Earnings per share: $1.39 vs. $1.53 expected
Revenue: $13.13 billion vs. $13.48 billion expected

Profit dropped 29% to $2.5 billion, or $1.39 per share from $3.69 billion, or $2.02 per share, a year ago, the New York-based bank said in a release. Revenue fell 11% to $13.13 billion from $14.8 billion, driven by the steep 55% decline in investment banking revenue.
The results confirm what some analysts had feared for Morgan Stanley, which runs one of the larger equity capital markets operations on Wall Street. The firm’s investment banking division produced $1.07 billion in second-quarter revenue, $400 million below analysts’ $1.47 billion estimate that itself had been ratcheted down in recent weeks.
Shares of the bank dipped less than 1% in premarket trading.
Wall Street banks are grappling with the collapse in IPOs and debt and equity issuance this year, a sharp reversal from the deals boom that drove results last year. The change was triggered by broad declines in financial assets, pessimism over the possibility of a recession and the Russian invasion of Ukraine.
“Overall, the firm delivered a solid quarter in what was a more volatile market environment than we have seen for some time,” CEO James Gorman said in the release. He added that good trading results “helped partially counter weaker investment banking activity.”

Equities trading produced $2.96 billion in revenue in the quarter, above the $2.77 billion estimate, while fixed-income trading revenue of $2.5 billion handily exceeded the $1.98 billion estimate.
The firm’s giant wealth management division produced $5.74 billion in revenue, below the $5.99 billion estimate, as lower asset values cut management fees.
Investment mangement revenue fell 17% to $1.41 billion from last year.
Morgan Stanley co-President Ted Pick said last month that markets would be dominated by concern over inflation and recession in a period of transition after nearly 15 years of easy-money policies by central banks came to an end.
“The banking calendar has quieted down a bit because people are trying to figure out whether we’re going to have this paradigm shift clarified sooner or later,” Pick said.
Shares of the bank have dropped 24% this year through Wednesday, worse than the 19% decline of the KBW Bank Index.
JPMorgan also reported disappointing second-quarter earnings on Thursday, as the biggest U.S. bank by assets, grew its reserves for bad loans and suspended its stock buybacks as its economic outlook dims.
Morgan Stanley, meanwhile, repurchased $2.7 billion of its own stock during the latest quarter and its board has approved a new $20 billion program.
Wells Fargo and Citigroup are scheduled to report results on Friday, while Bank of America and Goldman Sachs post on Monday.

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Check out the companies making headlines before the bell:
JPMorgan Chase (JPM) – JPMorgan Chase was down 2.9% in premarket trading after falling 12 cents shy of estimates with a quarterly profit of $2.76 per share. It also announced it was temporarily suspending share buybacks. CEO Jamie Dimon said inflation, waning consumer confidence and other factors were likely to have a negative effect on the global economy.

Morgan Stanley (MS) – Morgan Stanley reported quarterly earnings of $1.39 per share, 14 cents shy of consensus estimates, with the investment bank’s revenue also falling short. The bank saw weaker investment banking activity during the quarter, although it said results in equity and fixed income were strong. Morgan Stanley lost 2.6% in the premarket.
Taiwan Semiconductor (TSM) – The chip maker’s stock rose 1.5% in the premarket after second-quarter earnings beat analyst estimates. Taiwan Semi also raised its revenue forecast for the year. Results got a boost from strong markets for automotive and IoT chips.
Ericsson (ERIC) – The Sweden-based telecom equipment company reported a profit that missed analyst estimates, hurt by higher costs for components and logistics. Ericsson shares tumbled 9.1% in premarket trading.
Twitter (TWTR) – Twitter added 1.1% in premarket action, on top of a 12.6% jump over the past 2 sessions. Wednesday’s nearly 8% gain came after Twitter sued Elon Musk to force him to go through with a $44 billion takeover deal. Twitter also said in an SEC filing that it is not planning company-wide layoffs but may continue to restructure the company.
Conagra (CAG) – The food producer reported an adjusted quarterly profit of 65 cents per share, 2 cents above estimates, with revenue essentially in line with forecasts. Conagra saw an impact from higher costs, with operating margins falling by 310 basis points.

Cisco Systems (CSCO) – J.P. Morgan Securities downgraded the networking equipment maker’s stock to “neutral” from “overweight,” based in part on what it sees as downside risks to enterprise spending levels. Cisco fell 2.2% in the premarket.
Dollar General (DG) – The discount retailer’s stock fell 2.3% in the premarket after Citi downgraded it to “neutral” from “buy,” noting that the shares are within 4% of its price target. Citi also feels the recently announced CEO transition will be smooth and does not impact its view of the stock.

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It was a curious omission. In February, when the Federal Reserve published the winter edition of its semi-annual report to Congress, it dropped a normal section outlining the appropriate level of interest rates as determined by “monetary-policy rules”. Its inclusion might have been awkward, because it would have suggested that rates should be as high as 9%, when the Fed still had them near to 0%. In subsequent hearings at least three members of Congress pressed Jerome Powell, the Fed’s chairman, to explain its absence. Mr Powell promised that the section would be back in its next report. And so it was when the summer edition was published on June 17th—though only after the Fed had started to catch up to the rules’ prescriptions by rapidly raising rates.As controversies go, the disappearance of a three-page section in a lengthy policy report was rather minor. It garnered scant media coverage. Nevertheless, it was important. It shone light on a decades-old question that is being asked with more insistence amid soaring inflation: should central banks limit their discretion and set interest rates according to black-and-white rules?The search for rules to guide and constrain central banks has a long pedigree. It dates back to the 1930s when Henry Simons, an American economist, argued that authorities should aim to maintain “the constancy” of a predetermined price index—a novel idea in his era. In the 1960s Milton Friedman called for central banks to increase the money supply by a set amount every year. That monetarist rule was influential until the 1980s, when the relationship between money supply and gdp broke down.Any discussion of rules today conjures up a seminal paper written in 1993 by John Taylor, an economist at Stanford University. In it he presented a straightforward equation which came to be known as the “Taylor rule”. The only variables were the pace of inflation and the deviation of gdp growth from its trend path. Plugging these in produced a recommended policy-rate path which, over the late 1980s and early 1990s, was almost identical to the actual federal-funds rate, the overnight lending rate targeted by the Fed. So it seemed to have great explanatory power. Mr Taylor argued that his rule might help to steer central banks on the right path for rates in the future.However, just as the Taylor rule started to get attention from economists and investors alike, its explanatory power grew weaker. In the late 1990s the recommended Taylor rate was consistently lower than the fed-funds rate. That sparked a cottage industry of academic research into alternative rules, mostly grounded by Mr Taylor’s original insights. Some put more weight on the gdp gap. Others added inertia, since central banks take time to adjust rates. Another group shifted from current inflation to forecasts, trying to account for the lag between policy actions and economic outcomes. In its reports the Fed usually mentions five separate rules. The appeal of rules lies in their cold neutrality: they are swayed only by numbers, not by fallible judgment about the economy. Central bankers love saying that their policy decisions are dependent on data. In practice they sometimes struggle to listen to the data when their message is unpalatable, as it has been with inflation for the past year. Central bankers found numerous reasons, from the supposedly transitory nature of inflation to the limited recovery in the labour market, to delay raising rates. But throughout that time, the suite of rules cited by the Fed was unambiguous in its verdict: tightening was needed.The rules are, however, not perfectly neutral. Someone first has to construct them, deciding which elements to include and what weights to ascribe to them. Nor are they as tidy as implied by the convention of calling them “simple monetary-policy rules”. They are simple in the sense that they contain relatively few inputs. But just as a bunch of simple threads can make for one messy knot, so a proliferation of simple rules has made for a baffling array of possibilities. For example, the Cleveland Fed publishes a quarterly report based on a set of seven rules. Its most recent report indicated that interest rates should be anywhere between 0.6% (per a rule focused on inflation forecasts) and 8.7% (per the original Taylor rule)—an uncomfortably wide range.Moreover, each rule is built on top of a foundation of assumptions. These typically include estimates of the long-term unemployment rate and of the natural interest rate (the theoretical rate that supports maximum output for an economy without stoking inflation). Modellers must also settle on which of a range of inflation gauges to use. Slight changes in any of these inputs—common during periods of economic flux—can produce big swings in the rates prescribed by the rules. For example, an adjusted version of the Taylor rule, based on core inflation, would have recommended an interest-rate increase of a whopping 22 percentage points over the past two years (starting from negative 15%). Slavishly following such guidance would make for extreme volatility. Average eleganceOne possible solution is to combine multiple rules into a single result. The Cleveland Fed does just this, constructing a basic median out of the seven rules it tracks. Using this as a reference point, Mr Powell and his colleagues ought to have started raising rates gingerly in the first quarter of 2021 and should have brought them to roughly 4% today, more than twice as high as they actually are. That is much more sensible as a recommendation than the conclusion yielded by any single policy rule.Such a median could never substitute for analysis of a range of data by central banks. But there is a big difference between taking rules seriously and treating them as holy writ. After all the inflation missteps of the past year, a healthy sample of rules deserves a closer look in policy debates. And they certainly deserve more prominence than they currently get as a short section in monetary reports that the Fed can choose to omit when inconvenient. ■For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter.Read more from Free Exchange, our column on economics:Are central banks in emerging markets now less of a slave to the Fed? (Jul 9th) The case for strong and silent central banks (Jun 30th)People’s inflation expectations are rising—and will be hard to bring down (Jun 19th) More

Market commentators and investors often exaggerate the uniqueness of their times. History counts no fewer than four “Black Mondays”—echoing the “Black Thursday” that sparked the 1929 Wall Street crash, which heralded the Great Depression—even though the 1987 and 2015 editions rapidly proved unremarkable. Many other days once doused in dark paint have been forgotten. The 25-year period to 2007 looks so boring, in hindsight, that it is dubbed the “Great Moderation”. The ensuing financial crisis did rock markets, but the pattern of hyped but transitory shocks soon resumed—remember the taper tantrum of 2013? This year there have been plenty of stomach-churning gyrations. Since January the nasdaq, a tech-heavy stock index, is down by almost 30%. The shocks keep on coming. Just as investors started to worry about stubborn inflation, Russia invaded Ukraine, turbocharging commodity prices and piling more pressure on central banks to crank up interest rates. China is strangling its economy with its zero-covid policy.But just how unusual is the turmoil? In order to quantify its uniqueness, Buttonwood has examined three measures of market-related uncertainty: expected asset-price volatility, divergence in economic forecasts and the unpredictability of economic policy as chronicled in the media. The tests suggest we really are living in unusual times. Start with swings in asset prices. In the past month America’s s&p 500 stock index has been three times more volatile than it was before the pandemic. And investors are still jittery. The volatility index (vix)—which captures investors’ appetite for insuring themselves against future stock-price moves—has hovered at around 25 points since 2020, nearly eight points above its 2010s average. That is not unprecedented, however. Since the 1990s a range of crises, from the Gulf war to the dotcom crash, have kept the vix near 25 points for months.The bond-market hysteria is more unusual. The Merrill Lynch Options Volatility Estimate (move) is a gauge of fear among bond investors. It is at levels last seen in March 2020, when the spread of covid-19 caused market panic, although it is still lower than during the 2007-09 financial crisis. The elevated move reflects the clumsy pivot in central-bank policy. On May 4th Jerome Powell, the chairman of the Federal Reserve, signalled it was not even considering raising rates by 0.75 percentage points at its next meeting—before doing just that six weeks later.Central bankers have become hard to read for a reason: the macroeconomic oracles on which they partly rely, our second gauge, are exceptionally dispersed. A measure of disagreement among professional forecasters of economic growth surveyed by the Philadelphia Fed is nearly triple its typical 2010s level; it has been above two percentage points for nine consecutive quarters, which last occurred between 1979 and 1981, when inflation was in double digits. Our third measure of uncertainty, that arising from the inscrutable outlook for economic policy, indicates lasting change the most clearly. An index built by Scott Baker of the Kellogg School of Management and colleagues tracks the frequency of articles that include worrying bundles of words—such as “regulatory”, “economic” and “uncertainty”—in global publications. It suggests that economic-policy unpredictability has been rising steadily since the financial crisis and is now far higher than in the late 1990s, when the index began. That our indicators are flashing red at the same time suggests an enduring step-up in uncertainty from which it may be hard to climb down. Furthermore, the different types of uncertainty reinforce each other. Political polarisation, which tends to make economic policy erratic, is fuelled by high inflation. All this means the economy is harder to forecast, making life harder for central banks, in turn spooking investors. The fragmentation of global trade doesn’t help. The unwinding of supply chains encourages stockpiling during booms and fire-sales during busts, amplifying economic swings.Persistent uncertainty means a higher cost of capital and less affordable insurance against shocks. All of which tends to dampen business investment, weighing on gdp growth and equity returns. There have been many dark days for the nasdaq in 2022: the index has already recorded 32 daily falls of more than 2% since January. This time their entry on the calendar of doom looks deserved. For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter.Read more from Buttonwood, our columnist on financial markets:Crypto’s last man standing (Jul 9th)What past market crashes have looked like (Jun 30th)How attractively are shares now priced? (Jun 25th) More

Financial markets are supposed to follow a strict division of labour. The central bank sets the risk-free rate to stimulate or cool the overall economy, but it is “market-neutral”: it does not favour any asset over another. Private investors choose who to lend to and at what risk premium. Combine the two judgments, and the economy should have a set of interest rates that reflects economic conditions. The European Central Bank (ecb), however, thinks markets are not doing their job—or at least not the way it wants. It is preparing to intervene in two novel ways: by limiting what it deems an acceptable difference (or spread) in rates between sovereign borrowers; and by greening its bond purchases and banking rules. In doing so it will abandon market neutrality and discriminate between assets.Start with sovereign spreads. On July 21st the ecb is expected to unveil a new tool meant to prevent borrowing costs among euro-zone governments from diverging too much. The aim is to ensure that monetary-policy decisions work similarly across the bloc. If rising rates, say, led to ballooning spreads, with the extra costs transmitted to private borrowers, some regions might feel a bigger squeeze than others. The currency union has a history of such divergence. During the euro crisis, between 2011 and 2015, a bigger spread between sovereigns also meant tighter financial conditions for private firms and households. Yet some argue that the ecb’s mooted tool is not needed today. Europe has cleaned up its banks; the ecb has pledged to do whatever it takes to save the euro. In the private sector fragmentation is less of an issue: lending rates to firms in Italy are at the level they were before the euro crisis, relative to Germany’s, despite widening sovereign spreads. Moreover, the policy looks tricky to implement. The ecb will need to define what counts as an “excessive” spread. That is hard, because economists do not know what the true, justified interest rate is for any given bond. The tool could encourage vulnerable countries to borrow at will, knowing the ecb is capping their spreads. So strings may have to be attached. And if it is deemed akin to monetary financing, which is barred under the Maastricht treaty, it may stumble in the courts.Still, the ecb is likely to forge ahead. There is an emerging consensus that, in a diverse monetary union, managing sovereign spreads is part of monetary policy. Increasingly the ecb also sees as its duty to curb the financial risks of climate change—its second break away from market neutrality. On July 4th the bank said it would “tilt” its corporate-bond buying towards issuers “with better climate performance”. The central bank is also making it harder to pledge carbon-intensive assets as collateral for loans from the central bank.The ecb‘s neutrality was always a myth, says Pierre Monnin, an economist at the Council on Economic Policies, a think-tank in Zurich. Market-based estimates of risk are inevitably flawed when it comes to climate change, because no comprehensive system of carbon pricing exists. By failing to correct for unpriced “externalities”—harms imposed by borrowers on third parties—the ecb’s nominally neutral stance in fact reinforced such inefficiencies. Fossil-fuel firms also rely more on bond financing than renewables. But although these arguments are economically sound, it is not the traditional role of central banks to price externalities when the government has failed to act.And are the ecb’s own risk assessments up to the task? One yardstick is the adequacy of its first climate-stress test, whose results were published on July 8th. These suggest that 41 of Europe’s biggest banks could together suffer about €70bn in credit and market losses over the next three years in the event of more frequent natural disasters and a disorderly energy transition. That is only around 4% of these banks’ aggregate capital, and far less than the €400bn of damage the ecb reckons might hit them in an economic downturn.Yet the ecb itself admits the stress test is only a “learning exercise”, rather than an attempt to find out if the banks have a big-enough buffer to withstand climate chaos. Most banks do not have enough data to properly estimate climate losses; many lack the tools for incorporating climate risks into lending decisions. The ecb‘s first stab at totting up the potential costs of a messy transition is most probably a gross underestimate. By dropping market neutrality, the central bank is taking a more political role. Whether its visible hand ends up bending markets in the right direction is another question. ■For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter. More

A little less than eight years is not an especially long tenure for heads of government in much of the world. In Japan, it is a veritable aeon. And two years after the resignation of Abe Shinzo, a former prime minister who was assassinated on July 8th, the reforms he pushed in office look set to shape Japan’s economy for years to come.The current prime minister, Kishida Fumio, secured a big majority of seats in the upper house of Japan’s legislature in the election on July 10th. His greater focus on equality and redistribution, which he calls “New Capitalism”, was initially cast as an alternative to Mr Abe’s vision. In reality, it will be built on the foundations his predecessor laid out. The programme which began after Mr Abe’s 2012 thumping election victory—dubbed Abenomics—had three so-called “arrows” to dislodge Japan from its economic stagnation: flexible fiscal policy, monetary expansion and structural reforms. Clear positives stand out from Mr Abe’s record, most notably the financial accounts of Japan Inc. Reforms to corporate governance encouraged more shareholder-friendly activity and prodded firms to reduce moribund networks of cross-shareholdings. Those changes, paired with a slump in the yen, boosted corporate earnings to record levels (see chart). An environment friendlier to investors also helped to raise anaemic levels of inward foreign direct investment. In 2020, direct investment into Japan was worth 1.2% of gdp, the highest on record. There have been stark improvements in the labour market, too. Japan’s female employment rates, previously low by the standards of rich economies, climbed rapidly under Mr Abe. At 72% among working-age women, the employment rate is now more than ten percentage points above the levels Mr Abe inherited, and six percentage points above the American equivalent. Kathy Matusi, the economist who championed increasing female participation as a way to unlock the productive potential of the Japanese economy, credits Abe-era reforms, such as mandatory disclosure on gender diversity and more generous salary replacements for new parents.Mr Kishida’s aides now talk less of ditching Abenomics and more of building its legacy. When his New Capitalism Council revealed its “grand design” document in May, it concluded that the strategy would adhere to the three-arrow framework. The strategy focuses, rightly, on the need to get firms to deploy their excess cash through wage increases or capital investments. Stagnant wages have been Abenomics’s biggest shortcoming. At around 266,000 yen ($1,940) per month in May, Japan’s average wage has barely budged in a decade, and has actually fallen in real terms. Most of the recent rise in female employment reflects growth in part-time jobs that are usually poorly paid. This is where Mr Kishida could have the most to offer. Regrettably, his approach to the issue so far differs little from Mr Abe’s: tax incentives and browbeating, with a bit of a boost for public-sector workers.Fiscal policy was a troubled area for Mr Abe, and is likely to remain one for Mr Kishida. Two long-planned but ill-fated increases in Japan’s sales tax, in 2014 and 2019, made fiscal policy a drag on the recovery rather than a boost. Spending under Mr Abe was not as flexible as the first arrow’s label would have suggested. After leaving office, Mr Abe did convince the party to soften its pledge to balance the primary budget (excluding debt-servicing costs) by 2025. But Mr Kishida is said to be more concerned about fiscal sustainability. His closest advisers have backgrounds in Japan’s typically hawkish finance ministry. Mr Abe’s support for a more stimulative monetary policy has also lasted beyond his tenure, with mixed effects. Enormous purchases of bonds, and a subsequent policy to directly fix the yields of government bonds, may have prevented Japan from falling back into deflation, but failed to stimulate inflation or nominal-income growth as desired. As inflation rises globally, the Bank of Japan may find it harder to keep policy easy. But Mr Kishida will likely pick a continuity candidate when Kuroda Haruhiko, Mr Abe’s central-bank governor, leaves office next April.With Mr Abe gone, might Mr Kishida feel liberated to diverge further from his predecessor? Different global conditions could fuel such a change. Concern about fiscal discipline has more truck in a world of rising interest rates. But the differences between Mr Abe’s and Mr Kishida’s approach now look more likely to be a matter of degree rather than substance. Mr Kishida’s focus on wages, in particular, could augment the successes of Abenomics if properly pursued. Mr Abe’s arrows, in short, will remain essential weapons. ■For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter. More

A little less than eight years is not an especially long tenure for heads of government in much of the world. In Japan, it is a veritable aeon. And two years after the resignation of Abe Shinzo, a former prime minister who was assassinated on July 8th, the reforms he pushed in office look set to shape Japan’s economy for years to come.The current prime minister, Kishida Fumio, secured a big majority of seats in the upper house of Japan’s legislature in the election on July 10th. His greater focus on equality and redistribution, which he calls “New Capitalism”, was initially cast as an alternative to Mr Abe’s vision. In reality, it will be built on the foundations his predecessor laid out. The programme which began after Mr Abe’s 2012 thumping election victory—dubbed Abenomics—had three so-called “arrows” to dislodge Japan from its economic stagnation: flexible fiscal policy, monetary expansion and structural reforms. Clear positives stand out from Mr Abe’s record, most notably the financial accounts of Japan Inc. Reforms to corporate governance encouraged more shareholder-friendly activity and prodded firms to reduce moribund networks of cross-shareholdings. Those changes, paired with a slump in the yen, boosted corporate earnings to record levels (see chart). An environment friendlier to investors also helped to raise anaemic levels of inward foreign direct investment. In 2020, direct investment into Japan was worth 1.2% of gdp, the highest on record. There have been stark improvements in the labour market, too. Japan’s female employment rates, previously low by the standards of rich economies, climbed rapidly under Mr Abe. At 72% among working-age women, the employment rate is now more than ten percentage points above the levels Mr Abe inherited, and six percentage points above the American equivalent. Kathy Matusi, the economist who championed increasing female participation as a way to unlock the productive potential of the Japanese economy, credits Abe-era reforms, such as mandatory disclosure on gender diversity and more generous salary replacements for new parents.Mr Kishida’s aides now talk less of ditching Abenomics and more of building its legacy. When his New Capitalism Council revealed its “grand design” document in May, it concluded that the strategy would adhere to the three-arrow framework. The strategy focuses, rightly, on the need to get firms to deploy their excess cash through wage increases or capital investments. Stagnant wages have been Abenomics’s biggest shortcoming. At around 266,000 yen ($1,940) per month in May, Japan’s average wage has barely budged in a decade, and has actually fallen in real terms. Most of the recent rise in female employment reflects growth in part-time jobs that are usually poorly paid. This is where Mr Kishida could have the most to offer. Regrettably, his approach to the issue so far differs little from Mr Abe’s: tax incentives and browbeating, with a bit of a boost for public-sector workers.Fiscal policy was a troubled area for Mr Abe, and is likely to remain one for Mr Kishida. Two long-planned but ill-fated increases in Japan’s sales tax, in 2014 and 2019, made fiscal policy a drag on the recovery rather than a boost. Spending under Mr Abe was not as flexible as the first arrow’s label would have suggested. After leaving office, Mr Abe did convince the party to soften its pledge to balance the primary budget (excluding debt-servicing costs) by 2025. But Mr Kishida is said to be more concerned about fiscal sustainability. His closest advisers have backgrounds in Japan’s typically hawkish finance ministry. Mr Abe’s support for a more stimulative monetary policy has also lasted beyond his tenure, with mixed effects. Enormous purchases of bonds, and a subsequent policy to directly fix the yields of government bonds, may have prevented Japan from falling back into deflation, but failed to stimulate inflation or nominal-income growth as desired. As inflation rises globally, the Bank of Japan may find it harder to keep policy easy. But Mr Kishida will likely pick a continuity candidate when Kuroda Haruhiko, Mr Abe’s central-bank governor, leaves office next April.With Mr Abe gone, might Mr Kishida feel liberated to diverge further from his predecessor? Different global conditions could fuel such a change. Concern about fiscal discipline has more truck in a world of rising interest rates. But the differences between Mr Abe’s and Mr Kishida’s approach now look more likely to be a matter of degree rather than substance. Mr Kishida’s focus on wages, in particular, could augment the successes of Abenomics if properly pursued. Mr Abe’s arrows, in short, will remain essential weapons. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More