Tag Archives: Abenomics

current Japanese inflation? ..there is none

November 2, 2016 By in economics, inflation, inflation vs deflation, Japanese development, Uncategorized Tags: , , , , , , Leave a comment

Deflation means that prices in general are falling.  If this is the case, it’s better to put off buying new things for as long as possible, until they’re 100% absolutely needed.  That’s because anything you buy today will be cheaper tomorrow.

After a while, non-consumption becomes a habit, and an economy stagnates.

Conversely, in an inflationary environment, everything is more expensive tomorrow than it is today.  So consumers buy in advance.  In addition to things they need, they may also purchase items they have no intention of consuming.  They may think that keeping physical objects which they can later resell is a better way of preserving or enhancing purchasing power than keeping savings in the bank.

Japan has been in a deflationary economic funk for over a quarter century.   When Shinzo Abe became Prime Minister of Japan in late 2012, he decided to attack deflation as a way of boosting economic growth.  He had a plan that has become famous for its three “arrows”:  a massive depreciation of the yen, large-scale government deficit spending, and corporate/regulatory reform.  Each of the three should have been enough by itself to spark inflation.

The expense of the plan has been enormous, both in terms of the loss of international purchasing power of yen-denominated assets and in increased national debt.

The result after close to four years?   ….as the Tokyo government reported last week, no inflation at all.

How can this be?

From its outset, I’ve believed that Abenomics would be unsuccessful.  I thought the stumbling block would be corporate reform.  The earliest evidence that would indicate I would be wrong would, I thought/think, take the form of an effort to remove the legislative barriers to reform that the Liberal Democrats in the Diet had installed after the deflationary crisis had already begun.  So far, for all practical purposes there’s been nada.  So I continue to be convinced that corporate leaders will resist any changes to the status quo, aided as they are by the Diet’s removal of any levers to force reform from the outside.

Of course, any inflation-induced oomph to consumption won’t last forever.  People and institutions adjust. If nothing else, consumers run out of storage space for the extra stuff they’ve bought.  They then have to throttle back their spending   …or rent a storage unit  …or contemplate a McMansion.

What’s surprising to me, however, is that the same reluctance to spend–although perhaps not to the same degree–is evident in both the US and in Europe.  We might figure that the austerity approach of EU countries wouldn’t exactly spur consumers on.  But the lack of inflation and the paucity of mall-storming or website-crashing consumption in the US after eight years of extraordinary stimulus seem to argue that the overarching economic theories about how to induce inflation are incorrect.

Demographics as the cause?

 

unrest in the Land of Wa

April 28, 2016 By in Abenomics, Japanese development, Uncategorized Tags: , , , , , Leave a comment

Contrary to market expectations, the Bank of Japan, that country’s equivalent of the US Federal Reserve, declined today to add to its already super-extraordinarily loose monetary policy.

Reaction in financial markets was in its own way extraordinary.  The yen rose by 3% against the dollar and Japanese stocks fell by three percent.  Not only that but ripples from the Tokyo decline have spread outward to Europe, and to the US in futures trading.

I can understand domestic Japanese distress.

Conventional economic theory says that if a country weakens its currency, lowers interest rates and ups government spending, all three forms of stimulus will act together to rev up consumer and corporate spending and thereby increase GDP.  Upward wage pressure will ultimately emerge, however.  This will create inflation, causing the economy in the end to settle back to its old, slower rate of real economic expansion.  But the nominal figures will be higher because of the now-higher inflation rate.

Abenomics has done all the stimulus stuff, adding to already huge government debt and substantially reducing the purchasing power of ordinary citizens in the process.  But there’s no sign of the economic growth or of the inflation (which Japan would love to swap for the deflation now plaguing it) that theory promises.  Worse than that, the recent upward movement in the yen, helped along by today’s surge, has undone about a third of the currency weakening the government engineered a few years ago.

There are lots of possible reasons why Abenomics has not worked–aging population; resistance to immigration; entrenched, incompetent corporate managements; two political parties (one = pro-farming, the other = pro-North Korea, pro-pachinko, anti-nuclear weapons) with little relevance for modern Japanese life.

None of this is new.  After all, Japan is more than halfway through its third decade of deflationary economic stagnation.

But why the flow-through to other markets?

Maybe this is just day traders’ reflexes and the weakness outside Japan will begin to dissipate once trading in New York begins.  On the other hand, the EU has more than a passing resemblance to Japan.  It’s just not quite as old.  Maybe that’s what the world is starting to be worried about.

 

 

 

 

 

yen strength a minus for Abenomics

April 7, 2016 By in Abenomics, currency effects, currency markets, Uncategorized Tags: , , , 1 Comment

This time a year ago $1 bought about 120 yen.  That figure was 125+ last June.  The rate was 113, however, a week ago–and 108- today.

This amounts about a 10% year-on-year gain in the yen’s purchasing power against the dollar, half of that strength during the past week.

The rise is good for consumers for whom the cost of imported items like food has skyrocketed under the administration of Prime Minister Shinzo Abe.  Not so good, though, for Mr. Abe’s grand plan to resuscitate his country’s still moribund industrial sector through massive currency depreciation.

There’s no particular reason for the yen to strengthen that I can see.  Yes, Mr. Abe did recently observe that aggressive intervention in currency markets is an imprudent strategy.  And, yes, this is the time of year when corporate cash flows back into Japan causes mild currency strength.  But the Bank of Japan recently initiated a negative interest rate policy designed to weaken the yen.  And in my view there’s no sign yet that Mr. Abe’s bet-the-farm gamble on 1980s-era export industries is paying off.

Yet the currency is going up.

This may just be bad luck.

If we assume that the US dollar has peaked, then the question for short-term currency traders is which of the two remaining majors, the yen or the euro, is a better bet.  Given renewed uncertainty about Greece and the upcoming vote in the UK on a referendum to exit the EU, traders may think they have little choice other than to shift their holdings toward yen.

Still, the biggest economic problem for Japan–and the reason Japan is a cautionary tale for the US–is that the political power structure there is totally committed to defending the status quo and retarding structural change.  It’s subsidizing industries whose heyday was in the 1980s, and it’s allowing its workforce to shrink by its anti-immigration stance in the face of an aging domestic population.  A rising currency will only make the circle harder to square.

 

 

the yen and the unraveling of Abenomics

February 16, 2016 By in Abenomics, Uncategorized Tags: , , , , Leave a comment

Last week the Tokyo stock market had two days in which the benchmark Topix index fell by more than 5%.  For the week as a whole, the market declined by 12.5% (the quirky Nikkei 225, the Japanese equivalent of the Dow, fell by 11%).

This has little to do with worries about the oil price or about a global economic slowdown, in my view.  This is all about Abenomics.

The three “arrows” rhetoric aside, the idea behind Abenomics has been to create extraordinary short-term economic stimulus in Japan through huge depreciation of the currency, large increases in government deficit spending and a big expansion of the money supply.

It has been clear from the outset that all three of these actions will leave deep permanent scars on the Japanese economic landscape.  However, their purpose has been to buy time and space for export-oriented Japanese industry to restructure and modernize.  That would, in turn, allow these firms to hire more workers and increase wages for all.  In the eyes of Abe boosters, the benefits brought by a revitalized industrial base would more than offset the body blows caused by depreciation, inflation and an increase in already gargantuan outstanding government debt.

It has also been clear that Abenomics can’t take infinite time to work. Shock-and-awe stimulus is temporary; waves of it are progressively less effective.  Theory and practical experience both say that without substantive changes an economy tends to revert to its previous torpid state after a few years   …except there’s higher inflation.

In Japan’s case, industry hasn’t voluntarily restructured.  Government continues to protect recalcitrant corporate managements from outsiders skillful enough, wealthy enough and willing enough to take on the modernizing task.  So far, then, Abenomics has all been jam tomorrow, as Lewis Carroll put it.

Since the beginning of this month, early in the fourth year since the launch of Abenomics, the yen has risen by about 7% against the US$, 8% against the renminbi and about half that against the €.

This strength is a bit surprising, since it comes immediately after further stimulus by the Bank of Japan in the form of negative interest rates.  Investors in Tokyo are reading the currency strength as the first sign that the window of opportunity for Abenomics to succeed is starting to close.

I’m not sure this interpretation is completely correct.  But, having been an Abenomics skeptic from day one, I won’t argue that it’s wrong, either.

For people like me, who continue to watch from the sidelines, Japan is important to the rest of the world as a tourist destination, but mostly as a cautionary tale about the limits of monetary policy and the dangers of special interest politics determined to defend the status quo.

 

 

Sharp Corp (6753) and Abenomics

January 29, 2016 By in Abenomics, Uncategorized Tags: , , , , 2 Comments

Abenomics in brief

Prime Minister Shinzo Abe’s well-known plan for reinvigorating the Japanese economy has three “arrows.”  The first two are large government deficit spending and ultra-loose money policy, which were designed to buy time for structural reform of Japanese industry.   The two have had toxic side effects:  they have mortgaged Japan’s future with lots of new government debt and, through the currency depreciation they engendered, have reduced national wealth by a third.

Regular readers will know that from the outset I’ve believed that Japanese corporations won’t restructure voluntarily and that the Tokyo government had no interest in forcing corporate leaders to do so.  In other words, Abenomics a very expensive farce, that had no chance to succeed.

the Sharp case

The latest case in point is Sharp, a heavily indebted chronic money-loser which is in the process of being nationalized by state-owned Innovation Corporate Network of Japan (ICNJ).  ICNJ is offering shareholders a total of $2.5 billion for their shares and the company a continuing supply of the opium of state support.

Hon Hai Precision, a Taiwanese company best known in the US as Apple supplier Foxconn, has bid twice that figure.  It has pledged to keep all Japanese employees and to transfer its management and manufacturing technology into Sharp.  As I’m writing this, news is breaking that Hon Hai is about to sweeten its offer by pledging to invest a minimum of $850 million in Sharp operations after acquiring it.

the board decision…

So, which will the board of Sharp choose:

–twice the money for shareholders plus an infusion of new technology and world-class manufacturing management?, or

–what’s behind the curtain marked ICNJ?

Although no final decision has been made, all the press leaks indicate that Sharp is going to choose ICNJ–and that the Tokyo government is encouraging the company to do so.

a wake-up call?

The Financial Times seems to believe that the Sharp case will prove to be the ah-ha moment that will cause foreign investors to understand that Mr. Abe never intended to fire the crucial third arrow of Abenomics.  It thinks an outflow of foreign capital will follow this realization.  For the sake of Japanese citizens who are bearing the burden of the first two arrows, I hope the FT is wrong.  My private reaction is to ask why it’s taking foreigners so long to smell the coffee.