an Abenomics scorecard

summing up Abenomics

Abenomics is the name given in the press to the radical macroeconomic rescue policies promiseded by Japanese Prime Minister Shinzo Abe in his successful election campaign last year.

The idea is to try to end a quarter-century of economic stagnation through the firing of three “arrows”:

1.  a massive increase in the domestic money supply

2.  further stimulus through deficit government spending, and

3.  structural reform legislation.

In many ways, this is an all-or-nothing bet.

Arrow #1, which is already in flight, has triggered in a massive 20%+ devaluation of the Japanese currency–and a consequent staggeringly large loss of national wealth.  Arrow #2, which is in the bow, will add to Japan’s massive national debt–run up to dangerously high levels through decades of politically motivated but economically wasteful porkbarrel government spending.

The consensus view of economists throughout the world, which I believe is correct, is that this “all in” bet depends crucially on the success of Arrow #3.  My view has been, and still is, that it will never leave the quiver.

For  Japan’s sake, I hope I’m wrong.

the Japanese stock market as barometer

I’m writing this post to make two points.

1.  One of the main arguments being used for the potential success of Abenomics in jump-starting the Japanese economy is the strong performance of the Japanese stock market since last July.  This performance, however, is considerably less than it’s made out to be.

From the low point for Japanese stocks last July 26th to the peak of the market (so far) on May 22nd, the main indices rose by about 85% in local currency terms.  They’ve since fallen by almost 18%, for a net gain in ¥ since July of 50%+.

Factor in the currency loss and the return in US$ is 20.2%.  That’s almost precisely what the S&P 500 has done over the same time period.  It’s well below the 35%+ gain in US$ that European stocks have posted.

2.  To my eye, the daily fluctuations in the Japanese stock market over the past ten months have been uncharacteristically wide.  This suggests to me that the main actors in the market have been foreigners.  Not just any foreigners, either.  I suspect the current market bulls are top-down investors driven by general macro concepts–and without much knowledge or experience of the Japanese economy or its securities markets.  I don’t detect any great desire for Japanese professionals to participate.

I’m not sure what this means, if I’m correct.  My experience is that Japanese institutions don’t often cover themselves with glory in their domestic stock market.  On the other hand, they have the inside track in assessing what is/or is not possible politically.

 

In short, I think there’s much less positive about Abenomics than meets the eye.

 

 

 

is the rising yen an economic problem?

the current situation

As I’m writing this during afternoon trading on Monday in Tokyo, the yen exchange rate is at US$1 = ¥ 76.8.  That is down a bit from the high of US$1 = ¥ 76.5 the Japanese currency achieved last week.  But it’s still about 1% stronger against the greenback than when Tokyo intervened in the currency markets on August 4th trying to stem the yen’s rise against the dollar.

Notably, in contrast to the coordinated intervention by a group of major industrial countries that occurred after the tragic earthquake/tsunamis of last March, Japan acted alone this time.  The show of solidarity in March was enough to buy the yen a month of relative weakness; the difference of opinion implied in last week’s solitary move meant the Japanese currency gained a mere day of respite.

currency realities

Two of them:

1.  Countries, either alone or in groups, have far less firepower in currency markets than the big international banks.  Add to this the fact that governments typically want to defend politically expedient but economically inappropriate currency levels, and it should come as no surprise that countries stand no chance at all to impose their will on today’s currency markets.

2.  A rising currency acts to slow down economic activity, much in the way an increase in interest rates does.  But it also rearranges growth–away from export-oriented industries and toward domestic ones.  It also reduces the local currency price of imported raw materials.

what about Japan today?

I think it’s important to distinguish between the Japanese economy and the Japanese stock market.

economy

In the case of the former, the most pressing current need is to rebuild the Fukushima area after March’s devastation.  The increased government spending that will make up part of that effort will tend to lift GDP growth, negating at least a portion of the high-yen pressure on economic expansion.  To the degree that local companies use dollar-denominated materials in their rebuilding, their costs will be lower, their profits higher, than they would be in a weak-yen situation. Therefore, yen strength probably won’t be a significant negative for Japan’s economy–and may even be a mild positive.  Today’s announcement in Tokyo of better than expected 2Q11 GDP illustrates this point.  Economic news is likely to continue to be surprisingly positive over at least the coming 12 months.

stock market

The Japanese stock market, on the other hand, is in many ways a monument to Japan’s weak-yen, export-oriented economy past.  In fact, if you were to examine the sectoral structure of the Nikkei without knowing it to be the Tokyo index, you’d guess it to be the benchmark for an emerging economy, not a developed one.  Because this is so, although there will be pockets of strength among Japanese stocks, the index will likely be held back considerably by its high weak-yen component.