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.

 

 

 

I’ve been VERY wrong about the Japanese stock market

The Liberal Democratic Party retook control of the national government in Japan late last year on a platform of massive monetary stimulation aimed at shocking the economy out of its quarter-century of torpor.

Most economic effects have been as expected.  The ¥ has lost about a quarter of its value.  This has given export-oriented industries a big boost.  The price of imports has risen by enough, however, that the overall effect of devaluation on Japan has been slightly negative so far.  The trade balance will doubtless improve as Japanese citizens adjust to the tremendous drop in their standard of living that the devaluation has brought about.

Where I’ve been wrong has been in handicapping the behavior of the Japanese stock market.  In the only other recent episode of a big fall in the ¥, the Topix index (Tokyo large caps, the index professional investors use) rose as the currency declined, but only by enough to keep a dollar-oriented investor from losing money.  Yes, export-oriented stocks did better than Topix, but the overall index was unchanged in dollar terms.  I thought something similar would happen again.

Not this time, though.

Since the Abe administration took office and made it clear it would carry out its campaign promise, the Topix is up by 66% in local currency terms, meaning a dollar-oriented investor in the index has made a 25% gain.  Buyers of down-and-out consumer electronics firms like Sony have made twice that.  The long-Topix, short-¥ trade has made a killing.

As I see it, the rise in the Topix has been driven by foreigners.  Locals–never, in my experience, the canniest of investors–have  been mostly using the opportunity offered by devaluation to declare victory in their foreign investing forays and are bringing money home to put into things like real estate.

Press reports indicate new investors in Japanese stocks, including high-profile Western hedge funds, believe very strongly that the change in money policy also heralds a new era of openness to structural economic reform by Tokyo, and that foreigners will be allowed to play a significant role in the latter process.

My view, based on almost 30 years of watching Japan, is that Tokyo insiders regard devaluation as a substitute for reform, not a precursor.  I’d point to the experience of former Prime Minister, Junichiro Koizumi, who was given an overwhelming electoral mandate for reform but who resigned as PM after five mostly fruitless years (2001-2006) of trying to effect change.  As soon as he left, the Diet immediately began to reverse the progress he was able to make.

For Japan’s sake, I hope I’m wrong again.  But I’m not willing to bet on the possibility.  As for the new wave of foreigners, I find it hard to figure whether they have a much more sophisticated read on the political process in Tokyo than I do or whether they’re completely clueless.  Given that reversal of the deep social/political aversion to disruptive change should make me wildly bullish about Japan, in some sense I must think the latter is more probable.  My official position, though, is that I don’t choose to bet.