Tuesday, April 1, 2014

‘Abe Bliss’ or Getting Poorer and Liking It

by Pater Tenebrarum

The Inflationist Land of Cockaigne Remains a Pipe Dream

No-one can accuse the Japanese of not having done everything the Keynesian playbook said they should do, and in spades. Today, the government is burdened with the by far biggest debt of any industrialized nation and the central bank is printing money with gay abandon, while threatening to do even more of the same if it somehow fails to impoverish Japanese wage slaves by saddling them with rising consumer goods prices.

Well, the verdict so far must be that at least in this latter respect, the latest campaign dubbed 'Abenomics' has already been quite a smashing success. Of course, 'Abenomics' is the same warmed over inflationism that has been tried since the times of John Law. It can, for a while, create an illusion of growing prosperity, but in order to realize that printing money and pumping water from one end of the pool into the other (=deficit spending) cannot possibly create one iota of wealth, one only needs a tiny modicum of common sense. This in turn proves beyond a shadow of doubt that our monetary and economic affairs are run by what Bill Bonner referred to as 'high IQ morons'. In Japan an especially virulent strain of same has infested the policy making landscape.

The latest economic news from Japan was that “Japan Industrial Output Unexpectedly Drops(sic - maiming the English language is a sine qua non for a Bloomberg headline.)

“Japan’s industrial production fell in February, undershooting all forecasts by economists surveyed by Bloomberg News, as the first sales-tax increase since 1997 risks stalling recovery in the world’s third-biggest economy.

Output fell 2.3 percent from the previous month, the steepest drop in eight months, the trade ministry said inTokyo today. The median estimate of 28 economists was for a 0.3 percent gain. A separate gauge of manufacturing fell in March for a second straight month.


The 3 percentage-point increase in the sales tax is forecast to cause the economy to shrink at an annualized 3.5 percent in the second quarter, before a rebounding grow 2.1 percent in the following three months, according to a separate Bloomberg survey. Prime Minister Shinzo Abe gave the go-ahead for the sales tax increase to help deal with the world’s biggest debt burden, even as he pushes reflationary policies to spur growth and end 15 years of deflation.


Finance Minister Taro Aso last week outlined plans to front-load spending in next fiscal year’s budget to help the economy weather the blow from the higher levy. The Bank of Japan has also signaled that it’s ready to boost record easing if needed to drive inflation toward its 2 percent target.

(emphasis added)

In other words, they are raising sales taxes in order to bring down their perennial budget deficit, and in order to 'soften the blow', they are going to increase both their deficit spending and money printing. Sounds like a brilliant plan.

The Nikkei Still Writes the News

As we previously pointed out, news reports on the 'success' or lack thereof of 'Abenomics' are directly related to the performance of Japan's stock market (see: “How the Nikkei Writes the News”, and this chart).

Apparently nothing has changed in this respect. With the Nikkei recently wobbly again, we learn from Bloomberg that Abe Bliss Broken as Foreigners Flee Topix in Biggest Drop(yes, sic)So even the mainstream financial media are by now making the connection between 'Abe bliss' and the stock market's performance.

“In just one quarter, the developed world’s biggest stock rally has given way to its worst slump.

Japan’s Topix index, up 51 percent last year, fell 8.9 percent this quarter through March 28, almost twice as much as the next-worst market, Hong Kong. The retreat is emboldening short sellers, whose trades made up as much as 36 percent of daily Tokyo Stock Exchange volume this month. Foreign investors sold 975 billion yen ($9.5 billion) of Japanese shares in one week in March, the most since the crash of 1987.

While equities struggled around the world in the first quarter, declines were worse in Japan, where the euphoria created by Prime Minister Shinzo Abe and the central bank’s steps to beat deflation showed signs of wearing off.

An appreciating yen and concern about tomorrow’s sales-tax increase punished shares more than the rest of the world at a time when China’s slowdown, Russia’s annexation of Crimea and worry that the U.S. will raise interest ratessooner than anticipated made gains harder to come by.

“This situation is unfortunate and saddening,” Hisashi Iwama, a senior portfolio manager who helps oversee 12.7 trillion yen at Diam Co., said by phone on March 26. “I’d expected stocks to remain level during the first half of this year.”

(Emphasis added)

We hereby confidently predict that 'Abe bliss' will make a comeback as soon as the Nikkei rallies again. Since that must perforce coincide with a declining yen these days, it will ironically make Japan's citizens concurrently poorer. So the proper definition of 'Abe bliss' is: getting poorer and actually liking it!

Public Hedges its Yen Exposure

Meanwhile, Japanese household spending has rather conspicuously failed to get any noteworthy boost from the looming sales tax imposition. Real wages have continued to decline as well.

“Friday, March 28th: The Japanese Statistics Bureau at 23:30 UTC yesterday reported that February household spending declined 2.5 percent from a year ago, signaling that consumers are tightening their belts ahead of the planned sales tax hike on 1 April.

“Household spending data for February is not that good,” says RBS Japan Securities economist Junko Nishioka. But she notes that prices for durable goods such as television sets are increasing as manufacturers pass on the higher costs of imported components to consumers. Nishioka suggests that spending will probably rebound this month on a rush of last minute buying.

The government’s statistical arm also announced that the National Consumer Price Index (CPI) increased by 1.5 percent in February from a year earlier and the Core National Consumer Price Index, which excludes fresh food, rose 1.3 percent year-on-year, although a large portion of the growth was due to higher energy prices. The so-called core-core CPI, which excludes fresh food and energy rose 0.8 percent y/y.”


The unemployment rate declined to 3.6 percent in February from 3.7 percent in January, but seasonally adjusted household income dropped 1.3 percent.

(emphasis added)

So somehow, making the Japanese poorer doesn't translate into more spending on their part, aside from the fact that many of them are of course  forced to spend more due to soaring energy prices. So are Japanese citizens not good Keynesians? It seems they are at least spending some money on useless trinkets after all, inter alia to hedge their exposure to the yen (they are apparently beginning to suspect its eventual demise):

“Japanese shoppers have snapped up gold bars ahead of a controversial hike in the country’s sales tax, which takes effect Tuesday, a key part of Prime Minister Shinzo Abe’s economic “Abenomics” reforms.

Tokyo’s Tanaka Kikinzoku Jewelry K.K., Japan’s largest bullion retailer, said sales at the company’s seven stores jumped more than 400 percent in the first 27 days of March, relative to a year earlier, in an email over the weekend.

Gold sales increased five-fold in March, and sales for the first quarter of the year also improved compared with a year earlier.”

[And from the FT:]

Investors are being drawn to the metal not just because of higher taxes, said Itsuo Toshima, an adviser to pension funds.“Slowly and steadily, people are preparing for the worst, which is the failure of Abenomics.”

“To protect the value of wealth, gold comes into play as an inflation hedge, and if the economy goes back to deflationary circumstances then, again, money seeking safe havens would flow into gold.”

Yen The eventual failure of 'Abenomics' is of course set in stone, what is open to question is only how and when precisely that point will be reached and how exactly things will play out thereafter. As a rule of thumb one can assume that the longer the policy is pursued, the worse the longer term consequences will turn out to be.

The battered yen has lately stabilized a bit. Shorting the yen has become an extremely crowded trade, so some sort of reversal seems likely in the medium term – click to enlarge.
Nikkei and rates A long term chart of the Nikkei and Japan's discount rate (via our friend BC). Note in this context that a number of very steep bear markets occurred since the initial decline after 1989 without a prior inversion of the yield curve. Once the central bank's manipulated make-believe rates are stuck at or near zero, the yield curve no longer warns of recessions and bear markets – click to enlarge.

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