Is Abenomics Working?

by Koichi Hamada

TOKYO – Last April, Japan’s government implemented a long-planned consumption-tax hike, from 5% to 8%, the first in a two-step increase that is expected to bring the rate to 10% by 2015. The hike – a key feature of “Abenomics,” Prime Minister Shinzo Abe’s three-pronged strategy to revive Japan’s economy – signals the government’s long-term commitment to fiscal consolidation. But it has also dealt Japan a heavy macroeconomic blow.

Preliminary GDP data show a 6.8% contraction year-on-year in the second quarter of this year – the largest since the 2011 earthquake and tsunami that devastated the country. Moreover, consumer spending fell by a record amount, contributing to a total real (inflation-adjusted) decline of 5.9% from last July.

But it is not all bad news. Expansionary monetary policy – the second of three so-called “arrows” of Abenomics, after fiscal stimulus – has brought down the unemployment rate to just 3.8%. The ratio of job openings to applicants has exceeded parity, and the GDP deflator narrowed to close to zero.

Such data have given rise to two opposing views. Some economists worry that negative second-quarter data will dampen inflation expectations, thereby undermining Abe’s plan for boosting growth. Meanwhile, the Bank of Japan (BOJ) is emphasizing the positive outcomes of its monetary policy – and is hesitating to continue its expansionary measures.

If the first view proves correct, the BOJ will need to ease monetary policy further to counter falling inflation. If the BOJ is right, it should maintain its current approach, while the government should either postpone the next consumption-tax increase or implement it in two 1% increments, instead of a single 2% hike.

Of course, the second-quarter GDP data show the economy’s immediate response to the hike. But no decision should be made until the third-quarter results are released, providing a clearer picture of what will happen to Japan’s economy after it absorbs the first rate increase. Fortunately, that is precisely what Abe intends to do.

In any case, the success of monetary policy is difficult to deny. As the deflation gap narrows, however, the overall impact of monetary policy will weaken, as it increasingly influences prices more than output.

That is why it is time for Japan’s leaders to shift their focus from the demand-focused first and second arrows to the supply-oriented third arrow: a new growth strategy.

When there is sufficient excess supply in the economy, promoting supply-side productivity is practically useless without efforts to boost demand. That implies that it was not appropriate to focus on growth until the deflation gap narrowed considerably – that is, until now.

The third arrow is not a traditional industrial-policy-based approach. On the contrary, it emphasizes reform of the labor market, deregulation, and a reduction in the corporate-tax rate.

A key component of Abe’s growth strategy is to expand the workforce – a major challenge, given that Japanese society is aging rapidly. One logical solution would be to integrate more foreign labor into the Japanese economy. But efforts to promote immigration face considerable social and cultural barriers.

A simpler solution would be to mobilize working-age women who already – or plan to – stay at home. By removing the barriers to employment that women face – whether practical obstacles, like insufficient childcare services, or social constraints – Japan could substantially increase women’s workforce-participation rate, creating an invaluable buffer against the growing labor shortage.

The second imperative for boosting growth is the removal of excessively cumbersome government regulations. Under the current system, it took 34 years to approve the establishment of a new medical school – the result of collusion between government officials and doctors.

Abe’s plan calls for introducing a series of less strictly regulated special economic zones, each with a specific objective – for example, adopting new medical technologies or attracting foreign businesses. Such a move promises to help prevent damaging obstructionism by the authorities. At the same time, the government should work with the country’s trade unions to boost the flexibility and efficiency of the labor market.

Finally, Abe’s growth strategy demands a corporate-tax reduction – a powerful tool for increasing the tax base in a world in which countries are competing to attract multinational companies. Indeed, lower taxes are vital to increase foreign and domestic investment in Japan.

Some of these initiatives, particularly deregulation, will undoubtedly face resistance from bureaucrats concerned about losing their influence. But, as long as Abe, backed by Chief Cabinet Secretary Yoshihide Suga, remains committed to his stated objectives, Japan’s economic future will remain bright.

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US corn harvest prospects recieve rare downgrade

by Agrimoney.com

US corn harvest prospects recieve rare downgrade

US corn production prospects received a rare downgrade – albeit to a still-high figure – in a spate of revised harvest estimates implying scope for large upgrades when US officials next week revisit their own forecasts.

Analysis group Lanworth trimmed by 0.8 bushels per acre to 173.7 bushels per acre its forecast for the US corn yield this year, and by 200m bushels to 14.6bn bushels its estimate for production.

The downgrade contrasted with the upward trend of most crop forecasts, including from INTL FCStone, which overnight raised its estimate for the yield by 1.7 bushels per acre to 174.1 bushels per acre, and for production by 140m bushels to 14.595bn bushels.

Strong US Department of Agriculture data on the condition of the US corn crop, rated by far the best since at least 1994 for the time of year, prompted Futures International to lift its forecasts too.

East vs west Corn Belt

Lanworth, which employs satellite data significantly in its analysis, said that its downgrade reflected evidence of "moderately suppressed crop vegetation density over previously dry areas of Iowa, Minnesota, and Nebraska". Nonetheless, its estimate remains well above a USDA forecast of 167.4 bushels per acre, which is up for revision next week with the release of the monthly Wasde crop report. In eastern Corn Belt states a "combination of favourably cool temperatures, near-average precipitation and timely crop development indicate corn could yield 8-16% above trend and well above USDA's August estimates", Lanworth said. Separately, Allendale released the results of a farmer survey showing a yield forecast of 171.9 bushels per acre, and production estimate of 14.409bn bushels.

US corn yield, (production) forecasts FCStone: 174.1 bushels per acre, (14.595bn bushels) Lanworth: 173.7 bushels per acre, (14.6bn bushels) Allendale: 171.9 bushels per acre, (14.409bn bushels) Futures International: 170.8 bushels per acre, (14.280bn bushels)

Acreage threat

US soybean yield, (production) forecasts FCStone: 47.6 bushels per acre, (4.00bn bushels) Lanworth: 46.7 bushels per acre, (3.85bn bushels) Allendale: 46.4 bushels per acre, (3.884bn bushels) Futures International: 46.2 bushels per acre, (3.880bn bushels)

Lanworth added that weather forecasts "do not yet indicate risk for early freeze across the northern production region" which would pose a threat to harvest prospects in potentially bringing the growing season to an end. However, it did highlight the potential for a downgrade to its production forecast from a revision to acreage estimates, with data from the Farm Service Agency gleaned from insurance returns indicating "a loss of 1m acres or more from our current estimate of US corn plantings". Lanworth, which revealed an estimate for harvested US corn area of 84.328m acres, a little above the USDA forecast, said that it was continuing to review its forecast.

China downgrade

The group restated an estimate for the US soybean yield of 46.7 bushels per acre, with production pegged at 3.85bn bushels, down 10m bushels from the previous forecast.

"Minor yield reductions in Iowa, Kansas, Minnesota, and Nebraska are largely offset by higher yield in Indiana and Delta states," Lanworth said.

The comments came in a report in which the group also reduced its estimate for the Argentine wheat crop by 700,000 tonnes to 12.1, tonnes, citing "excessive precipitation" in parts of the major producing province of Buenos Aires.

The forecast for China's corn harvest was downgraded by 2m tonnes to 218m tonnes, after "below average precipitation fell across the Northeast provinces of Jilin and Liaoning, and much of the North China Plain" last month.

"In spite of recent precipitation, current soil moisture remains well below average across Hebei, Shandong and Henan and slightly below average in Jilin and Liaoning," the group said.

"Drought impacts are likely to be as severe as 2002 for Hebei (-5%) and Shandong (-13%), and 2009 for Liaoning (-22%)."

The USDA estimates Chinese corn output this year at 222m tonnes.

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Here’s Why Morgan Stanley Says S&P 500 May Near 3,000

By Sofia Horta e Costa

The Standard & Poor’s 500 Index rally isn’t over and the gauge could jump 50 percent more by 2020 as the U.S. economic recovery heads for a record winning streak, according to Morgan Stanley.

A slower though sustained period of growth could help the equity benchmark gauge peak near 3,000, according to a report dated today. The U.S. economy, which began recovering in July 2009, may continue growing for five years or more, making it the longest period of expansion, Morgan Stanley said. The S&P 500 fell 0.1 percent to 2,001.87 at 10:03 a.m. in New York.

Three rounds of stimulus have helped spur growth in the world’s largest economy. The S&P 500 almost tripled from its low in March 2009, sending the value of U.S. shares to a record $23.9 trillion on Aug. 26. A report showed last week that gross domestic product rose in the second quarter more than forecast, pushed by the biggest gain in U.S. business investment in more than two years.

“Equities should benefit from a scenario where the probability of a cycle peak remains low for some time,” Adam Parker, chief U.S. equity strategist at Morgan Stanley, and economist Ellen Zentner wrote in the note. “As the prolonged expansion becomes more visible, we’d expect a materially higher U.S. stock market.”

August Jump

The S&P 500 rallied 3.8 percent in August, the most since February, as investors bet central banks will continue to underpin global economies. Minutes from the Federal Reserve’s July meeting released last month reinforced the central bank’s commitment to supporting the recovery even as some policy makers indicated a willingness to raise rates sooner than anticipated.

The U.S. economy will grow 2 percent this year and 3 percent next, which would be the most since 2005, according to the median forecast in a Bloomberg News survey.

As major economies across the world -- from China and Japan to Europe and Mexico -- are at different stages of growth, central banks are likely to keep interest rates lower for longer, according to the report. This will keep the cost of corporate financing low and help extend the economic expansion.

And, amid lower levels of household and corporate debt, and brighter confidence on the part of American consumers, the economy may be just half way through a period of sustained growth, with company profits following, Morgan Stanley said.

If earnings for S&P 500 companies increase about 6 percent every year from 2015 to 2020, profits will be close to $170 a share, Morgan Stanley said. Should the equity index trade at 17 times its companies’ reported earnings, its peak level could near 3,000, the bank said. The gauge currently trades at a multiple of 18 times, data compiled by Bloomberg show.

Earnings for S&P 500 companies will climb 8.1 percent in 2014, according to the average analyst estimate compiled by Bloomberg as of Aug. 29. Profits will grow 11 percent in both 2015 and 2016, the projections show.

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VIX

 

Should Scotland Leave the Pound Zone?

by Harold James

PRINCETON – As Scotland prepares for this month’s referendum on independence, the United Kingdom – indeed, all of Europe – must brace itself for the impact of a successful bid. Scottish independence would revolutionize the British and European constitutional frameworks, and give a tremendous boost to other European separatist movements, from Catalonia to northern Italy. The economic impact of independence, however, is far less certain.

Advocates of independence have long insisted that they are motivated primarily by the distinctiveness of Scottish identity. But Scotland’s history and traditions, while undoubtedly its own, have been shaped by centuries of interaction with England and other parts of the British Isles.

The more immediate issue for Scots is money. The question of whether an independent Scotland could or should continue to use the British pound has dominated discussions over the last few months of the referendum campaign. The outcome – for Scotland, the UK, and Europe – could vary widely, depending on which path Scotland chooses.

So far, Scottish nationalists have insisted that an independent Scotland would retain the pound. But, given how much easier it would be to make the case for a separate currency – not to mention the fact that Chancellor of the Exchequer George Osborne has explicitly rejected Scottish First Minister Alex Salmond’s proposed currency union – such declarations amount to an own goal.

The problem with the Scottish nationalists’ vision is a mirror image of the eurozone’s main shortcoming. Given that a single currency cannot function without a common monetary policy, and that economic conditions across the currency union differ, individual members will, at times, be subject to unsuitable policies.

For example, during the construction boom of the 2000s, Ireland and Spain should have had tighter monetary conditions, higher interest rates, and lower loan/asset ratios. But their eurozone membership meant that government and private-sector borrowers alike benefited from very low interest rates. After the financial crisis erupted, and policymakers began seeking ways to compel banks to revive lending in these and other struggling countries, it became apparent that there were no available tools to employ.

Today, the UK faces a similar dilemma. The property boom in the London area demands tighter monetary conditions. But higher rates would wreak economic havoc on the rest of the country, where the recovery remains anemic.

Moreover, like Germany, London maintains a huge current-account surplus (8% of GDP) – a potentially serious problem, given the deflationary effect that Germany’s surplus has had on the rest of the eurozone. Already, the rest of the UK runs an external deficit that is higher than that of any industrialized country.

The behavior of a currency can be driven by one powerful and preeminent sector of the economy; in the pound’s case, it is the financial sector. Some viewed the pound’s rapid decline in 2007 and 2008 – a 30% depreciation in trade-weighted terms – as a much-needed economic stimulus, given the boost that it implied for export competitiveness. The UK’s independent monetary policy provided it with a level of flexibility that the eurozone economies lacked.

But the revival of confidence in the financial sector has caused the pound to rebound sharply (by 18% since the end of 2008), eroding the UK’s competitiveness gain. What is good for the City of London is not necessarily good for the rest of the economy.

There is thus an unmistakable appeal in escaping an economic arrangement that shackles Scotland to London – an appeal that the great Scottish economist Adam Smith would have recognized. Indeed, his most influential work, The Wealth of Nations, was motivated by the belief that the interests of the London merchant community were distorting British commercial policy.

The alternative to retaining the pound, however, presents its own challenges. According to the Scottish economist Ronald MacDonald, an independent Scotland should have its own currency, which would behave like a petro-currency, owing to the economy’s dependence on North Sea gas and oil.

But replacing one dominant sector with another is probably not good for the rest of the Scottish economy, which would lose competitiveness whenever surging energy prices pushed up the exchange rate. As less competitive industries were driven into loss and insolvency, economic activity would become even more concentrated and specialized.

Placing the burden of adjustment on the exchange rate is not the answer. The small, open economies of Switzerland and Norway – important models for Scotland – struggled with sharp currency appreciation during the global financial crisis. For Switzerland, the solution was to implement a ceiling on the franc’s exchange rate against the euro.

This should inspire Scotland to pursue association with a larger currency area and a more diversified economy. How about adopting the euro?

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Weekly Grains Analysis

By Ryan Ettner, Jim McCormick

The new crop beans tested both ends of last week’s range to begin the week. Initial weakness was seen on the overnight market while the strength came during the day session. Late in the session the new crop beans managed to take out last week’s highs (filling a gap on the chart) but were not able to close above them.

The September beans and meal contract continue to find strength on the tight old crop supplies. As harvest moves north we would look for the old crop cash market to weaken as more beans come available. I had a customer near Covington, Indiana report that harvest of some beans would begin in his area next week.

There continues to be talk of Sudden Death affecting some areas of the Midwest but we do not believe it is wide spread enough to have a major effect on the nations yield.

Friday’s commitment of traders report showed that the funds were short 21,940 contracts which was biggest short trade position since 2006. In 2006 they maxed their short position out with about 55,000 contracts. In China last night, their weekly auction of government stocks saw 132,135 tonnes of soybeans purchased out of the 337,539 offered. This would imply a 39% participation rate, above the 30% from the previous week. Weather continues to be viewed bearish as the warm wet forecast will allow for the bean plants to add pods and fill them out to the max.

The trade was anticipating crop ratings to stay stable tonight at 70% G/E. The five-year average for this date is only 55% of the crop being rated g/e. The actual ratings counter seasonally improved by 2 points and are now rated 72% g/e. Allendale continues to look for beans to fall to the $9.50 area when the fall low is scored and would recommend not chasing rallies and for producers to sell into a price rally if it were to occur. Allendale will release the results of our 25^th annual crop survey tomorrow morning.

Corn (CBOT:CZ15) 

Corn saw a mainly calm trading range today. Coming back from the 3-day weekend the weather remained mainly the same with no cold threats to offer a bounce from. Given that the news remained mostly the same, corn traded in a range that was mostly the same as well. There were plenty of buyers today in the low 360s and there were just as many sellers in the high 360s. Corn was reported 74% good-to-excellent, up 1% from last week. Eventually news will be seen which breaks this market out of the recent small range but without a cold weather threat or Midwest yield reports this market remains mainly stuck on a grind sideways.

Bulls:

• As long as yield estimates do not move higher than 173 there continues to be a reason for bulls to buy in the low 360′s
• Larger support is expected the closer to contract lows this market moves
• Keep an eye out for disappointing yields, low test weight talk and especially early frost fears to buy from
• Bulls can also look for wheat support on days when Ukraine news is sending that market higher

Bears:

• No news at all remains beneficial for the bears as there are still slightly more sellers than buyers
• Today’s forecast continues to suggest temps that remain slightly above average for most of the outlook
• Don’t look to get too excited about upcoming yield reports to suddenly push corn lower unless numbers 173 or higher are seen.

Wheat (CBOT:WZ14)

Wheat finished lower today. The lack of new news out of Ukraine and Russia is pressuring the market. We continue to suggest this market is trading sideways and with this recent Russia Ukraine confrontation giving us reason to bounce, we would expect to continue this moving forward. Ratings for spring wheat came in at 63%, down 3% from last week.

Allendale is releasing their yield results tomorrow morning. We are expecting to see this be a market moving event and would expect to find support or selling pressure based on what the results are going to be. There has been some talk about quality concerns in the spring wheat growing areas which would suggest we could see the Minneapolis wheat gain some premium against the Chicago contract moving forward.

Funds are still actively short wheat and this would still suggest we could see some defending of their position until we break above the August highs. On a feed basis we could see corn harvest pressure the wheat market but would expect the spread between the two to widen. Continue to look for sideways to higher trade moving forward and we continue to struggle on higher moves as it doesn’t appear the Black Sea confrontation is giving the market enough reason to buy into new highs.

• Export inspections were 773,041 tonnes above trade estimates of 425-675,000 tonnes
• Egypt seeks 55-60,000 tonnes of US soft wheat
• Ukraine’s grain exports jump to 5 million tonnes in July-August

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