Liberal Democratic Party

If there was ever a clear sign that the leadership of Japan is fully aware that the country is about enter a terminal economic catastrophe this is it. Using the cover of currency devaluation and a rising stock market, Japan’s Prime Minister, Shinzo Abe, is attempting to make it easier to change the country’s constitution so that they can eliminate freedom of speech and set the stage for a military dictatorship.

If anyone is confused why the BOJ refused to do anything of note until January 1, 2013 at which point it would proceed with open-ended monetization a la the Fed and the ECB's OMT, the reason is simple: it allows the country's (transitory) leaders to jawbone, threaten, cajole and coax, in what will be daily attempts to talk the currency lower without actually implementing any monetary action: just like the ECB has done so far. Case in point: the now daily speeches by Japan's economic and fiscal policy minister Akira Amari, who every single day of the past week has been talking to reporters, on many case openly contradicting himself, and whose only purpose is to spook any remaining Yen longs into submission. Sure enough here comes today's sermon:

• AMARI: ABE CAREFULLY CONSIDERING BOJ GOVERNOR CANDIDATES
• AMARI: ABILITY OF BOJ CANDIDATES MORE IMPORTANT THAN BACKGROUND

But funniest of all:

• AMARI: GOVERNMENT HAS NO TARGET FOR STOCK MARKET

Wait, back up, what? It was just four days ago that Amari himself made it very clear that he would not sleep until the Nikkei hit 13,000 by the end of March.

This morning, in an understated way (of course) ahead of the G-20 group-hug at the end the week, Economic and fiscal policy minister Akira Amari stated "It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)." This level for the Nikkei implies a USDJPY level of 104.75 (or a further 12% devaluations for here). However, there is a strong correlation between the USD-JPY exchange rate and the S&P 500-to-Nikkei 225 relationship. Based on that 104.75 target (and the toungue-in-cheek belief that this will help Japan's competitiveness - which means someone else has to suffer), the ratio of the SPX to NKY would be 8.7x. So while the Nikkei would see a 17% surge (in nominal value), the S&P 500 would lose 3-4% from here. 

The recent landslide victory of the Liberal Democratic Party (LDP) on a platform that promised positive change for the long-struggling Japanese economy has thrust a somewhat forgotten Japan back into the headlines. Indeed, as Goldman notes, asset markets have already responded aggressively to the prospective changes with Japanese equity markets climbing to multi-year highs and the Yen declining to multi-year lows against the US dollar and the EUR. But, as Kyle Bass has recently explained, very real questions remain about the ability of the LDP and new Prime Minister (PM) Shinzo Abe to deliver on promises and break the damaging cycle of low growth and deflation that has become well-entrenched in the Japanese economy over the last five-plus years. These doubts are reinforced by concerns about the health of the domestic banking sector and of Japan Inc. in general. "Abe-nomics 'appears' positive, but for how long?" Goldman asks and Hamada's recent concerns over 'going too far' are very real - though in general Goldman's positive 'take' is a useful counter-point to Bass' somewhat more realistic apocalyptic endgame thesis.

“Here we go again”

The newly elected Japanese Prime Minister, Shinz? Abe, has caused quite a stir. The leader of the Liberal Democratic Party, which scored a landslide victory in 2012’s election, he’s promised to restart the Japanese economy, whatever it takes. How will he do this? By “bold monetary policy”, what he means—and what he has said—is to end the independence of the Bank of Japan, and have the government dictate monetary policy directly. The perception is, the Bank of Japan will not only print yens and buy government bonds à la Quantitative Easing of old - it is also generally thought that Mr. Abe and the incoming Japanese government fully intend to target the yen against foreign currencies, like Switzerland has been doing with the euro. This perception is what has been driving the Nikkei 225 index higher, and driven the yen lower. But why was this decision triggered?

As Japan’s Liberal Democratic Party national defense task force announced on Jan. 8 that it would increase the nation’s defense budget by more than 100 billion yen ($1.15 billion), three of five scenarios explored by the defense ministry recently involve the Self-Defense Forces squaring off against the People’s Liberation Army (PLA). While the scenarios remain in the realm of speculation, Japan’s inclusion of a Taiwan contingency again underscores the importance Tokyo places on Taiwan remaining de-facto independent. Certainly, China’s assertiveness in 2012 in both the East China and the South China Sea has done little to reassure Tokyo that it could live comfortably with a CCP-controlled Taiwan so close to its waters and territory.

The ascent of the Democratic Party of Japan marked the end of Japan's one-party state, dominated by the Liberal Democratic Party since the 1955.  However, the DPJ was unable to address the challenges Japan faced, was internally unstable, as illustrated by the revolving door in the prime minister's office, and spent scarce political clout to support a controversial retail sales tax increase.  

The LDP has returned to power.  Its ascent is a victory for the old elite.  Reports suggest that half of the cabinet positions were given to members of parliament who had inherited their Diet seats from their families.    The LDP's program, or Abenomics as it has been dubbed, seeks to strengthen the domestic economy and enhance Japan's ability to project its power internationally. 

The politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. But will it work? Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?

Ministry of Finance official: “That’s why the MoF is trying to gain control over the Bank of Japan.”

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At a time in the year when the market should be at a standstill, and when all trading should be over, the tension in the S&P is unprecedented, driven by two main factors: the ongoing Fiscall Cliff confrontation, which now appears set to not be resolved by Christmas, and very likely to persist into the new year, and what happens with hotel AAPLfornia, as suddenly it has become a liability to show LPs any holdings of the fruit in the year end statement. The two events combined will likely see furious market volatility persist well through the year end, and since volumes will further die down, we may well see massive stock moves on odd lots. And while AAPL is trading under $500 for the first time since February following last night's Citi downgrade, the confusion over the Fiscal Cliff persists, with The Hill first reporting that Boehner is willing to cave on the debt ceiling extension,  even as Boehner himself subsequently tweeted that "Any increase in the debt limit will require a greater amount in spending cuts and reforms." So back to square one, with a red herring proposal that Boehner can say we offered to the president and the president turned down. Japan continues to attract a lot of attention with the ADHD market desperate to hope that the coming of Abe 2.0 will be much better than that of 1.0, when in one year he achieved nothing and then resigned due to diarrhea. Judging by the action in the USDJPY, we may be a few short hours away from closing the gap that sent the pair to 84.30 first thing, and proceeding to unwind the near record JPY commitment of traders short position as the JPY realizes this time will not be different. Quiet calendar in the US, with the Empire State Manufacturing Index expected to print at -0.5 at 8:30 am Eastern, TIC data to show China's ongoing TSY boycott at 9 am, and a hawkish Jeff "Mutiny on the Eccles" Lacker speech at 1 pm.

As we pointed out earlier today, Japan's new Prime Minister Shinzo Abe, is really Japan's old Prime Minister Shinzo Abe, who in September 2007 quit after precisly one year in the PM post, despite having been groomed his entire life for the position. His tenure was, in short, a sheer disaster. The Economist summarizes it as follows: "Mr Abe's government was initially very popular. Yet the tide in Mr Abe's affairs only ebbed. True, early on he made a notable opening towards China, with whom relations had been strained under Mr Koizumi. Other than that, Mr Abe proved unable to impose discipline upon a cabinet of the corrupt and incompetent.... Mr Abe's inert response to a bureaucratic scandal involving 50m missing pensions records underscored how out-of-touch he was. In late July voters punished his government in elections for the Diet's upper house: for the first time in its half-century life, the LDP and allies lost the upper-house majority, to the opposition Democratic Party of Japan (DPJ). Not just the opposition but LDP heavyweights too began calling for Mr Abe's resignation." And thus began the slide of the LDP, which soon thereafter saw its uninterrupted run of 50 years at the helm of Japan end, with power handed over to the DPJ. Yet what was the gracious "exit" pretext that Abe used to evacuate his leadership spot without admitting defeat? Diarrhea. Yup: diarrhea.

To little surprise, and confirming the pre-election polls, Shinzo Abe, who previously was Prime Minister of Japan from September 2006 to September 2007, has just won a second chance in today's Japanese election, following a crushing defeat by the LDP and the concession moments ago of challenger Yoshihiko Noda (who will no longer be watchim\ng, watching, watching). As BBC reports "The LDP, which enjoyed almost 50 years of unbroken rule until 2009, is projected to have an overall majority in the new parliament. Mr Abe has already served a Japan's Prime Minister between 2006 and 2007. He campaigned on a pledge to end 20 years of economic stagnation and to direct a more assertive foreign policy at a time of tensions with China. He is seen as a hawkish, right-of-centre leader whose previous term in office ended ignominiously amid falling popularity and a resignation on grounds of ill health. But Japanese media project big gains for his LDP who they say are on course to win between 275 to 310 seats in the 480-member house." In other words, with Japan's sharp turn to the right, this time will be different, and Abe will succeed where previously he failed miserably, or so the people, who have long abandoned any hope of an economic recovery, dare to hope.