Abenomics: Japan's Thermidor

Marc To Market's picture

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 LDP program has three components:  monetary policy, fiscal policy and nationalism.   It is monetary policy that most recently has captured the imagination of observers and investors alike.  Essentially, the Abe government wants the Bank of Japan to be more aggressive.  The BOJ adopted a 1% inflation target in early 2012, which is missed in 2012, as deflation still is evident (as it has been for around 15 years).  The government wants a 2% target.  The BOJ is set to debate increasing its inflation target at the next board meeting (Jan 21-22)

The Abe government also wants the BOJ to adopt an open-ended commitment to expanded its balance sheet, as the Federal Reserve has done and the ECB says it will do under its Outright Markets Transaction scheme (which has yet to be initiated).   The BOJ expanded its assets purchase program five times in 2012.  It is not immediately clear how this would be substantively different from an open-ended commitment.  

The Abe government had threatened to alter the BOJ's charter to force it to comply.  However, it seems to be backing down from this, suggesting that it may not seek to legislate, if the BOJ cooperates.  We have previously recognized that with the BOJ governor and two deputies' terms ending in a couple of months, the LDP can achieve its objectives with personnel decisions what it threatens.  

Some observers have sought to defend the independence of the BOJ.  However, we note that the BOJ's independence may not have been what many think.  Under existing law, the Ministry of Finance can, for example, send representatives to BOJ meetings.  Can you imagine the US Treasury Secretary dropping in on a FOMC meeting or the German Finance Minister popping in on  Bundesbank meeting, back when the Bundesbank had keys to the printing press ?  

On the other hand, the independence of central banks, more broadly, begs questions about independence from whom (the same political forces that we trust with grave responsibilities, including the national defense) and to what end.  

Complimenting what the aggressive expansion of monetary policy, the LDP-led government will pursue an aggressive fiscal policy.  A supplemental budget is being cobbled together, with reports suggesting a JPY10 trillion package.  When Finance Mnister Aso was Prime Minister (2008-2009) he also offered extensive fiscal support, as the global credit cycle ended dramatically.

The FY2012-13 budget is also being drafted.  The near-term fiscal stimulus is not being tied to longer term fiscal consolidation.  Abe feels no compulsion to respect the DPJ's self-imposed JPY44 trillion annual debt cap.  The Abe government has also indicated that it is considering investing directly in some companies to help them cope with the economic situation.  

Compliments aggressively accommodative monetary and fiscal policy, Abenomics wanted the yen to fall.  Without taking a single action, Abe and the LDP appear to have been more successful than BOJ intervention in weakening the yen.  Finance Minister Aso has suggested a JPY90 target, which is within striking distance. Some Japanese producers have weighed in, preferring a JPY100 target.  

Moreover, as the yen has weakened the Nikkei has rallied.  Foreign investors, who had been large buyers of Japanese government bonds earlier in 2012, finished the year as strong buyers of Japanese shares.  In a weak yen environment, Japanese stocks outperform bonds.  Japanese 10-year bond yields have crept higher recently, but have actually outperformed US Treasuries, German bunds and UK gilts in recent weeks.  

The third-prong of the LDP's program is nationalism. It has taken several forms. The DPJ eschewed controversial visits to the war shrine.  Top LDP officials do not.  The LDP has suggested interest in re-writing a 1995 apology about its aggressiveness and colonization policies in East Asia.  

It has not shown any conciliatory tone in the dispute over the Senkaku-Diaoyu islands with China.  This simmering dispute with China seems to be doing what North Korea failed to do by launching missiles in Japan's direction and what US urging was unable to accomplish, namely an emerging consensus favoring a re-militarization of Japan.  Perhaps most telling about the regional tension with a more assertive China, the Philippines recent endorsed the re-arming of Japan.  

The rise of nationalism does not bode well for Japan's participation in the Trans-Pacific Partnership, an attempt to build a free-trade area covering both sides of the Pacific.  Although it was somewhat controversial for the DPJ, it had seemed to be moving in a supportive direction.  The LDP (and the interests it represents) seem more hostile.  

Thus far, there seems to be little push back against thrust of the LDP's monetary and fiscal policies.  The purposeful depreciation of the yen has not spurred protests by other countries, but we suspect that a continued sharp decline will antagonize Japan's competitors, including South Korea and China.  Although most of Japanese cars sold in the US are made in the US, US auto companies may also express their frustration.  

The Senkaku-Diaoyu dispute with China is likely to be prolonged.  Although in his first stint in office Abe struck a conciliatory tone with China, this time seems a bit different  Japan violated the status quo by, in effect, nationalizing the islands, but yet does not seem prepared to confront China directly.   China did not pick the timing or place for the tension, but seems bent on seeking the advantage.  Its new leaders cannot back down without risking emboldening a number of other countries with whom it has unresolved territorial disputes with.    

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neutrinoman's picture

It's not true that China has solidified alliances that exclude the US. That's so ... 2010. The reality now is that China is progressively alienating everyone around in Asia, which houses a lengthening list of China's ex-allies. Those countries, as well as India, want the US back in, in a big way.



Thus, the recent moves of the Philippines and Myanmar to distance themselves from China and get friendlier with Japan are very important. Even Korea is making nice with Japan. Given Japan's history of brutally occupying Korea and the Philippines, this is amazing and shows what's really happening. One of China's main alllies in the region, Pakistan, is coming apart at the seams.

The big problem with the O-man in the White House is that, without Hillary Clinton, he risks losing out on this opportunity. He's bringing in Senatorial has-beens and losers like Kerry and Hagel, who are the political equivalent of last decade's vanity license plate.

Snakeeyes's picture

Japan: Just produce trillion yen coins. That'll fix yer problems!!!!


Uber Vandal's picture

Maybe not, they would need 1,000 coins to match thier 1 Quadrillion yen debt.

besnook's picture

the dpj was formed by disgruntled former members of the ldp frustrated by the ldp's allegiance to the old post ww2 paradigm. this is not your father's ldp. this is the new and improved ldp. this ldp was scared shitless by the rise of the dpj which allowed them to change direction from focusing on western power to eastern power. one has to understand that japan is still run by the same families that ran it 100 years ago. internal disputes are settled politically now, not with swords.

the boj may become the rogue central bank that actually adopts the trillion dollar coin to establish the boj's independence in the world market. it's independence in the domestic market is one of those japanese inscrutables where the proper public words hide the closed door reality. it has, however, been reluctant to go along with the new independent japan. abe and the ldp just want to move it along since the boj is critical to the strategy. in other words, the ldp wants the boj to say, "fuck the fed. we are japanese and will do what is best for the japanese", instead of coordinating action(japan as pawn of the fed) with the fed.

don't bring up the phillipines as having any influence on japan. the phillipines don't matter and have never mattered except for a coupla years during ww2. the usa has built up naval forces in the phillipines and tells the phillipines what to say and do. so the the usa uses them to reiterate that the usa wants japan to remilitarize, like japan needs to be asked to. two things, the phillipinos are considered the niggers of the pacific by everyone else so no one really pays attention to them, anyway and japan will militarize to protect and project japan's interests, not the usa's interests. if japan's interests align with china(and they do) then that is where they will go. what japan wants to prevent, as does the rest of the pacific basin, is another wave of chinese quasi colonialization where thousands(hundreds of thousands) of chinese emigrate to outlying nations and set up a modern economic base in those countries strong enough to affect and effect local .gov. the role of the new japanese military might be to coordinate with the pacific nations to offset chinese soft power by keeping chinese regional military power in check. the senkaku islands dispute is the first round in the emergence of this policy.

the usa has decided to reassert it's influence in the region at a time when the region has realized the usa is not needed at best and a nuisance at worst. the usa is the only western power left with the juice to influence the pacific nations and everyone knows that power is waning leaving the gap neccessary for japan to assert it's independence and china to assert it's regional influence.



OpenThePodBayDoorHAL's picture

Well done, agree with most of your analysis. Except the part about :

what japan wants to prevent, as does the rest of the pacific basin, is another wave of chinese quasi colonialization where thousands(hundreds of thousands) of chinese emigrate to outlying nations and set up a modern economic base

because that cat is already WAY out of the bag, overseas Chinese already completely control entire nations, Singapore, Malaysia, Vietnam etc etc, they even have their own bank Overseas Chinese Banking Corporation OCBC

But the media has missed the latest in the American "pivot" to Asia: it is failing completely. Hilary and Obomba had a big new alliance they wanted to form, the Asian nations EXCEPT China, they spent millions dreaming it up, then Obomba and Hilary flew to a conference in Phnom Penh to announce it and sign people up, this was to be the master framework for the next 30 years. Oops. The Asian countries said NO THANKS, even Australia said no, they said they already have their grand Asian alliance, it INCLUDES China but EXCLUDES the US.

Maybe the US needs a rethink. Lecturing people about freedom and democracy while trashing it at home, drone bombing and invading anyone who resists, hey maybe that's not the best way to win friends and influence people

besnook's picture

the old wave of chinese are not as beholden to the new china even though the local population occassionally suspects their allegiance. a new wave would be purposed with allegiance to the new china. there is still time to prevent that from happening.

i always get a kick out of western analysis claiming the pacific nations are afraid of japanese aggression if they remilitarize when the real fear has always been about china.

laboratorymike's picture

Link? I want to see this.

I was over in China last summer (2012), and while there I saw some news not covered in US media about the Trilateral Investment Agreement between China, Japan, and South Korea. It's becoming clearer to me that these nations are unhitching themselves from us... I wonder why.

eatthebanksters's picture

Democracy in Japan is a cover for feudalism, there never was a true democracy, only the illusion...the same with communism in China where all people are not created or treated equal.

laboratorymike's picture

Communism, or at least those who established it, was never about eqality anyway:


This is a link to the Mr. X document, by far the most influential document of the entire Cold War. I read it the first time during a class at my alma mater, but reading it again, I see a number of similarities between it and our present situation. Thousands of years ago Solomon wrote in his Book of Ecclesiastes that "There is nothing new under the sun," meaning that human nature does not change. Maybe just maybe he is right, and maybe human nature is the reason that history seems to repeat itself.

besnook's picture

even after 500 years in asia the west has a grade school understanding of region. only a few americans realize japan and china both see the usa as a still barbaric newcomer to the world stage. both look to the continent for the history and culture of the west but to the usa for it's innovation of applied research and development and world trendsetting but niether forget their sense of superiority over the west. the asian stereotypes of americans in particular are hilarious.

DR's picture

So Japan finds it's balls again. Now if only they can use them to produce more babies...

Never One Roach's picture
Looking into the Japanese real estate mirror: Residential home prices in Japan back to levels last seen 30 years ago in spite of near zero percent mortgage rates.





"When the Japanese housing bubble burst in 1990 the economy was left in disarray.  Hard to believe that this happened 23 years ago but real estate prices in Japan are now at levels last seen in 1983.  In other words, thirty years of virtually no real growth in real estate values. "




Joebloinvestor's picture

Can't when the radiation renders one sterile.

Freddie's picture

I will volunteer for that job for them hottie Japanese womens.

As long as they serve me (radioactive Fukashima) Lobster Thermidor.

Nage42's picture

There has _got_ to be a birthrate bump this year, I have so many friends that were popping them out this year.

I think the quake really shook the dust off the Jboys' balls and reality-slapped the Jbirds.  All the Jbirds were wandering around thinking: "I wanna try a job for a while, do some travelling, buy some brand-name clothes, have foreign men lay some good satisfying pipe (that's where I fit in... literally!)," but after the shake up, when the aftershocks settled down (four months later), all the 30-36 chicas I knew had a _very_ different look in their eye, and it wasn't eye of the tiger, it was friken eye of the momma bear looking for a den to welp cubs.

Whole different attitude over there now, even late 20 chicas are giving the "someone needs to put a baby in me, hayaku~!" which was never the case during my 15 year stint there in the past (maybe it was 30 years ago...).


I'm gonna go ahead and say that the birth rate musta jumped a fair bit when they take it all in... so like from 1.21 -> maybe even 1.23 (I know, don't look like much, but in a single year with pop. base of 125M, that's a whole lotta welping.


Still pretty amazing dynamic over there if you can put on the show that you are even entertaining the idea of having kids... (I couldn't bring myself to lying to them... they're in a real hard situation there, too unfair to "work game" on them, just straight-up "I'm only offering baby making _practice_," you'll have to use your newly acquired skills outside of my futon-surfing school.