Everyone Loves Abe?

Bruce Krasting's picture


In a world where the vast majority of people don't like their appointed leaders, Japan's Prime Minister Shinzo Abe stands out as an exception. It seems that everyone loves this guy.


The Japanese people love him.




Obama loves him.






Liberal economists like Paul Krugman love Abe.




The Japanese stock market totally loves Abe.




Even the Japanese bond market loves Abe.




Speculators and hedge funds love Abe.






Some Biz mags love Abe too.





My only question about the love affair with Abe is, "How long will this last?" Some issues I see on the horizon.


- The business of weakening the Yen to achieve stock market gains and trade advantage is inherently dangerous. So far, so good. I give it a 50-50 chance that things become unstable in the FX markets. At the moment, the troubles in Europe that are resurfacing have stabilized the Yen cross rates. The huge advance of the Euro versus the Yen is now somewhat in check. This opens the door for the USDJPY to advance higher. I can see a quick move to 100 when/if the dust settles down in Europe.


- It has been far too easy for the Nikkei to rise while the Yen weakens. Folks like Business Insider see it as a virtuous circle. The cheaper the Yen, the better for stocks. That is an accident waiting to happen. A few days of big drops in the Yen's value coupled with drops in the equity market is all it will take. There are a hell of a lot of speculative positions from hot foreign money in the Japanese stock market today. The gains in stocks have more than offset the FX losses for investors from the EU, UK and US. But it's hot money. And hot money takes profits and moves fast.


- The flip side of the falling Yen will be domestic inflation. Imports of everything, from food to fuel are jumping in price. The vertical line ends with January data. The line has been soaring higher in February and will continue through March, even if the Yen stabilizes.


Screen Shot 2013-03-03 at 8.52.22 AM


I ask, "When will these price hikes cause domestic sentiment to shift away from Abe?"


- Abe faces a problem with the country's Social Security System - It's going broke. Abe hinted at his solution in a speech last week.From Japan Times (Link)


Mr. Abe said that he will build a system in which people’s financial benefits and burdens are balanced


This leads to a Means Test for SS benefits. My read of the Japanese SS system is that a very steep means test will be required. This is a lead balloon waiting to fall.


- There has been virtually no progress in the cleanup at Fukushima, but Abe has still committed to reopen Japan's nuclear power plants. Economically, this is an important step, but socially it will be very unpopular.


- The Japanese economy stinks. GDP is about where it was seven years ago.




By US standards, the Japanese unemployment picture is enviable. But it's still 4Xs what it was a generation ago.


Screen Shot 2013-03-03 at 9.12.10 AM


As always, the question is youth unemployment.


Screen Shot 2013-03-03 at 9.11.24 AM



- The Senkaku Island conflict with China is temporarily on the back burner. Abe tried to sound reasonable when he recently said the matter should be resolved by the "rule of law" and that he was "open" to dialog.

What Abe meant was that the Rules of the Sea should apply, China does not agree with that position. And as for the dialog, I think he was offering to pay the Chinese a few bucks to end the dispute. China believes the islands are theirs, and they are not for sale. This will come back on the front burner.


- My biggest concern is that Abe is a Nationalist. I can't blame him for that. He has to think, "Japan First" every day. But what does he mean when he says:


“Let’s aim to become No. 1 in the world.”


If he thinks he is going to achieve that status via a devaluation of the Yen, he is in for a surprise. When USDJPY hits 100 the folks in Detroit will scream - and Treasury Secretary Lew will start talking about predatory exchange rates.


- Finally, there is Abe's intention to change the constitution of Japan. He wants to eliminate Article 9. This is the section of the Constitution that renounces war.

How is China going to react to that? How is the US going to respond? S. Korea? N. Korea?

Abe has not officially put the change in the Constitution on the table. But he is going to do this. The Japan Times commented:


It is regrettable that the prime minister did not say clearly what he is trying to do with the Constitution since it is widely known that he plans to revise its war-renouncing Article 9.

It is not appropriate for the country’s leader to hide his true intentions about an extremely important matter when addressing the Diet and the people.




When Everyone is lined up on one side of something, the opposite is often the outcome. Abe's popularity is like Apples's stock back in November. When the price broke $700 - everyone loved the stock. It was over-loved, and had nowhere to go but down. It was a great short. The love affair with Abe is a short too.




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steve from virginia's picture




Stock-and-bond markets are pressurized, the establishment has made stupendous efforts to wring volatility out of them, ditto commodities, particularly gold, copper, foodstuffs and petroleum.


Time marches on and costs of volatility suppression are added to other market costs, volatility emerges where the suppression forces are weakest. Switzerland can peg its currency to the euro at an affordable cost, just like the Chinese can peg RMB to dollars. Today's question is where and how does Japan fit in particularly with its shiny, new trade deficit?


Japan is orbiting the drain, the trade deficit is the last straw, the country has too many obligations to meet ... all coming due at once. Its trade surplus, the flow of overseas funds and the carry trade have been the means by which the country has endured deflation without the accompanying depression. Japan now needs either 'growth' (cancer) or a return to the inflow of overseas funds.


Depreciating the yen is a symptom of the cancer -- Japan's past growth is now killing Japan. The country is beyond desperate: on deck is NGDP targeting, the Bank of Japan making unsecured loans (because the Japanese private sector finance is not making loans).


Sadly, the Japanese establishment does not understand why the private sector is not lendng ... they are in denial like the rest of the industrialized world. the reason is because the private sector isn't borrowing. It's bankrupt. So are Japan's overseas customers, they just aren't announcing it. Instead,  the Forex markets are announcing it for them, voting with their feet.


Basically, Japan is 'doing the Paulson': threatening the world's finance system with destruction if its demands for a bailout aren't met, holding the world hostage. "Buy our worthless junk ..." scream the Japanese, "or we will cause the world's greatest bank run (that nobody will be able to stop)".


The more things change, the more they remain the same.

Orly's picture

"Sadly, the Japanese establishment does not understand why the private sector is not lendng ... they are in denial like the rest of the industrialized world."


Takehiro Sato, a member of the BoJ, has said that the economy of Japan would be aided tremendously if major companies would pay their workers more money; loosen up the trillion-yen war-chests.

That makes sense, especially if your goal is to cause systemic inflation.  It's funny that the more money people have, the more they want to borrow; the more they spend; the more money chasing fewer goods.

 You're certainly right in this case, Steve.  People are broke. They don't want loans.  They want to pay down what they already owe.

But if companies all over the world would pay their workers more, ironically, eveything would get much better much more quickly.


bobbydelgreco's picture

one thing u can learn from this is how important a devalued currency is to create a rising stock market now listen  1 day something bad is going to happen in the world when it does the dollar takes off & equities commodities & pm's crash yes zhers even pm's

GMadScientist's picture

'Sumo-sized win' eh?

Isn't that the most notoriously rigged sport in the world? (makes WWF look downright honest by comparison)

tom's picture

Nice one. I think it's going to be much harder than Abe imagines to generate inflation. Since their incomes aren't going up, Japanese will be forced by import price inflation to cut back on consumption of domestic goods. Even the yen devaluation won't be sustained without sustained FX intervention.

Orly's picture

...and another thing!

Every time the Japanese have tried direct intervention in the 4X market, they've got it handed to them pretty quickly, with marked levels of diminishing returns.

If I were the Japanese, I wouldn't touch the yen with a ten-meter cattle prod.


de3de8's picture

If Abe's bet on changing article 9 rests on US (nobama) support, bad bet.

chump666's picture

Abe is exporting inflation via a currency war to the rest of Asia.  China and Taiwan have both suffered hyperinflation in the past (study post war WW2 Taiwan and China).  Keynesians are idiots.  The point is, which can be see now, is a stock market built on top of a 'cold war' between China and Japan that could go hot any-day.

Yeah Abe is a real f*cking genius.


Orly's picture

How do you see the yen crosses this week, Chump?

chump666's picture

Well you should worried about the carry fading on the AUD, could support the YEN slightly.  Market looks like ready for a profit take in equities pre employment Friday.  The bulls want this higher with the money printers all in, plus HFTs on all supports.  USD bids are in, which is interesting, USTs could be bid also.  You may see some volatility midweek, barring any straight up bearish internal/external events.  But if employment is bad, all bets are off and another attempt at a significant correction in stocks, YEN buying, USD slamming the AUD, CAD and maybe EUR.  Did you see the 1.30 support in the EUR, could finally crack it the USD goes parabolic.

Check IMMI USD longs: http://link.reuters.com/hyh46t

IMMI EUR:http://graphics.thomsonreuters.com/Buzz/FX_Positioning.html


Orly's picture

The EURUSD cracking support is exactly why I say get long USDCHF.  It is the stealth trade for the next couple of months.

Thanks, Chump.


besnook's picture

i don't agree. i think abe's appeal to nationalism may be his ticket to ride. i have watched japan become increasingly nationalistic since the beginning of the end of the bubble economy. this is the hatoyama era. remember hatoyama resigned when he had to acquiesce to the usa on the okinawa usa military base issue. kick the usa out. establish an independent military for a japan centric defense policy. form an alliance of asian states to counter chinese regional(and worldwide) hegemony. at the same time, exploit it for the wealth 1.3 billion people can bring to the region. the upcoming trade talks about a regional free trade zone with the usa will fail. the asian nations have been much more demanding than the usa is accustomed to because they have china as a counter weight. the usa as a protection against china rings flat. this bargaining tactic is just another example of how the west has never understood the east asian/ pacific dynamic. it is really interesting that the region is in many ways becoming the insular place it was pre western expansion with all the local relationships falling back into the place they were pre colonial era.

abe reaffirmed ties to the usa because he has to...for now. the trade are the senkaku islands. while the dispute may be about energy resources, the real issue is usa committment to the security of the region with japan as the key to usa influence along with south korea(hence n korea saber rattling). the chinese are testing the limits of usa involvement. so far the chinese are winning because they hold the economic cards. if the usa does not defend japan or south korea then the usa is out and china is in. this may actually play into the end game for both south korea and japan as both know their economic future lies within the asian realm with the middle kingdom as the hub of the wheel. the chinese, as is their nature, will push until they are told no emphatically and then they will push some more to test how emphatic the no really is.

as far as the domestic economy, if the japanese see value in the sacrifice, they will sacrifice. the biggest danger to the west is if the japanese decide japan comes first(what did abe say?) and jumps off the western ponzi scheme train unilaterally deciding that is the better choice over derailing on the broken tressle ahead. that could mean coupling with the yuan(which would unleash huge firecracker, whore laden parties all over china) or a quadrillion yen coin to wash all their troubles away.

Orly's picture

"...the upcoming trade talks about a regional free trade zone with the usa will fail."

And the renmimbi becomes the regional base currency in the South Pacific?  I just don't see it happening, politically speaking.

Remember that Abe is relying on the prestige of being a proud Japanese to carry out his reforms.  Remember, too, that he was also rejected the first time he mentioned visiting the White House after the election.


"However, Japanese media quoted unnamed sources as saying Obama postponed Abe’s trip on purpose due to concerns of his hard-line stance on the island spat with China."

I would submit that it wasn't the island dispute that turned the White House around but the Japanese stance on the TTP.  Abe decided to play ball.

That way, he carries the prestige of having his picture taken in the Oval Office and is free to carry on his nationalistic rhetoric.  Abe got what he needed.

The US got its trade deal.


OpenThePodBayDoorHAL's picture

Transpacific trade deal is a toxic mess of fascist garbage, US forcing members to send transcripts of emails and voice to a central organization controlled by the US, US can dictate countries' minimum wage and labor laws...no wonder it's been a tough sell. They even shipped Obomba and Hilary to Phnom Penh in person but laid an egg, even Australia said "no thanks we already have a trade group that includes China but excludes the US"

besnook's picture

you are making the mistake that japan is in the position of weakness when dealing with the usa. a foreign leader does not publicly say he will meet with the potus. potus extends an invite(unless you are the pm from israel) to his subjects. the usa needs japan's participation in the trade pact to leverage the other nations to join. japan really doesn't need the pact. besides japan's farmers are still very influential in japan and will not allow it. rice farmers are the keepers of the soul of japan.

china and japan are in talks to set up a renmimbi/yen swap as the core of a regional currency swap for intraeastasian/pacific trade. russia and iran can supply all the energy needs of the region without a single dollar involved if it comes to that. so, yes, the future is the yuan, first in asia then the world.

i think what you are missing is the entire region has understood since the beginning of the colonial period and with the usa post ww2 that they have been the useful idiots of the empire and the rise of china has given them a way out as they are more comfortable with a local master(despite some historical disputes) than a western one. japan is the key to this transition. japan knows it. china knows it. everyone else knows it, including the usa. so, just as india is the key to central asia, japan is the key to east asia. if you think the japanese are going to roll over you would be misinterpreting the polite public speak of the japanese as the humble team players they would like you to believe they are instead of the shogun and samurai society they really are.

the hatoyama manifesto is the japan policy of the 21st century. making it come true won't be easy but they will give it the old japanese try. i am not sure the west knows this or understands it and therefore, how to deal with it.

suteibu's picture

That should be the Ozawa manifesto (at least, the Ozawa/Hatoyama manifesto). 

That said, the Obama administration rolled both Ozawa and Hatoyama for it.  If Abe is bound to carry on with that manifesto, it would seem that he is off on the wrong foot unless he has some secret deal with China over the Senkaku drama and has blatantly lied to Obama and the foreign policy wonks in Washington last week.  Drawing closer to the US is an odd way to get rid of Japan's western master. 

Although I am happy that you see it this way, you should explain Abe's grand plan for accomplishing it in the face of his public words and actions (TPP, Okinawa bases, Article 9, selling weapons systems, etc.)

Bruce Krasting's picture

Winds of War?

Nice writing by the way.


Orly's picture

I appreciate your response.

We'll see what happens.


ejhickey's picture

i thought they were talkng about Lincoln

suteibu's picture

When the Japanese find out what is in the TPP, if Abe does join (a probability), his popularity will plummet.  sadly, he will be long gone before Japan realizes what the TPP is all about.

besnook's picture

there is no way japan joins. the most the usa can expect is dragging this out for years until it is inconsequential to say no.

suteibu's picture

I hope you are correct.  I believe that Abe, like Noda, is going to give the US everything it wants in return for security.

eddiebe's picture

I really don't think Abe is doing anything but what he is being told. Same as Obama and Bernanke. Actors and lackeys some better, some worse. The greedy fucks running the show will keep running it. That is their objective and they will stop at nothing except total nuke devastation of the planet to get it all with what appears to be elected leaders being nothing but pawns and the rest of us vermin at best, being granted the right to live to do their bidding. More or less the same as it was throughout history, only it's all done in a more sophisticated manner.

Awakened Sheeple's picture

Fascinating theories on how this plays out. The "dumb cousin" (as someone referred to them recently) of financial markets could be in for a reality check. Reality being a relative term, of course. I just wonder how quick the bankers will react with some coordinated printfest to calm the markets down. Currency war or not, loss of CONfidence in global markets, isn't good for any of the western economies right now.

Crazed Smoker's picture

I remember buying Japanese equity mutual funds in the eighties when the index was 20,000 range.  MER on fund was 2.5% a year on it.  Had I employed the buy and holds strategy my "financial planner" recommended i would have paid 2.5% x 25 years or about half of face value in MER fees and another 50% in face value losses.  Reading this now minister gonna crank inflation seems ridiculous.  Everybody wanna get paid but nobody wanna work for it seems like.  


orez65's picture

You must be talking about the majority of the American people:

"... Money for nothing and chicks for free ..."

Orly's picture

I have been guilty of using simple extrapolation models, a la Birinyi's Ruler to judge the movement in the yen crosses.  Bad Orly!

Using your chart above of the Nikkei 225 Index, it is possible to see the massive ramp in Japanese equities.  This has also been carried out in Europe with the FTSE and the DAX also moving much higher.

The EURJPY pair had been moving hand-in-hand with the ES and global equities for the past three years, at least.  I figured EURJPY (EJ...) to 134 and said as much on these pages.  But Mr. Birinyi smacked my hand with that ruler, once up and once down (memories of Catholic School?  But I digress...) when I said that the ramp in Japanese equities would carry the pair there.  Guess what? On or about the first of February, the intense correlation between the EJ and the global equity market suddenly shut down.

Overlaying a chart of NKY and the EJ, you can see that, had the correlation continued, the pair would sitting right at 134 as we speak.  But that's not at all what happened.

Global equities ramped higher everywhere but "risk" pairs in 4X began to come off.  Now someone is wrong here and I bet you can guess which market that might be.  Bonds and 4X aren't buying the ebullience.

With the EJ about to roll over, this sends a very loud signal to equities that the gig is up and they had better take cover.  Now, I know better than to ring a bell on the stock market but I  am telling you that the correlation will find its way back to "normal" one way or the other.

Hedge accordingly.



t0mmyBerg's picture

Timely as ever.  I was just last night looking through the various polls in Japanese media to gauge Abe's standing.  Very high at this point but only 2.5 months after the election.  They usually give the incoming PM a few months before he gets whacked.  Will be interesting to see how this changes.

ISEEIT's picture

Three intelligent comments in a row? That's pretty impressive, even by ZH standards.

Orly's picture

Mr. Krasting's posts are our super-uber-double-top secret hideout.  Don't tell everybody...

Orly's picture

"When USDJPY hits 100 the folks in Detroit will scream - and Treasury Secretary Lew will start talking about predatory exchange rates."

Detroit is now a wholly-owned subsidiary of the State of Michigan.  I doubt Michigan is going to be screaming about the value of the yen.

Toyota makes trucks in San Antonio, Nissan, Alabama, Daimler, Alabama, GM, Mexico and Canadia.  It's a global car market and things have changed dramatically.  Sorry GM couldn't keep up but Mulalley at Ford has done an incredible job, if you asked me.

You mentioned the other day about there not being many safe-havens left.  I can't understand why the yen just goes from acting like a safe-haven currency to being in the doghouse in two months- and everybody's okay with that.  Like they suddenly decided to wear black instead of white, change hats, so to speak and poof and voila! they are completely different- because they said so?  I am sorry but in the real world, it doesn't work that way.

The Euro has been propped up through the back-door by the Fed every Friday night.  How long does that go on?  Forever?  The Swiss franc is priced for perfection.  How long do the Swiss remain perfect, do you think?  Ad infinitum?  It's possible but not likely.

Why was Dr. Bernake so rattled the other day?  Could it be USD appreciation and the effects it will have on other currencies and the global economy?

The Pound Sterling is in the tank and the ECB is expected to lower rates this week on Thursday.  Lots of moving parts here but, technically speaking, the yen pairs have topped and are in for some correction as they roll over into this changing 4X environment.

Don't be shocked and amazed if the EURJPY gives up half its gains from over the past three months- a "normal" fifty percent retracement is certainly not out of the question.  The yen is way oversold and the Euro is way overbought and with Monti rejected soundly in Italy, it may be time for the Fed to question throwing good money down the rabbit hole that is Europe.

All I am saying is hang on to your hats because we are about to go into the Alice in Wonderland world of trading where what things seem to be may not be that at all.  It's a'gonna get wild.  Not that it hasn't been fairly insane lately but the coming moves may even get a, "Wow," out of Bruce Krasting.


The Heart's picture

"...throwing good money down the rabbit hole..."

Talk about throwing money down the rabbit hole. Look at how much goes to all these countries.:


And here is an elaborative pig-in-a-poke article the expounds on who gets what to accompany this interactive map.:

"If the D.C. critters would begin to put the U.S. citizens first in line for any aid needed and were serious about the U.S. becoming financially sound, they would stop all the free money around the world. Israel is one of the biggest receivers of Free money from the U.S. for every reason possible."


OpenThePodBayDoorHAL's picture

Next time you're in Sydney the beers are on me. Great posts, lots to talk about, why not.

Orly's picture

I was certainly frustrated last week with the movement in the AUDUSD.  There were some shenanigans going on, boy.  Finally, I just threw in the towel because I couldn't figure out where they were trying to move it.

I have never seen anything like it. My instinct tells me the pair is going much higher but there were some big US players standing on it all week.  Nothing made any sense whatsoever.  So weird.  It was almost like a "revenge" trade, getting back at the Aussie for some perceived slight.  Who is willing to lose that much money because they're pissed off?

If it pops higher, it could really, really move.  I'll wait for the big break, either way.

Thanks for the offer of the beers.  The first time I am in Sydney, I'll let you know.


bank guy in Brussels's picture

Japan is going radical, and why not ... What have they got to lose at this point in the game of over-extended debt ... they have had a good 23-year run avoiding depression after the 1990 crash, now it's time for bolder steps

Economically they will do the radical monetarist theory of Nominal GDP targeting, more fully and intentionally as no one else has done before, it could possibly work okay

With energy and nuclear they are going to go the new much safer thorium reactors, which high-tech Japan is uniquely able to do quickly

With Asian regional policy they likely correctly see that China, rising world power and all, is in some ways like the US in early 1929 ... about to have a huge crash of internal instabilities, which will delay their ascendacy

Everyone else in East Asia is having a headache over China's arrogance ... Japan may be a bit ahead of the curve in ticking off the big local bully ... they can get their food imports from other Asian countries China is annoying

Time for Japan to buy oil from Iran, take the lead in nuclear reactors and get their own nuclear weapons, while more generally modifying their lifestyle to something more modest and sustainable, which they are well-oriented to be able to accomplish

Maybe the Japanese will even overcome their xenophobia to realise that a few million nice Filipinas and Filipinos there would create an economic boom while posing very few social problems

Japanese have always had some reserves of unique courage, and this is a good time for it ... wouldn't write them off yet, as they pull some gutsy and bold moves

Reptil's picture


they're building MOX enrichment plants and more fission reactors on top of seismic faults next to the ocean, near rich fishing grounds.

the japanese got a visit from some head honchos in the american militairy industrial complex, who told them "stay the course".

they complied.

OpenThePodBayDoorHAL's picture

True, they've made some epic bold moves in the past. Like kicking a hornet's nest by bombing Pearl Harbor, when they knew perfectly well they would lose in the end. Now that's cognitive dissonance of the highest order. Banzai! Now they're trying the Divine Wind economic policy...let's see how it goes.

Orly's picture

Flips?  I was thinking more like South Koreans...

CTG_Sweden's picture


bank guy in Brussels:

"Maybe the Japanese will even overcome their xenophobia to realise that a few million nice Filipinas and Filipinos there would create an economic boom while posing very few social problems"


My comments:

I doubt Japan needs more labour now when their unemployment rate is 4 times as big as in the 1970s, one of Japan´s most successful decades.

One of the few advantages Japan actually has is that they don´t have that costly, massive excessive supply of labour like Europe and the US. Especially in Europe were unemployed people get more generous unemployment benefits than in the US and a health care insurance paid for by the government, excessive supply of labour is very costly to the tax payers.