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.
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.
As always, the question is youth unemployment.
- 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.