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Abenomics Tries To Make Sure Japan Is Going Down Swinging

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Anecdotal evidence has been piling up in Japan. Lamborghini sales in fiscal 2012, ended March 31, hit the highest level in 14 years. Ferrari sales jumped 40% for the first quarter. Luxury retailers forecast fat profits. “The sudden improvement in the stock market has led to a big rise in sales at our department stores for luxury brands and high-end goods like jewelry, precious metals, and watches,” said Ryoichi Yamamoto, president of J. Front Retailing Co.

The rich – beneficiaries of the Bank of Japan’s phenomenal money-printing binge – are spending, even if it’s not on products made in Japan.

Now we have the first trickle of statistical evidence. Much of it came in one fell swoop, appropriately enough, during Golden Week, which has nothing to do with gold and isn’t even a week, but a series of holidays interspersed with a few work days. Overall retail sales were down 0.3% in March from prior year, but large-scale retailers booked a 2.4% gain. Spending by households of two or more persons jumped 5.2% in March from prior year. Part of it was ascribed to warmer temperatures, the rest to the stock market.

“This is the effect of Abenomics,” explained Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., giddily oblivious to the misery that asset bubbles leave behind, including the epic bubble in Japan that burst in 1989; to this day, the economy stumbles over its detritus. But everybody loves bubbles on the way up. They make people forget the aftermath of prior bubbles. They make economists and central bankers say stupid things. They make rational people giddy.

But Abenomics wisely didn’t take credit for the unemployment rate that inched down in March to 4.1% from 4.3% – due to women dropping out of the workforce. The number of employed people grew by 310,000 over the 12-month period, to 62.46 million, a solid improvement in a country with a declining working-age population. But that was underway before Shinzo Abe was hoisted to the perch of Prime Minister.

Another trend Abenomics couldn’t take credit for: housing starts rose 6.2% for the 12-month period through March, the third year in a row of growth. Among them, starts for rental homes soared 10.7%. Even industrial output increased in March, for the fourth month in a row, if by a less-than-hoped-for 0.2% month to month. A beginning. For the 12-month period, output was still down 7.3%. Based on the recent improvements, the Ministry of Economy, Trade and Industry increased its assessment for the future. Optimism is winding its way back into the economic fabric.

If Japan is going to go down under its load of debt, Abenomics will make sure it’s going down swinging. Two weeks ago, the Lower House passed the ¥92.6 trillion budget, of which 46.3% has to be borrowed. Once the “supplementary budgets” are thrown on top of it, half of all government expenditures have to be borrowed. Abenomics sticks to the old playbook, the one that didn’t work before: spending on public works projects will jump 15.6%. That budget feeds the corporate and individual welfare state. But no one wants to pay for it. Borrow it instead.

Alas, someone will end up paying for it. And it’s not going to be the taxpayer, as the budget makes clear. It’s going to be the direct or indirect owners of Japan’s debt, it’s going to be savers and anyone with assets. Yup, taxpayers. Abenomics is conjuring a bout of inflation.

In patriotic support, companies are busy raising prices. McDonalds announced proudly that it would jack up the price of some burgers by 25%! The first increase since 2008. Double-digit energy price increases have already whacked consumers and businesses. Now the government confirmed its success story: inflation has arrived!

The preliminary all-items index for the Tokyo area for April, a precursor for the national index, showed inflation of 0.3% month to month, reducing deflation for the 12-month period to 0.7%. Goods were up 0.4% – annualized about 5% inflation! Services rose 0.2%. Almost every item was up. Fuel 1.3%, clothes and footwear 2.2%, in one month! The national index for March, which lags the Tokyo index by a month, showed a monthly inflation of 0.2%, cutting deflation for the 12-month period to 0.9%. This is just the beginning. At this pace, Abenomics will meet the 2% inflation target early.

But the 2% target is just a cover. The BOJ will allow inflation to spiral “out of control” while keeping its iron knee on yields. Inflation will eat into the wealth of savers and retirees, the generation that benefited the most from funding much of the welfare state with debt. It will eat into wages. It will cause mayhem and pain, but gradually, rather than suddenly. In the process, it will diminish the debt's weight. Abenomics seems to have chosen that strategy as a lesser evil – because, as Vice Finance Minister Takehiko Nakao pointed out in a hilarious understatement, “A debt ratio of 245% of GDP is not really safe.”

High government debt is not a problem until it becomes one – the “Bang! moment.” That’s the fundamental conclusion by Ken Rogoff and Carmen Reinhart when they studied the now hotly debated correlation between government debt and GDP growth. Now John Maudlin tears into the mainstream media’s distortions of that debate. Read.... Outside the Box: Debt, Growth, and the Austerity Debate

And here is a powerful, musical appeal (with lyrical text in English) to the Japanese that slams politicians, bureaucrats, the nuclear industry and its shenanigans, and the mainstream media.... "humanERROR" by the Japanese rock group "Frying Dutchman"

 

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Thu, 05/02/2013 - 10:36 | 3522313 SmackDaddy
SmackDaddy's picture

Tell this to the dude who just bought one of those Ferraris.  I'm sure he'd say, "Well, I would rather have used to have a Ferrari than never had one at all.  And in the meantime I'm going to get as much pussy with this thing as I possibly can.  Bitchez."

Thu, 05/02/2013 - 10:14 | 3522179 q99x2
q99x2's picture

As if we didn't know what would happen when you give a banker an open ended credit card. Addictive behavior as they say at AA. When the withdrawal hits it ain't going to be pretty.

Thu, 05/02/2013 - 07:37 | 3521637 theliberalliberal
theliberalliberal's picture

Another article already linked that song a while ago.

 

Since then, I havent heard anything else blow up so the problem's probably fixed.

 

Wed, 05/01/2013 - 21:53 | 3520835 minakaze
minakaze's picture

"Much of it came in one fell swoop, appropriately enough, during Golden Week"???better get the facts straight, golden week is right now and ends on Monday 6th, so the "BIG" weekend is the one comin and not the one that has p@assed....

Wed, 05/01/2013 - 20:31 | 3520543 Diogenes
Diogenes's picture

Dishonest Abe gets his wish.

Wed, 05/01/2013 - 19:55 | 3520406 steve from virginia
steve from virginia's picture

 

 

If there are no wage increases in Japan there can be no inflation. Who is there to buy the 25% pricier Big Mac? Stock swindlers? They eat sushi.

 

Ferrari and Porsche sales numbers will expand but what about everything else? Which customers get left behind and do they count? Richter suggests that the answer to the last question is no. This is wrong because the ordinary citizen in Japan isn't just a 'saver' to be ripped off but a source of cash flow to Japanese businesses ... which are now also paying +15% more for energy each month.

 

At some point the cost becomes too high and then deflation returns with a vengeance. The central bank cannot be the entire Japanese economy, whether Abe wants it to or not.

 

The jump in fuel prices has to hurt. Meanwhile, there is little positive effects on Japan's trade deficit which is the cause for the Abe-frenzy in the first place. As the deficit continues, Japan will burn through its forex reserves while the 'smart money' runs out of yen into securities (hoping to be able to get out in time).

 

Yes, the Nikkei will rise for awhile ... a bubble maybe ... but a small one.  Why? Because there is nothing to the price manipulations within Japan that can effect the country's exports or its trade deficit. This is because Japan must import all of its raw materials using hard currency it gains by way of its mercantile trade. The only way Japan can cut the real prices of its export goods is to repress wages ... which leads back to the top. If there are no wage increases in Japan there can be no inflation.

 

 

Wed, 05/01/2013 - 22:20 | 3520931 andrewp111
andrewp111's picture

QE is ultimately deflationary. When this Bernanke-Draghi-Abe bubble pops it will be the mother of all bubbles bursting. it's gonna be one for the History Books, folks.

Wed, 05/01/2013 - 23:19 | 3521157 kita27
kita27's picture

yes but until that time some are becoming rich, while others become poor. Which one are you?

 

Wed, 05/01/2013 - 21:51 | 3520828 Seer
Seer's picture

Excellent assessment!  Especially:

"Japan must import all of its raw materials using hard currency it gains by way of its mercantile trade. The only way Japan can cut the real prices of its export goods is to repress wages ... which leads back to the top. If there are no wage increases in Japan there can be no inflation."

In the final analysis it's less about what govt actions occur (or what KIND of govt is in place) and much as to to about whether one has "physical."

Wed, 05/01/2013 - 22:49 | 3521044 Simplifiedfrisbee
Simplifiedfrisbee's picture

You speak it how it is Steve. The BoJ, just as "the peasant" Bernanke, is shooting blanks. Neither can control the money velocity so deflation is always near waiting to be the gravitational force that it is. Yet, that is not to worry of, what is to be concerned of is when the massess indulge in the wine and partake in the credit expansion.

Wed, 05/01/2013 - 17:36 | 3519839 lolmao500
lolmao500's picture

Good thing I have millions in the stock market.

Thu, 05/02/2013 - 07:12 | 3521613 Ethics Gradient
Ethics Gradient's picture

What, you mean you're long? Investing in companies futures? In actual shares? Unleveraged? Allowing companies to put your capital to good use?

That's not why stocks exist, man. It'll never catch on.

I suggest you take your money out of stocks and invest in triple leveraged ETFs that offer exoticly compounded synthetic products based on a mixture of unicorn farts, Ukip council seats and who'd going to win the world series.

Wed, 05/01/2013 - 17:27 | 3519803 maskone909
maskone909's picture

Im short JGB's via JGBD(a x3 leveraged short jap bond etf). Lets assume the jgb 30y bond yield climbed to 10%. The current price of JGBD is 18.03. With the30y at 10%, where would JGBD be? I say 180.00 per share but thats just my guess. I would appreciate some input and or critisizm

Wed, 05/01/2013 - 17:39 | 3519851 HpDeskjet
HpDeskjet's picture

If you read the text carefully => the policy is aimed to keep nominal rates low and real rates negative (for example 4% inflation, 1,5% nominal rates) such that debt gets "eaten". It's way smarter to short the currency than the bonds if you want to make money on the idea that inflation is going out of control

Wed, 05/01/2013 - 17:53 | 3519917 maskone909
maskone909's picture

Let me explain....

As far as im concerned JGB's can not go much lower. With that being said, the down side risk lies in the decay rate of the etf, predominantly.

I am also shorting the yen. This in my eyes carries much greater risk as the forex market is much more volitile and highly leveraged.

Despite what the policy says, i am confident jgb's yields will rise. It is just a matter of time

Wed, 05/01/2013 - 18:01 | 3519947 HpDeskjet
HpDeskjet's picture

Question is, will the jgb yields rise fast enough to keep up with a 3x leveraged decay rate. I don't know to be honest. Japan is a very "strange" country with lots of incentives to keep rates low. Only if current JGB holders are forced to free up capital, yields will rise. But this could take (much) longer than anyone expects. Japanese have gathered huge amounts of foreign assets over the years => If they sell them first (to free up capital) before selling JGB's, the rising yields idea is postponed for a decade easily... => I would play it via the currency or option-like structures. Dont have negative carry for too long

Wed, 05/01/2013 - 18:07 | 3519972 maskone909
maskone909's picture

Primary buyer of jgb= japanese citizens.
Jap savings are dwindling
10y raises over 2% and they will have probs financing gov debt and boom
Edit

The decay hasnt been too bad when compared to the upside potential

About -10% over 18 mnths

Wed, 05/01/2013 - 18:16 | 3520012 HpDeskjet
HpDeskjet's picture

I totally agree with you that they are "dead" once rates start to go up. I only think this could take a while. Lately the biggest marginal buyers of French gov bonds have been Japanese (and they have been gathering foreign assets for a very long time). Why would they first sell JGBs before the French bonds? All governments/central banks in the developed countries know: If rates go up, it's game over => everything will be done to keep rates down.

Wed, 05/01/2013 - 22:21 | 3520945 andrewp111
andrewp111's picture

They can always issue trillion Yen coins to fund the Gub'mint and keep rates at zero. The same logic applies to the Euro and the Dollar.

Wed, 05/01/2013 - 17:42 | 3519864 maskone909
maskone909's picture

I am.

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