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Crazy Abenomics Orgy In Japan Is Ending Already – Pounding Hangover Next

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

Kudos to the Bank of Japan. Its heroic campaign to water down the yen has borne fruit. The Japanese may not have noticed it because it is not indicated in bold red kanji on their bank and brokerage statements, and so they might not give their Bank of Japandemonium full credit for it, but about 20% of their magnificent wealth has gone up in smoke in 2013. And in 2014, more of it will go up in smoke – according to the plan of Abenomics.

What folks do notice is that goods and services keep getting more expensive. Inflation has become reality. The scourge that has so successfully hallowed out the American middle class has arrived in Japan. The consumer price index rose 1.6% in December from a year earlier. While prices of services edged up 0.6%, prices of goods jumped 2.6%.

It’s hitting households. In December, their average income was up 0.3% in nominal terms from a year earlier. But adjusted for inflation – this is where the full benefits of Abenomics kick in – average income dropped 1.7%. Real disposable income dropped 2.1%.

Abenomics is tightening their belts. But hey, they voted for this illustrious program. So they’re not revolting just yet. But they’re thinking twice before they extract with infinite care their pristine and beloved 10,000-yen notes from their wallets. And inflation-adjusted consumption expenditures – excluding housing, purchase of vehicles, money gifts, and remittances – dropped 2.3%.

But purchases of durable goods have been soaring. Everyone is front-loading big ticket items ahead of April 1, when the very broad-based consumption tax will be hiked from 5% to 8%. Pulling major expenditures forward a few months or even a year or so is the equivalent of obtaining a guaranteed 3% tax-free return on investment. That's huge in a country where interest rates on CDs are so close to zero that you can’t tell the difference and where even crappy 10-year Japanese Government Bonds yield 0.62%. It’s a powerful motivation.

And it has turned into a frenzy. In December, households purchased 32.2% more in durable goods than the same month a year earlier, in November 25.2%, in October 40.4%. These front-loaded purchases have been goosing the economy in late 2013. But shortly before April 1, they will grind to a halt. The Japanese have been through this before.

In 1996, after the consumption tax hike from 3% to 5% was passed and scheduled to take effect on April 1, 1997, consumers and businesses went on a buying binge of big-ticket items to dodge the extra 2% in taxes. The economy boomed. But it ended in an enormous hangover. In the spring 1997, as the tax hike took effect, business and consumer spending ground to a halt, and the economy skittered into a nasty recession that lasted a year and a half!

First indications of a repeat performance are already visible. The Japan Automobile Manufacturers Association (JAMA) forecast last week that sales of automobiles, after an already lousy 2013, would plunge 9.8% this year to 4.85 million units, the lowest since 2011 when the earthquake and tsunami laid waste to car purchases.

In response, automakers will curtail production for domestic sales. Other makers of durable goods – those that still manufacture in Japan – will prepare for the hangover in a similar manner. Housing and construction will get hit. Retailers will get hit too. During the last consumption tax hike, many large retailers tried to keep their chin above water by not passing the 2% tax hike on to their customers but shove it backwards up the pipeline to their suppliers. This time, having learned its lesson, the government is insisting on inflation, and it passed legislation last year that would force retailers to stick their customers with an across-the-board 3% price increase.

In 2014, the hangover will be even worse than in 1997. Businesses and consumers are dodging a hike of three percentage points, not two percentage points. Hence, the motivation to front-load is even stronger, the payoff greater, and the subsequent falloff steeper. This, on top of the already toxic concoction of stagnant wages and rising prices. Oh, and the plight of the retirees, whose savings and income streams are gradually getting eaten up by inflation. The glories of Abenomics.

But there are beneficiaries. Japan Inc. benefits from lower cost of labor. The government, without having to reform its drunken ways, might somehow be able to keep its out-of-control deficits and its mountain of debt from blowing up in the immediate future. Throughout, the Bank of Japan, which is buying up enough government bonds to monetize the entire deficit plus part of the mountain of existing debt, will remain in control of the government bond market, what little is left of it – even if it has to buy the last bond that isn’t totally nailed down. But for the real economy the party is now ending, and by spring, a pounding hangover will set in. 

According to Japan’s state religion of Abenomics, devaluing the yen would boost exports and cut imports. The resulting trade surplus would jumpstart the economy and induce Japan Inc. to invest at home. It would save Japan. But the opposite is happening. Read.... Why Japan’s Trade Fiasco Worries Me So Much

 

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Tue, 02/04/2014 - 05:49 | 4399433 Kina
Kina's picture

Japan, the only place where women who want it cant get it because the guys blow all their energy maturbating to lolita girl bands.

 

http://www.youtube.com/watch?v=PjgyH3lVI18

Time to start exporting the women before they become too irradiated.

 

Mon, 02/03/2014 - 21:22 | 4398359 toadold
toadold's picture

China has the same demographic problem as Japan if not worse. The one child per family law and the hidden killing of female babies has led to a decrease in working age men. The governemnt is only no easing up on the law, because of the money flow. If you can't have the traditional children who will support you in your old age and there is no pension fund for you you have to save and invest.  Banks are paying diddly so a whole lot goes into real estate.  This has led to an over abundance of empty living quarters being sold as "investments."  Of course a lot of that money hasn't gone into quality building but into officials pockets.  Then you add the fatalities and early deaths from polution. 

There are anuses puckering all through the leadership of East Asia in fear of what the idiot the next country over is going to do.  Devalue, start a war, start a civil war, or become a anti-biotic resistant plague source.  

Mon, 02/03/2014 - 21:09 | 4398311 starman
starman's picture

Harakiri!

Mon, 02/03/2014 - 20:55 | 4398253 Orly
Orly's picture

I always appreciate your articles, Wolf.  They are coherent and understandable.

Missing for me is the impact of Abe and Kuroda's policies on the Japanese yen,  I know it is difficult to make predictions but if you could have a quick look back (and having some on-hand memories of those events...), perhaps you could say what the Japanese currency did the last time these policies were implemented.

Thanks,

:D

Mon, 02/03/2014 - 17:07 | 4397207 kchrisc
kchrisc's picture

Japan, soon to be the 35th. province of China.

They better pray that the Chinese are over the Manchurian "incident" of the 40s.

Mon, 02/03/2014 - 20:35 | 4398140 Panem et Circus
Panem et Circus's picture

That's the scenario I think is most likely as well. It's going to come down IMO to either starvation, or giving up their sovereignty. Pop density of 837 per sq mile, no natural resources, no food, worthless currency, massive debt with no ability to repay...

Tue, 02/04/2014 - 01:24 | 4399104 i_fly_me
i_fly_me's picture

Japan is Detroit writ large.  Who the hell would want it?  My guess is that 50 years from now it will be almost completely feral.

Tue, 02/04/2014 - 10:55 | 4399972 Kobe Beef
Kobe Beef's picture

Doubt it. The 3rd World immigration rate is extremely low.

 

Tue, 02/04/2014 - 03:39 | 4398935 Yenbot
Yenbot's picture

The Chinese know what MacArthur knew: Japan will only give up sovereignty when every last Japanese man, woman and child worldwide are dead, then Japanese will reincarnate like Cylons and destroy any invader from within.

No foreigner will ever own Japan; Americon nukes only bought an ally, not a kowtow. Stop spewing crap.

Mon, 02/03/2014 - 18:11 | 4397462 pashley1411
pashley1411's picture

July 8th, 1937

Mon, 02/03/2014 - 16:57 | 4397155 SmittyinLA
SmittyinLA's picture

Even NHK was bleak, Japanese women are not enjoying their feminist independence, working till you're dead to rent a shoe box aint fun.

Mon, 02/03/2014 - 16:28 | 4397013 The Wisp
The Wisp's picture

Bullish for Geiger Counters & Lead Hats...

Mon, 02/03/2014 - 16:02 | 4396884 toadold
toadold's picture

This will also be hurt the birth rate in Japan more. 

Tue, 02/04/2014 - 02:53 | 4399280 Bunga Bunga
Bunga Bunga's picture

More frustation,

more masturbation.

Mon, 02/03/2014 - 18:58 | 4397701 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The Japanese stopped having kids decades ago. Soon grandma and grandpa will be working the farms until they die from heart attacks. No one will be there to bury them. Sad situation.

Tue, 02/04/2014 - 00:12 | 4398911 TheReplacement
TheReplacement's picture

That would not be the worst way to go.

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