• Steve H. Hanke
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    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

Guest Post: Mr. Abe's Trigger

Tyler Durden's picture


Submitted by Gonzalo Lira,

The newly elected Japanese Prime Minister, Shinz? Abe, has caused quite a stir. The leader of the Liberal Democratic Party, which scored a landslide victory in 2012’s election, he’s promised to restart the Japanese economy, whatever it takes.

How will he do this? He “will implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three policy pillars, achieve results”—according to his statement following the LDP election victory.

By “bold monetary policy”, what he means—and what he has said—is to end the independence of the Bank of Japan, and have the government dictate monetary policy directly. (You could argue whether any central bank in any of the developed economies is truly “independent”—or indeed, has ever been so. But for the sake of this discussion, let’s assume that they have been.)

The perception is, the Bank of Japan will not only print yens and buy government bonds à la Quantitative Easing of old - it is also generally thought that Mr. Abe and the incoming Japanese government fully intend to target the yen against foreign currencies, like Switzerland has been doing with the euro.

This perception is what has been driving the Nikkei 225 index higher, and driven the yen lower.

[ZH - as as an aside - the correlation between JPY and the TOPIC is the highest since 1988!! via Bloomberg]


Prime Minister Abe’s policies have yet to be fully implemented—so far, it’s all been just talk. But the markets are taking Mr. Abe at his word, convinced that he is going to set a policy very similar to what the United States and the Federal Reserve have been doing: Targetting the equities markets, and printing in order to bring the yen down, and thus make Japanese products competitive in foreign markets.

But why was this decision triggered? For going on twenty-three years, Japan’s GDP growth has been sluggish at best, it’s government amassing huge debts, all the while the yen slowly strengthening and the Nikkei index meandering—yet all of a sudden, now the Japanese government is ready to do whatever it takes to turn the Japanese economy around, which begs the question: Why now?

Simple: Japan’s balance of trade has turned decisively negative for the first time since the Oil Shock of 1980—and this has put the fear of God into the Japanese leadership. Look at the following chart:

Click to enlarge.


Since the Iranian Oil Shock of ‘79, Japan has consistently held a positive balance of trade—until 2011. And 2012 was a nasty shock, as the balance of trade went full-on negative. Japan had a trade deficit for the first time in 33 years.

This was Mr. Abe’s trigger.

In a very real sense, Japan could afford to have an economy in the doldrums because it was a net creditor nation. The United States and Europe might follow Keynesian claptrap that “deficits don’t matter”, be they fiscal deficits or trade deficits. But the Japanese believe that trade deficits matter.

Japan don’t seem to mind about fiscal deficits: If the government was overindebted, the Japanese people were down with it, as shown by the polls—because the Japanese people were the ones financing the Japanese government’s deficit. Consider this chart:

As can be seen, over 85% of the Japanese government’s debt is held by the Japanese. So although Japan’s fiscal debt is monumental—over 230% of GDP, dwarfing the U.S.’s figure of 110% of GDP—it has never been that much of a political issue in Japan, because it is internal. It is money the Japanese government owes the Japanese people.

But the turn to deficit in the balance of trade has the Japanese public and political establishment shitting lead bricks, to use a highly specialized, technical socio-economic term for the situation they are in.

This is why Mr. Abe’s LDP party won so decisively: The deficit in the balance of trade proved to be politically unacceptable. Mr. Abe won by promising to turn that deficit into a surplus.

Now, how can Mr. Abe do that? Well, if you want to export more than you import, a country has to produce stuff that other countries want—or make foreign imports expensive. What’s the quickest way to make a country’s goods cheap so that others buy them, while making imports that much more expensive? Easy-peasy, Japan-easy: Devalue the currency.

And that’s what Mr. Abe is proposing. Not in so many words, but he is saying that the Bank of Japan’s autonomy ought to end, and that monetary policy should be directly under the thumb of the government.

Since a fiat currency like the yen cannot be devalued by diktat, the only way for it to fall is relative to other currencies—like the dollar, the euro, or the pound sterling.

How do you get a fiat currency that is the region’s reserve currency to fall against other foreign reserve currencies? Simply by buying up foreign sovereign debt with your local currency, flooding foreign markets with your currency, and thus driving down its value against the dollar, the euro and the pound.

This is basically what the Swiss have been doing, by targetting the Swiss franc at CHF1.20 to the euro. And this is what Prime Minister Abe and his government plan on doing—of course on a much larger scale, considering how much bigger Japan is than Switzerland.

Prime Minister Abe also unveiled a massive ¥10.3 trillion (US$116 billion) stimulus package. Adjusting for the size of the GDP, this Japanese stimulus would have been equal to a $296 billion package in the United States. An impressive-enough number.

But the Abe stimulus is a sideshow—the real issue is the devaluation of the yen.

Devaluation is the only way for Japan to make its exports cheaper and its imports more expensive—and this flies directly in the face of what is going on with Japan’s historic deflationary trend, which as I explained in the previous section of this discussion, is a product of the demographic realities of Japan that are inevitable.

But this is where Mr. Abe wants to go. And the trigger for this radical—extremely radical—approach was not the sluggish GDP, nor was it the massive fiscal deficit, no: It was all triggered by the rising Japanese trade deficit.

Here is where economic realists have to tread very, very carefully, lest they be blown out of the water by something I call Cassandra’s Blindness. In the next section, I will discuss some investment ideas I think might be worthwhile, considering the new reality going on in Japan.

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Thu, 01/17/2013 - 19:16 | 3164324 Stackers
Stackers's picture

I wonder what global hyperinflation looks like ?

Thu, 01/17/2013 - 19:20 | 3164342 NotApplicable
NotApplicable's picture


Thu, 01/17/2013 - 20:00 | 3164501 max2205
max2205's picture

No need to drop the big one on Japan, they are committing hari carri.

The worlds markets have become a tulip

Thu, 01/17/2013 - 20:33 | 3164619 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

I am a deflationist by nature, but Japan will be the first hyperinflation event in the coming collapse. It signals currency death.

Fri, 01/18/2013 - 02:20 | 3165391 mickeyman
mickeyman's picture

Why do they never learn that currency devaluation doesn't fix the trade balance, especially for Japan which will have to pay for all of its imported raw materials with devalued currency.

Fri, 01/18/2013 - 11:27 | 3166173 Flakmeister
Flakmeister's picture

Estimate the average coupon on the JCB US dollar holdings... it "pays" for a good chunk of their imported oil...

Thu, 01/17/2013 - 21:22 | 3164766 philipat
philipat's picture

Gold, bitchez....

Thu, 01/17/2013 - 19:20 | 3164340 NotApplicable
NotApplicable's picture

Wait, there are still people buying Japanese exports?

Oh yeah, I forgot, Fukushima will be contained...

any century now.

Thu, 01/17/2013 - 21:51 | 3164859 old naughty
old naughty's picture

Devalue against pound and USD, in the current state of the world, all for improving the trade deficit?

This is getting desperate...I wonder why?


End of the rising sun.



Thu, 01/17/2013 - 19:29 | 3164363 fourchan
fourchan's picture

this wont last and the reversal will be sick. the boj's buying can never top the feds printing on the race to zero value.



Thu, 01/17/2013 - 20:11 | 3164535 bank guy in Brussels
bank guy in Brussels's picture

Don't think the real heart of Japan's new policy is to play foreign exchange debasement games, tho they are playing at that too

The real heart is something more sophisticated than covered in Gonzalo Lira's article

Japan is the first nation going all-out to try the theory of a small group of hard-core monetarists, saying that what needs to be done for a huge balance-sheet recession slump, is to juice the money supply sufficiently to raise nominal GDP growth a couple points above the interest rate

And since Japan's (artificial) interest rates are about 1%, that means juicing nominal GDP to about 3% or so

A more radical twist than plain vanilla QE or debt-stoking Keynesianism (that Japan has already done more than anyone)

Hell, it might work, and the Japanese need to be applauded for having the samurai courage to try it, at the risk of blowing up Japan in the process

If it does work the rest of the world will know what to do ... If not, they can be remembered like the 300 Spartans

Thu, 01/17/2013 - 20:14 | 3164546 Orly
Orly's picture

And Japan becomes the 52nd state.

Thu, 01/17/2013 - 20:32 | 3164608 linrom
linrom's picture

I suspect that both you and Lira are correct.

Thu, 01/17/2013 - 20:43 | 3164657 Bendromeda Strain
Bendromeda Strain's picture

I think I'll stay with Kyle Bass' prognosis, and bet that he doesn't succumb to that "Cassandra" thing. No matter what PM Abe does, since Depends are outselling Pampers they are up shit creek without a diaper.

Thu, 01/17/2013 - 21:17 | 3164747 BigDuke6
BigDuke6's picture

I'm sorry but i'd prefer the 'tradeonfire' bob diabolina's call on this

or is it 'tradelikeyourassisonfire.com'?

Thu, 01/17/2013 - 19:31 | 3164370 Seasmoke
Seasmoke's picture

I want nothing from Japan that reminds me of glowing Japs.

Thu, 01/17/2013 - 19:38 | 3164395 bugs_
bugs_'s picture

Climb Mount Niitaka!

Thu, 01/17/2013 - 19:41 | 3164402 magpie
magpie's picture

East wind, rain

Thu, 01/17/2013 - 19:41 | 3164407 alessior
alessior's picture

but "gonzalo" has writed at this link




The marginal Eurozone members—the PIIGS, basically—will have to exit the Euro in an orderly fashion, go back to their own old currencies, and devalue against the Euro. At the same time, their Euro debts will have to be restructured.


..and if I'm not wrong he has wrote also that mises did not understund why the "sistem defoluts".................this was appenning about 4 years ago .....


Thu, 01/17/2013 - 19:43 | 3164415 FROZENOJFUTURES

Did I ever tell you what the definition of insanity is? Insanity is doing the exact... same fucking thing... over and over again, expecting... shit to change. That... is crazy; but the first time somebody told me that...I dunno, I thought they were bullshitting me, so boom - I shot him. The thing is, okay... He was right. And then I started seeing: everywhere I looked, everywhere I looked, all these fucking pricks, everywhere I looked, doing the exact same fucking thing... over and over and over and over again thinking: "This time, it's gonna be different; no, no, no, no, no, please... This time it's gonna be different."



Thu, 01/17/2013 - 19:50 | 3164418 VATICANT
VATICANT's picture

What does 127,817,277 starving Japanese look like? 

The same thing as 311,591,917 starving Americans. Indeed forward!

Thu, 01/17/2013 - 19:47 | 3164437 Flakmeister
Flakmeister's picture

Did someone bother to point out the meaning of nominal to Abe?

Thu, 01/17/2013 - 19:52 | 3164463 suteibu
suteibu's picture

As for those imports, Japan imports 98% of its oil and 60% of its food.  This weak yen strategy to pump up the Nikkei will only get public approval if the government runs the polling and only asks the corporate and investment classes if they approve (which is all that matters to the so-called leaders anyway). 

Imagine having your income and savings devalued by 12% in a one month span while living in a high-rent box in one of the most expensive cities in the world.  I don't think the consumer class is going to be all that thankful for the new and improved Abe through the upcoming cherry blossom season.

Thu, 01/17/2013 - 19:59 | 3164487 Wakanda
Wakanda's picture

This is the last big saki punchbowl before northern Japan is uninhabitable.

Radiation does not negotiate.

Thu, 01/17/2013 - 20:06 | 3164509 THE DORK OF CORK
THE DORK OF CORK's picture

Increased radiation dose  vs less food in the belly.


Dorks will always go for food in the belly.


If Japan does not relight those Nuclear fires soon Europe (its export market) is dead anyway.


MAJOR MAJOR LNG Pressure is building in Europe.................if Algerias gas piplines go off line Spain & Italy will follow it down the toilet as there is not enough LNG in the world to fill both empty western Europe  and Japan.


Emergency shipment ?


Thu, 01/17/2013 - 20:31 | 3164607 Clowns on Acid
Clowns on Acid's picture

Kam_i_kaze.....heading toward Uncle Ben's printing press....

Thu, 01/17/2013 - 20:32 | 3164610 neutrinoman
neutrinoman's picture

The article is essentially correct; this is what Japan has to do to save itself. They no longer have the domestic savings to support government borrowing as they once did. They are losing their foreign currency reserves rapidly, because of the fiscal and trade deficits. They have to devalue, quickly, to get their trade surplus back -- and to devalue the value of their outstanding debt, when denominated in yen and looked at by foreigners. The Japanese know that foreigners will soon be asked to buy their debt, in quantity. They have to make it cheap. So far, the goal is actually modest, maybe 110 or 120 yen/dollar. It was that five or so years ago.

(BTW, the fiscal deficits do matter, because Japan can no longer support those with domestic savings.)

But they'd better watch out what they wish for. To make it possible for Japan to substantially borrow from foreigners with reasonable interest rates (and not quickly bankrupt the Japanese government), the yen is going to have to drop a lot more, like to 150 or 180 or even 200/dollar. That halves, roughly, the value of the outstanding debt. This is the kind of drastic action that Greece or Spain cannot take, because they're locked in the eurozone.

And the eurozone ... it will break down or break up at some point. But the time for the PIIGS to leave is past. They need to stay in, to get their bailouts. It's the wealthier, surplus countries that will leave eventually, starting with the small ones first (Holland, Austria, Finland). Germany will be left with a big dilemma. It will foot the bill, or at least part of it.

Fri, 01/18/2013 - 02:53 | 3165424 MajorWoody
MajorWoody's picture

Out freakin' standing reply.  Perhaps better than the article.  Good job.

Thu, 01/17/2013 - 20:35 | 3164627 CheapBastard
CheapBastard's picture

With all that printing, I bet many Japanese will yen for PMs.

Thu, 01/17/2013 - 20:48 | 3164674 Bendromeda Strain
Bendromeda Strain's picture

Maybe they will even mint some with that funky shunga porn on the coins...

Thu, 01/17/2013 - 22:15 | 3164938 besnook
besnook's picture

the japanese have always been believers in gold and silver.

Thu, 01/17/2013 - 21:31 | 3164795 FischerBlack
FischerBlack's picture

Replicating yen

A leader cannot be found

The samurai die

Fri, 01/18/2013 - 00:47 | 3165273 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture


Thu, 01/17/2013 - 22:05 | 3164905 alfbell
alfbell's picture

Japan: another country that was busy and on its way to becoming an empire, having been SHORT CIRCUITED.

Those bankers are good. They are kicking ass in Japan, EU, and USA. I guess those of us remaining after the collapse will just have to go find them all and cut their heads off and then start all over again.

Thu, 01/17/2013 - 22:38 | 3164936 besnook
besnook's picture

japan will do what it has always done since tokugawa and much before in a regional way under the shogunate. they will rally behind nationalism to bite the bullet(possible pun) and take dramatic action in the name of the rising sun. quadrillion yen tokens issued by the diet will solve all their problems, devalue the yen, extinguish their debt while allowing china to pay for japanese stuff in worthless dollars(to chinese) exchanged for valuable treaury bills(to the japanese).

the problem with western analysis of japan is they think japan will act like a westerner when the reality is japan will act like a westerner when it derives a benefit but will act like a japanese when it needs to. the old western stereotype of the inscutable fanatic has been unleashed and a financial pearl harbor is imminent.

Thu, 01/17/2013 - 22:19 | 3164952 besnook
besnook's picture

before the yen there was the sen, 1/100th of a yen.

Fri, 01/18/2013 - 00:03 | 3165197 earleflorida
earleflorida's picture

poor abe... that's all i can say?

i can remember as if it were 1979 yesterday, when carter named volcker fed chairman... the nascent portmanteau-word, 'stagflation' was just an aberration... a one-off, but, soon to find its place in america's legendary economic's 101, lexicon!

poor carter? what the arab's did to him via the morgan's, rockefeller's and rothschild's?... but, mostly the subversion orchestrated by the [in]famous, 'cowboys from texas [wti]'?

sadly, the guy didn't stand a chance against reagan's dynamic quad-aegis.

where does this lead to... you say? stagflation is here, period! so what! we all know that... but, it is what the fed does, that keeps us up at night, or is it? the simple hypothesis i can only surmise is that the fed will quickly step on the 'bls-feet' to get the unemployment numbers down to end the monetary easing! this is crazy to think so radical, but is it?

a new? fed chairman that comes in after unemployment is no longer a drag on the economy [soon, very soon] and starts to raise rates before the world even gets a whiff. rates could go up 50-75bp overnite and 50bp semi-annually... perhaps as much as 2.25%/ 2.5% in one year!

it's comin... and, when it comes it'll be fast and furious!

please forward your arrows to the 'who gives a fuck dept.'... thanks and good night.   

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