Guest Post: Is Abenomics Going To Put Japan Back On The Map?

Tyler Durden's picture

Authored by Keith Fitz-Gerald, via The Burning Platform blog,

On the surface, Abenomics – the radical unlimited stimulus plan put in place by newly elected Japanese PM Shinzo Abe – appears to be working.

The Nikkei is up 68% since July, 2012, the yen has weakened by 26% over the same time frame, and Japanese consumer confidence is up sharply to the highest levels in six years.

The theory behind Abenomics is that the rising stock market will create capital, and the falling yen will make Japan’s export-based economy more competitive in global markets, while newly profitable companies will hire more workers.

Don’t hold your breath.

As I noted during a recent interview on NHK, Japan’s national public broadcasting network, the beleaguered island nation faces significant challenges:

  • Japanese debt is already nearly 500% of GDP when you add up public, private, and corporate obligations. That’s the highest on the planet and makes Europe’s spending look positively miserly. Mimicking Bernanke’s helicopter hijinks won’t help on anything more than a short-term basis.
  • More money does not equal greater innovation. Many Japanese companies are struggling to remain competitive in industries they once dominated. Examples include Sony, Matsushita, and Fujitsu.
  • Japanese utilities literally can’t produce enough power to fuel a Japanese recovery . Only three out of 54 nuclear reactors are running, and the national LNG import bill hit ¥621 billion in March. That’s more than double pre-quake limits, according to the Ministry of Finance. These costs will continue to rise as the yen weakens further. I doubt very seriously that any increase in export sales will be enough to offset rising energy costs, because margins are going to get pinched.
  • Formerly deep trade surpluses are now deficits.
  • Prices in Japan are rising faster than income at the same time that taxes are being raised. That’s a lethal combination that is serioiusly pinching consumers.
  • Japanese corporations, once keen to return profits home, are now expanding overseas and keeping money outside Japan.
  • Japan’s population is aging so fast that, effectively, there are no new workers, a problem that is compounded by the near complete lack of a workable immigration policy.

The bottom line?

Japan is making the same mistakes we’re making … or we’re making the same mistakes they’ve already made – it’s hard to tell.

Either way, the bottom line is pretty simple: You give me a trillion yen and I’ll give you a good time, too.

In order for Abenomics to work, four things have to happen:

  1. Japanese banks cannot hoard money the way big banks have in the US. They have simply got to keep it moving right through to Japanese citizens and small local businesses.
  2. Japanese bond market participants have to be willing to maintain bidding as the Bank of Japan conducts “market operations,” which is Fed-speak for interfering with normal pricing dynamics in an effort to maintain stability. If bidders walk away, the bond market will fail and the government will have to contend with offshore derivatives traders who are already lining up to play the same games they did in Italy, Spain, Greece, and the balance of the EU.
  3. Japanese consumers have to engage. If wages fail to increase, living standards will decline and Abe will be up a creek without a paddle – and yes, I mean THAT creek.
  4. The international banking community has to allow Japan to debase its currency without punitive repercussions. So far the G20 has acquiesced, but their tacit approval doesn’t really mean much. They have no choice but to go along with Japan’s moves. Kuroda, who is Bernanke’s equivalent at the Bank of Japan and Abe’s sidekick, has made it clear he is fully committed to the program, no matter what the West thinks.

Longer-term, Abenomics is a recipe for disaster – have no illusions about that. Japan, as John Mauldin likes to say, is a bug in search of a windshield. No nation in the history of mankind has ever bailed itself out on anything more than a short-term basis by pursuing a course like Japan’s.

But short-term … that’s another matter entirely, and therein lies opportunity.

Historically, every 10% drop in the yen versus the dollar has translated to a 0.3% rise in Japanese GDP the following year, noted Kiichi Murashima, chief economist at Citi in an FT interview.

You cannot say the same thing about Japanese stocks.

Since the Japanese market’s initially collapse in 1991, the world has watched with bated breath as the Nikkei has risen … and plunged with alarming regularity.

If you’re going to buy and sell like a trader and you’re nimble, you can ride the Japanese equity bull – pun absolutely intended. Most investors aren’t so equipped, though, -and so the “buy and hope” approach they favor is far more likely to leave them disappointed than profitable.

Japanese bonds are probably of dubious value, too. So far they’ve been stable, because Japan has been able to issue mountains of debt to its own dutiful citizens. The cost of debt service has been negligible, because nearly all of it was held domestically.

Now, however, Japan has got a very different situation on its hands. Any rise in long-term rates, let alone a significant one like Kuroda is planning, is going to dramatically hike the cost of debt service to unsustainable levels. Factor in Japan’s rapidly aging population and dwindling workforce, and you’re looking at a far smaller pool of bond buyers.

My expectation is that Japan will be forced into international bond markets no later than 2015, which will effectively double their capital costs. Without meaningful social security reform and spending cuts, that’s going to really impact things.

That’s why I’d rather short the Japanese yen.

Stocks are fickle. Abe doesn’t care whether they go up or down. Bonds are a part of Kuroda’s repurchasing agenda, so those are covered, too. But the yen stands on its own.

In that sense, it’s the key to the proverbial castle.

In order to conduct any sort of serious financial reform, Abe is going to have to move the yen’s needle. Everything in corporate Japan depends on it.

Since I first brought this trade to everybody’s attention in Money Morning in February, 2012, the yen has dropped by 30%, and the investment vehicle I recommended, the ProShares UltraShort Yen Fund, is up more than 60% as it flirts with the psychologically important ¥100/$1USD level.

Now, having come close enough to that target for government work, I think the next stop is ¥125 to the dollar, which means that even if you missed the first part of this trade, it’s not too late to get on board.

And if you’re already holding Japanese equities?

Don’t look a gift horse in the mouth.

Hedge the snot out of them or sell into strength – equity markets are not as directly connected to central banking stimulus efforts. But they are absolutely linked to traders’ expectations, which can and do change all too frequently on nothing more than a whim or an errant “tweet,” as we have recently seen.

You don’t want to be left holding the bag.

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kaiserhoff's picture

Good question Knuks.

He must mean the carry trade map. 

Now that has legs.

Shell Game's picture

Well, if Abenomics doesn't put Japan on the map at least it's put on the ZH banner ads.

Aguadulce's picture

I'll take jap anus relations for 200.

That's, Japan US relations Mr. Connery.

Burt Gummer's picture

Back on the map? No, it's going to put them straight into the ocean, 20,000 leagues of yen deep to every other fiat currency out there in double quick time.


Buh Bye Japan!

kaiserhoff's picture

Not only has no county ever "devalued" to prosperity,

Japan will have to import most of its energy as far into the future as anyone can see.

How could this work?

Ness.'s picture

How could this work?

It won't.

Yancey Ward's picture

Don't you worry your pretty little head- they got top men working on it.  Top men.

lolmao500's picture

In other news, Japanese schools to begin teaching safe tentacle sex.

buzzsaw99's picture

workable immigration policy - lulz

Hedgetard55's picture

For now, it's free money. The Japs are transferring their own people's wealth to me, through my Japan fund, and will continue to do so for a while yet. Just as Ben did the same to us.

suicidalpsychologist's picture

What about  when  new earthquakes/ tsunamis will completely break open the already badly damaged nuclear plants and make the whole island/country known as japan unhabitable for centuries if not milleniums, and probably also the whole pacific ocean and other asian areas.


Japanese are depressed lost fucked up people who somehow know they re toast in basically all aspects and are just waiting to disapear, that is sad. I see a massive exodus of their youth to north america and australia once the island becomes completely tainted by the air, water leaks.

kaiserhoff's picture

Never happen.

We only take the illiterate, useless, wretched refuse of your radiated shores.

kwatinhu's picture

Looks like all the other Asian Tigers are doing to Japan what Japan did to the US back in the day. Boo hoo. That plus the tsunami, the aging population with no immigration, ... looks a little bleak eh?

williambanzai7's picture

The equity "bull" has been spotted in a Korean sushi bar on the Upper East side.

toadold's picture

I noticed that S.Korea has just lowered its interest rates to play the export game.  They are at least importing women to make up for the shortage.  Not too many S.Korean girls from Seoul want to marry farmers these days.

WelfareFTW's picture

Destination Japan 2016... Mission: To get Geisha'd up with Cheap Yen!! woohoo!

They trynna catch me ridin dirty's picture

I am so sick of hearing about Japan's "aging population" and "immigration policy."  On what planet would Japan opening up its borders to third world immigration be a good idea.  Look at what has happened to Europe and America's cities.  But that doesn't matter to these NWO serpents as long as the GDP looks good, huh.  Who cares if the average citizen's quality of life has fallen through the floor.

For anyone who's ever been to Japan, even the dimmest observer can see that a Japan full of Japanese people with an average age of 65 is still better off than a Japan full of Somalians and Yemenites with an average age of 25.  Japan has virtually no crime, by far one of the most productive populations in the world, and a quality of life for the average citizen that would make many Americans jealous.  Under no circumstances would it be a good idea for Japan to open its doors to immigrants from even China or Korea, let alone the third world.

What two atomic bombs could not destroy in Japan, rest assured, third world immigration will.

bank guy in Brussels's picture

There are immigrants from some cultures who don't cause problems, particularly Asian

Filipinas have already established a very good reputation for themselves in Japan, and the Japanese are considering further expansion on that basis

Japan having controlled immigration from some cultures, like Filipinos and Filipinas, will do a great deal for their economy and lives without damaging their culture, crime rates or quality of life

It was on ZeroHedge the other day, that in the USA, Asian-born people have lower unemployment than the native-born Americans

In general it does seem that East and South Asian peoples cause the least immigration problems ... they work hard and do not disturb the social order in their new homelands

They trynna catch me ridin dirty's picture

Yes and no. An influx of mainland Chinese with their corrupt Guanxi culture, or Koreans with their ethnic networking and deluded belief that the Japanese have Holocausted them in the past, would mean the end of Japan as a nation with first world living and working standards.

Japan is fine when it's full of Japanese people. In fact, it's best that way.

malikai's picture

So the Guanxi are the only corrupted ones in Japan?


History is history, but if my grandma was raped, imprisoned, and murdered during the Japanese occupation, I'd have strong feelings too.

They trynna catch me ridin dirty's picture

Have all the strong feelings you want against Japan. Just don't immigrate there and then try to play the victim card against the Japanese in their own country like so many Koreans do.

MiltonFriedmansNightmare's picture

What two atomic bombs could not destroy in Japan, Central Banksters will.

PiltdownMan's picture

How about nooooooooooooo!


ISEEIT's picture

Desperation is the last gasp. This is how society dies. It's also how society is born.

besnook's picture

japan must realize they have to give up the easter island model of economics in favor of a post ponzi kin based sustainable economy focusing upon productivity per capita rather than the bankster debt based fiat scheme of forever growth model.

polo007's picture

Since the financial crash of 2008 the western economies (US, Euro zone and Japan) have been using quantitative easing (QE). QE is not new. It was also used extensively in the 1930's. Japan has been using forms of QE for over a decade. But when one looks at the velocity of money and the money multiplier the money is not getting into the broader economy. But it is getting into the stock markets largely through the large money center banks that are the major beneficiaries of QE. Rising stock market valuations help the money center banks balance sheets. It is believed for the US at least that QE is primarily to help prop up the banking systems in the US, the Euro zone and Japan. The banking system remains saddled with huge amounts of debt that is either toxic or uncollectable.

GCT's picture

The can will continue to be kicked for a decade or two in the USA.  I am not sure if the USA will implode before Japan due to demographics.  Having lived in Japan the people will tolerate alot more then we will in the USA. 

fuckitall's picture

Japan will show the world what open-ended QE during an economic depression does to a non-reserve currency.

(Hint: Zimbabwe)

And btw, USD won't be reserve currency much longer.

When economic depression halts wealth creation, governments start looting whatever wealth is there (eating the seed corn).  QE is how they do it.  Saving banks is the cover story.

toadhall's picture



The Brits will beat the Japs to it. Chinnook Carne is on his way!