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Abenomics 101 - The 15 Most Frequently Asked Questions

Tyler Durden's picture





 

With the first arrow of Abenomics perhaps hitting its limit, it will be the second and third arrows that need to occur quickly and aggressively to carry this momentum forward (and for the economy to grow into stock valuations). Barclays lays out 15 of its most frequently asked questions below but concerns remain as the BoJ’s planned absorption of nearly 80% of new JGB issuance from the markets this fiscal year has triggered a dramatic change not only in JGB supply/demand and ownership structure but in the JGB market risk profile itself, which has moved from “low carry, low volatility and high liquidity (superior to other assets from perspective of risk-adjusted returns or Sharpe ratio)” to “low carry, high volatility and low liquidity (inferior from same perspective)”. Barclays added that with a wave of major political and policy events ahead, starting with a crucial Upper House election, there was no big change in the basic belief among foreign investors that Japan is likely to be the main source of surprise for the global economy and of volatility in financial markets.

Via Barclays:

Q1: Is the BoJ’s 2% price stability target achievable?
A1: It will be difficult through monetary easing alone

Q2: Where might a surprise appear in inflation trends?
A2: Inflation tends to jump unexpectedly when a combination of monetary easing and significant fiscal expansion coincides with some sort of supply shock.

Q3: What transmission channel is the BoJ envisioning for achieving its inflation target?
A3: Since the interest rate and credit channels are unlikely to recover anytime soon, the BoJ will have to depend largely on more accommodative financial conditions via higher share prices and a weaker yen.

Q4: What other monetary policy actions are expected?
A4: We think the BoJ will likely be compelled to ease again in 2H FY13 (most likely in October), consisting mainly of increased purchasing of ETFs as the most feasible risk asset.

 

Q5: How do we describe the government’s fiscal policy stance for 2013-14?
A5: Assuming no additional fiscal measures, fiscal policy will shift from a markedly expansionary stance relative to other developed nations in 2013 to an abrupt contractionary stance next year.

Q6: What is the likelihood of a return to a public-spending-driven economic recovery?
A6: If the economy is underpinned by strong overseas demand (robust exports), as in the Koizumi era, it would reduce the chances of a major fiscal expansion or resulting economic rebound fueled by public works.

Q7: Is government debt sustainable?
A7: This will depend on growth initiatives. If the government continues to depend unduly on QQE without a proper growth strategy (sluggish potential growth), the possibility of a ‘sell-Japan’ scenario would reemerge over the long term.

Q8: How has the government’s growth strategy progressed?
A8: There has been no notable progress yet. Momentum for growth initiatives may pick up depending on the Upper House election results, but key measures such as a corporate tax cut and easing of job dismissal regulations could take considerable time.

Q9: Are Japanese stocks overvalued?
A9: Japanese stocks are superficially rich as measured by valuations such as P/E. However, we believe share prices have further upside as long as excess liquidity continues to curb the ERP.

Q10: What will be necessary to ensure a more sustained rise in share prices?
A10: A more sustained rise in the liquidity-driven stock market will require a return of surplus funds to shareholders when real interest rates fall into negative territory, a cut in corporate tax rates, and higher financial leverage.

Q11: How has the structure of JGB markets changed since the launch of QQE?
A11: The post-QQE risk profile of JGB markets has changed dramatically from “low carry, low volatility and high liquidity (high Sharpe ratio)” to “low carry, high volatility and low liquidity (low Sharpe ratio).”

Q12: Will QQE trigger significant portfolio rebalancing by financial institutions?
A12: Banks will reduce their JGB holdings substantially in 2013-14. Still, their considerably higher risk tolerance levels compared with the VaR shock of 2003 should act as a buffer for JGB markets.

Q13: Will the yen’s decline accelerate? What is the risk of reversal to yen appreciation?
A13: The fall in the yen’s value could hasten if a further BoJ easing coincides with a reduction by the Fed in its QE. However, from a supply/demand perspective, purchasing of Japanese shares by overseas investors should offset the effect of portfolio rebalancing by domestic investors, suggesting that the pace of yen depreciation should slow.

Q14: What political developments can be expected after the Upper House election?
A14: If the LDP secures a majority in the Upper House, the government will have control of both houses for the first time in six years, setting the stage for a long, stable administration. The political stability could be the driving force for growth initiatives.

Q15: What are the best- and worst-case scenarios for Abenomics?
A15: The best-case scenario is the LDP wins a large majority in the Upper House election and more momentum for growth initiatives, along with QQE to ease near-term deflationary pressure. The worst case would be a retreat in growth initiatives and prolonged overdependence on QQE.

Whether the markets go for a buy-Japan or sell-Japan scenario will depend in good part on the results of important policy and political events in the next three months. Of particular note are: 1) BoJ Monetary Policy Meetings; 2) the Council on Economic and Fiscal Policy’s Basic Stance for Economic and Fiscal Management, scheduled for release in June, and the outline of growth initiatives by the Industrial Competitiveness Council and Council for Regulatory Reform; and 3) the Upper House election (as well as the Tokyo Metropolitan Assembly election, a prelude for the national poll).

 

Source: Barclays

 


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Fri, 05/24/2013 - 20:31 | Link to Comment GMadScientist
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"Did he just really say that out loud?"

"WTF?"

 

Fri, 05/24/2013 - 21:01 | Link to Comment NotApplicable
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Q0: Are we all fucked?

Fri, 05/24/2013 - 21:22 | Link to Comment LetThemEatRand
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AO:  In the unlikely event that were to occur, we are confident that by increasing the size of the recepticle of the monetary shaft that any fucking will not be noticed.  Additionally, we have taken steps to inebriate the receiver of said hypothetical fucking by rehypothecating the money supply of the fuckee in a manner that makes it unclear the following morning whether any fucking actually occurred.

Fri, 05/24/2013 - 23:42 | Link to Comment JackT
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This means "risk on" right?
(Actually I logged in just to give you an up arrow)

Fri, 05/24/2013 - 20:35 | Link to Comment lolmao500
lolmao500's picture

Missing : is Abe out of his fucking mind?

Fri, 05/24/2013 - 20:46 | Link to Comment knukles
knukles's picture

Honest Abe-a-nomics.
Grow a beard, dude.

Ya know, I really hate stuff written in that Q&A format for those of the lower IQ pool such as myself as it's insulting.  I much prefer something like when Oblahma lectures and pontificates in is arrogant manner, dissembling and making no fucking sense at all 'cause then I can freely drool while my mind wanders off to imaginary realms of candy, back scratches and warm liver compresses on  my soft dripping pustule.

Sat, 05/25/2013 - 08:26 | Link to Comment GMadScientist
GMadScientist's picture

TMI.

Fri, 05/24/2013 - 20:53 | Link to Comment AndrewJackson
AndrewJackson's picture

Did Barclays hire the BLS head data forcaster. I have never seen such a bull shit projection debt projection in my life. With "growth incentives" their debt to gdp will flat line for 10 years? Really. At least spice your bogus debt numbers with a little monte carlo simulation to make it appear realistic.

Sat, 05/25/2013 - 09:40 | Link to Comment malikai
malikai's picture

Yea, um. Speaking of BLS numbers..

Isn't it amazing how you can be paying nearly 3x as much for electrical generation than you were just two short years ago, 40% more for crude and distillates, at least 15% more for food, and still have only 2% ish inflation?

Anyway, I'm sure it's nothing. Those guys who calculate inflation are of course the experts, after all.

Sat, 05/25/2013 - 10:28 | Link to Comment him
him's picture

Sure, experts at destroying peoples' lives...

Fri, 05/24/2013 - 21:05 | Link to Comment Fuku Ben
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Alternative Media Top 1 Question

Q1: What is your plan B?
A1: I have instructed Minister Toshimitsu Motegi to restart the idle reactors across the country

Fri, 05/24/2013 - 22:38 | Link to Comment AndrewJackson
AndrewJackson's picture

That is effing brilliant.

Fri, 05/24/2013 - 23:27 | Link to Comment GMadScientist
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And "Tha Choppa".

Fri, 05/24/2013 - 21:24 | Link to Comment Yen Cross
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     "With the first arrow of Abenomics perhaps hitting its limit, it will be the second and third arrows that need to occur quickly and aggressively to carry this momentum forward (and for the economy to grow into stock valuations)."

     There's no such thing as triple-tops, or bottoms. When a range is(fully) retraced in either direction, It's confirmed or rejected. (technically speaking).

     For example; gbp/aud has technically confirmed a double top. [IMG]http://imageshack.us/a/img547/1212/gutop.png[/IMG]

  Knowing the crosses are extremely overbought, I would be looking at shorting this trade.

     Rest assured, Kuroda and Co. will keep chasing the top. (Japan can print just like Chair Satan)

Sat, 05/25/2013 - 10:31 | Link to Comment disabledvet
disabledvet's picture

Well the question we've been asking for years here is "what happens when you can longer print?" restarting the reactors as a form of increasing output? Really? How so? Seems to me usage is capped by growth in the economy.

Fri, 05/24/2013 - 21:32 | Link to Comment besnook
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if this doesn't work then what next? a financial atom bomb will be dropped on the fed and ecb in the form of the quadrillion yen coin. we will send gold models of the genbaku dome to all parties as a token of appreciation for playing the game with japan.

 

Fri, 05/24/2013 - 21:59 | Link to Comment RottenAlpha
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Fri, 05/24/2013 - 22:05 | Link to Comment Yen Cross
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  Well done.

Fri, 05/24/2013 - 22:06 | Link to Comment ISEEIT
ISEEIT's picture

Japan is truly fucked. Stage 4 terminal governance.

FORWARD!

Fri, 05/24/2013 - 22:13 | Link to Comment Yen Cross
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    How do you hyphenate (Japan & Alcatraz)?

Sat, 05/25/2013 - 05:50 | Link to Comment BigInJapan
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Escape From Japalcatraz?

 

Japalcatraz - say it with a David Attenbobough accent.

The Japalcatraz is an animal of legend. Drunk off its own hubris it stumbles forth in the night twoards some not so distant cliff. Believeing it can fly, the Japalcatraz walks off the cliff and while falling to its death, assures itself that everything is fine. Only upon impact with the ground does the Japalcatraz come to the realization that it has been dead for quite some time and the walking was merely the synapses firing, waiting to run out of juice.

Fri, 05/24/2013 - 22:53 | Link to Comment chindit13
chindit13's picture

Two---actually probably a lot more---major problems with Abenomics:

1) Abe believes Japan's debt can be both repaid and made less onerous by a severe weakening of the yen. Theoretically corporate Japan becomes more competitive, earns a lot of FX, and then that FX translated into yen profits increases tax revenue to pay down old debt and obviate the need for new debt.  All well and good, provided another China-sized market emerges from nowhere, grows 10+% a year for a dozen years, and actually likes Japan.  That Super Market doesn't seem to exist on this planet.  Also, there is an underlying assumption that Japanese domestic industry hasn't been hollowed out, and that somehow corporate Japan's foreign manufacturing investments, which become less competitive as the yen weakens, don't become a drag on corporate profitability, and hence tax revenues.

2)  The BoJ will find it difficult to find JGB sellers in a rising interest rate environment. That might sound backwards, but owing to the peculiarities of Japanese accounting, it is not.  JGB holders---banks, pensions and insurers---regularly cross their holdings internally so as to realize gains. It has been about their only source of profit for years, other than additional financial shananigans.  The JGBs go back on the books at the crossed rate.  If rates subsequently rise, these JGBs have a paper loss.  No one will want to realize the losses, since realized gains---for contractual payout purposes and reported profitability---must be offset by realized losses.  Unrealized losses can be ignored, and carried at cost forever.  If rates rise, nobody will want to sell and be forced to realize a loss.  The BoJ may print buckets of money, but have nothing to buy.  Oddly, that would lead to lower rates, as the marginal buyer (BoJ) would be the one setting the price.  Lower rates haven't done Japan a lick of good for two decades.  The printed money won't get out into the market, because the transmission mechanism is flawed by the very nature of the system itself.  Those who follow this system of accounting, and who have been crossing their JGBs for years, include everyone from banks to insurers to pension funds to corporates to Yucho and Kampo (Postal Savings and Postal Insurance).  Mrs. Watanabe, if she holds JGBs, might sell, and the foreigners who hold about 8% of Japanese sovereign debt might want to sell, but who else?  That leaves ETFs as the one available transmission mechanism.  ETFs are new enough that few are holding long term unrealized losers, so sellers might emerge.  Single name issues, however, run into the same accounting gimmickry that hobbles JGBs.  Some people are still holding NTT at 3.4 million yen per share.

All of the legacy issues Japan created to pretend it was doing okay since 1990 are now impediments to any effectiveness of Abenomics. It's like an army that laid out a massive minefield, got flanked, and was forced to retreat through its own handiwork.

One's head spins.

Sat, 05/25/2013 - 00:40 | Link to Comment Yen Cross
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      I did a screen shot of your comment. Gramatical structure, is a plus.

Sat, 05/25/2013 - 04:22 | Link to Comment falak pema
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Here is an interesting viewpoint from AE Pritchard  of Telegraph the celebrated financial analyst that should raise some eybrows :

 

http://www.businessinsider.com/bank-of-japan-must-crush-resistance-2013-5

Sat, 05/25/2013 - 06:46 | Link to Comment chindit13
chindit13's picture

Thanks for the link.  I hadn't read that yet.

I wonder how widely understood it is that large holders of JGBs are constrained by the nature of the system?  Banks, insurers and pensions are quite hesitant to take a loss, especially those who must make contractually agreed-upon payouts each year (which can only come from net realized gains).

If the BoJ wants to liquify and inflate, they are going to have to let these guys get out at favorable prices.  I imagine the BoJ is now consulting with the large holders to see where their current book cost is.  Looks like, for all intents and purposes, the BoJ will have to peg, even if it is on a case by case basis.  That would necessarily be non-transparent, but Japan has no problem with being opaque.

The next question then becomes, will newly liquified banks et al hang around in low-yielding yen-based paper, or will there be capital flight? Also, can Japan retool behind a weaker yen? Do they have the labor force? Is there a market for them? Do banks want that risk, considering that they are still loaded up with offshore losses in non-consolidated subsidiaries they formed in the early 1990s.

Again, for people who want to better understand Post Bubble corporate Japan, read the book on Olympus.

Sat, 05/25/2013 - 08:19 | Link to Comment GMadScientist
GMadScientist's picture

So here's what I don't understand: how do you make your currency weak relative to the reserve currency for pricing energy when you're beholden to the outside world for self-same energy?

Seems like podiatric target practice.

Sat, 05/25/2013 - 09:25 | Link to Comment chindit13
chindit13's picture

I'm sure you don't think Abe has thought this through anymore than Bernanke thought about exit strategy when he embarked on QE. I'll be damned if I can figure out a way this ends in anything other than disaster (though it can appear sweet in the very short term).  I've considered as many possible permutations as I can, and none comes up roses. There must be something, something positive, which I am not considering.  If not, Abe is stark raving mad and he is leading the entire nation over the Okinawan cliffs.  The LDP was never competent, they were just lucky for a few years, being in the right place at the right time.

Sat, 05/25/2013 - 06:32 | Link to Comment NipponMarketBlog
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60% of volume on the Tokyo Stock Exchange is driven by foreign investors. 95% of of those foreign investors do not care whether the underlying economy points to a "buy-Japan or sell-Japan scenario". They play the liquidity momentum on the way up, and then they dump their holdings (most of them on the way down and at a lower level than where they bought in). If (or rather, when) they decide to pull the plug on their Japan holdings, the equity market and the Yen is going to take a tumble.

Regarding this: "The best-case scenario is the LDP wins a large majority in the Upper House election and more momentum for growth initiatives."

Historically, policy initiatives in Japan have had little to no lasting effects on the economy. Why? Because the underlying issues (inefficiencies in the coporate sector) are virtually impossible for the government to affect directly.

The only thing that could permanently improve corporate Japan's competitiveness is a round of very painful 'creative destruction' where all the zombie-companies (especially in the mainly domestic demand orientated sectors) are purged from the system, and what remains is a much healthier and much stronger and better managed corporate sector. This however, is the only thing the political classes will not accept, so they will keep patching up the current system (through fiscal stimulus and monetary initiatives), in the same way that the Fed and the Tresuary patched up the investment banks in 2008, when in fact it would have been much healthier for the system as a whole if most of them had been allowed to fail.

 

http://nipponmarketblog.wordpress.com/

Sat, 05/25/2013 - 05:41 | Link to Comment BigInJapan
BigInJapan's picture

I don't give a fuck what they say, there's nowhere to go but down for Japan. Find me one realistic scenario in which the economy doesn't flatline and make me a believer.

 

I'm hitting the rum here in an hour or so. Watching Rome burn.

Sat, 05/25/2013 - 08:20 | Link to Comment GMadScientist
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Many would've said the same about America circa 1938 or so. ;)

Sat, 05/25/2013 - 06:35 | Link to Comment WaEver
WaEver's picture

If common sense/history teaches you money printing leads you to the abyss, not a 1000 eCONomists should make you believe otherwise.

Sat, 05/25/2013 - 08:24 | Link to Comment GMadScientist
GMadScientist's picture

They aren't exactly making more informed decisions than your average heroin junkie; there's the consequence of not printing and precious little else in their pointed little heads.

 

Sat, 05/25/2013 - 12:36 | Link to Comment John Law Lives
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Q4: What other monetary policy actions are expected?

A4: We think the BoJ will likely be compelled to ease again in 2H FY13 (most likely in October), consisting mainly of increased purchasing of ETFs as the most feasible risk asset.

-------------------------------------------------------------

Holy frijole.  Broken Arrow.  There's no hiding it now...

http://www.youtube.com/watch?v=TqKLtp6MRv4

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