Time For Abe To Start Worrying About His Approval Rating?
Up until now, Japan's six month experiment with Abenomics has resulted in consecutive months of record trade deficits, soaring energy costs, rising staples prices and a jump in bond volatility and yields so dramatic it led to consecutive halts in the Treasury market and the bond market window slamming shut for corporate credits. It has not resulted in a jump in economic output, in capital spending, and an increase in wages: the three key things needed for a sustainable and viable recovery (despite projections that 6-12 months in the future all shall be well, and the BOJ hiking its economic assessment almost on a daily basis).
Yet all of this was ignored for one simple reason: the Nikkei was soaring, and when the stock market has nearly doubled in 6 months, everyone is by definition is happy. However, in the past three weeks things have changed drastically, with the Nikkei now solidly in bear market territory, and the USDJPY unable to catch a bid to save its life. Which naturally brings up the question: has Abenomics failed?
Impossible, Abe's fans will say: he has barely had a chance to explore his policies. That maybe true, but one major problem with Japanese society is that it is very impatient when it comes to its politicians. In fact, the median tenure in office of each of its last 10 prime ministers is precisely 419 days, or just over 1 year. And Abe is already six months into his term (his second term, of course: let's not forget he quit his first stint as PM after exactly 365 days due to diarrhea). What is worse is that the key variable that has kept his approval rating high has been the stock market: worse, because the stock market is now in freefall, and with few favorable things Abe can point to in the economy (recall that his entire policy is based on a stock-market driven wealth effect - no Nikkei ramp, no wealth effect, no inflation), he suddenly finds himself in a support vacuum.
So where is Abe's approval rating in the context of all other recent prime ministers? Courtesy of CLSA we know the answer, and it is one which if mean reversion works, spells lots of pain in the immediate future for Abe at the polls.
Six months in and Abe has the highest approval rating of the past 8 prime minister! Forget the wealth effect - talk about the ratings approval effect! Here is the take of Chris Wood from CLSA on this divergence:
It is the case that Prime Minister Shinzo Abe’s approval ratings remain high in terms of the opinion polls despite a recent slip downward. Thus, the latest Nikkei poll conducted in late May showed that the approval rating for Abe’s cabinet fell from 76% in April to 68% in May. That is still 13ppt higher than Koizumi was after an equivalent time in office (see Figure 15).
But what goes up, must come down: first the Nikkei, and then Abe's approval rating. And as the Nikkei goes, so goes, for better or worse, the popularity and approval of both Abenomics, and of Abe himself.
So what happens to the great global reflation experiment and the freebie $75 billion (or nearly double the Fed's) monthly liquidity injections from the BOJ should there be an unexpected and "unmodeled" departure at the very top? After all, it won't be Abe's first time he has resigned his PM post.
And if Abe is too busy worrying about other things, just what is Bernanke's Plan B? Because if the Fed tapers at a time when Japan is forced to end its idiotic reflation experiment, and the global liquidity tsunami is suddenly cut by more than 50%, then just how will Bernanke support the S&P500 wealth effect - the last and only indication that Bernanke's policies have not been a complete and utter disaster.