Submitted by Pater Tenebrarum of Acting-Man blog,
We recently opined that it takes a decline of between 1,500 to 2,000 points in the Nikkei to raise doubts about 'Abenomics' (i.e., hoary inflationism combined with deficit spending). In order to test that hypothesis we surveyed a few headlines that have appeared in the press between November and January. Apparently even smaller declines in the Nikkei tend to sow doubt. It is really quite amazing how the stock market almost literally 'writes the news'. The same goes of course for the US and Europe – all the talk about 'recovery' is mainly motivated by rising asset prices. In other words, people mistake the temporary effects of massive monetary inflation for a sign of 'growth'. It isn't. Rather, it is a sign that scarce capital is likely being consumed.
Anyway, here is a chart of the Nikkei with accompanying newspaper headlines – it is really quite funny:
Abenomics: lauded when the Nikkei rallies, doubted as soon as it begins to correct – click to enlarge.
Of the articles listed in the chart above, the following struck us as especially interesting, as it reflects the current consensus view quite well: “Abenomics Needs a Booster Shot”. Note that the article fails to mention a very important point: the rate of growth of Japan's money supply remains subdued, as the BoJ's 'QE' modus operandi tends to massively increase bank reserves, but fails to boost the money supply directly. Other than that, the article points out that further measures from the BoJ should be expected, as it will attempt to 'balance out' the effect of the coming sales tax increase. That it is basically sheer lunacy to expect genuine growth to result from a combination of inflationism and mercantilism is of course not discussed.
The Nikkei has meanwhile arrived at a crucial support level – a bounce from here seems likely. Conversely, if this support level fails, it would have to be seen as a big short to medium term negative in our opinion:
The Nikkei currently resides near converging support lines – click to enlarge.
JGB and Yen
We just came across an article published in 2009 about the 'impending big crash in the JGB market'. The risks to JGBs are currently no doubt greater than they have been in quite some time, but this example shows why shorting JGBs has become widely known as the 'widow-maker trade'. Time and again the crash of this market has been expected and speculated on – and yet, JGBs remain only a smidgen below their all time high:
10 year JGB: at 144.86, it is only a little over one point below its all time closing high – click to enlarge.
So far, there's still only one JGB crash:
'Crash' – a novel by JG Ballard (or JGB for short).
Clearly, the JGB market doubts that 'Abenomics' will manage to produce a lasting increase in inflation, in spite of the recent uptick in consumer prices on account of yen weakness.
The yen continues to look perky. Money supply growth in Japan remains very low compared to that in other developed nations, and the entire decline in the yen seems to have been driven by a change in sentiment alone – click to enlarge.
We are still wondering what Abenomics is supposed to achieve. With a graying population and consequently a shrinking work force, inflationary policies seem especially ill-conceived in Japan. Given that unemployment was already very low when Abe came to power, there seems to be no point in employing the Keynesian trick of lowering the real incomes of workers even from the point of view of those who normally support such policies (which sadly includes most of the economic mainstream).
If the BoJ were to alter its modus operandi and actually boost the money supply directly, an upset in the the JGB market would become increasingly likely. Maintaining the market's calm is predicated on the belief that the inflationary policy pursued by Abe/Kuroda will actually fail. Moreover, Japan's government can simply not afford higher borrowing costs, as 25% of its tax revenue is already going toward merely servicing interest costs on its current outstanding debt. In other words, Japan's government bond market is a glaring example of a Ponzi scheme (actually, all government bond markets are, but Japan's is topping the list among industrialized nations). If the BoJ 'succeeds', this might ultimately be the consequence:
Elbonian inflation: purchasing a potato becomes a complex task.