Can Japan Ever End Its Easy-Money Addiction?

Tyler Durden's picture

Authored by Brendan Brown via The Mises Institute,

The shock landslide defeat of PM Shinzo Abe’s Liberal Democratic Party (LDP) in the recent Tokyo metropolitan elections - and the triumph there of Tokyo Governor Koike’s new party (Tomin First) - has lit a faint hope that the radical Japanese monetary expansion policy could be on its way out. The flickering light though is not strong enough to soothe the mania in Japan’s carry trades and so the yen continued to slide in the aftermath of the elections. Between mid-June and early July the Japanese currency depreciated by some 5% against the US dollar and 10% against the euro. 

The perception in currency markets is that Japan will not be embarking on monetary normalization this year or next, in contrast to Europe where ECB Chief Draghi has hinted that the train (to monetary normalization) will start next year, even though the journey promises to be very slow. The US train to normalization continues at a glacially slow pace including some periods of reverse movement. Moreover the monetary climate prior to the journey commencing is even more extreme in the case of Japan than in Europe or the US.

It was possible to imagine that the shock election setback for the LDP could have caused Shinzo Abe to withdraw support from his money-printer in chief, Bank of Japan governor Haruhiko Kuroda (whose term ends in April 2018), thereby signaling an early end to negative interest rates and quantitative easing. But markets in their wisdom have concluded this is not to be. Many elderly Japanese are pleased with their stock market and real estate gains even though they complain about negative interest rates and the threat of inflation. In any case it was young voters, responding to the stink of alleged corruption scandals, who turned out en masse for Governor Koike’s new party.

In fact, the widespread prediction is that PM Abe will nominate an even more radical monetary experimenter to the head of the Bank of Japan along with two deputy governors of similar persuasion. Some political pundits in Tokyo suggest that Shinzo Abe could yet face a challenge in an LDP leadership election in September 2018 and that ex-Defence Minister Shigeru Ishiba (also on the nationalist right of the party) could prevail. Ishiba-san would favor, some speculate, a return to monetary orthodoxy. But in market terms this is a long time ahead and much further monetary damage will have been done first.

Three Risks to the Current Easy-Money Orthodoxy

Currency markets are not a one-way bet and there are three main risks confronting speculators on further yen depreciation.

First, Washington could yet get its trade and currency acts together (President Trump’s nominee for the role of Treasury Under-Secretary responsible for international affairs, David Malpass, has not yet been approved by Congress). The US would take aim at currency manipulation by Europe and Japan, now occurring under the camouflage of the global 2% inflation standard and deployment of non-conventional monetary policy tools. In particular the Bank of Japan’s policy of pegging long-term interest rates at barely zero is surely a means of keeping the yen cheap.


Second, the US economy could enter a growth cycle slowdown and even recession which in turn would narrow the yield gaps which draw capital out of Japan.


Third, the giant carry trades could suddenly go into reverse as global asset price inflation progresses toward its final deadly phase.

Booming carry trades are indeed a top symptom of asset price inflation. As income famine investors hunt for yield, or investors impressed by a series of capital gains become irrationally exuberant, they are unusually susceptible to speculative narratives, discarding normal healthy cynicism. These narratives justify risk-arbitrage positions implicit in all the various forms of carry trade (whether in search of premiums for exchange risk, or term risk, or credit risk, or illiquidity, or equity risk). Japan, due to the extent of monetary distortion there, has become the land of frenzied carry trading.

The Japanese War Against Deflation 

The natural rhythm of prices has been unusually strong in a downward direction in Japan, meaning that the central bank’s targeting of positive inflation creates powerful monetary disequilibrium. The entry of China into the global economy in the case of Japan has meant an integration process which brings persistent strong downward pressure on prices (and on wages via offshoring). Adding to this pressure has been the growth of the “irregular” labor market (temporary contracts as against lifetime employment). And if we consider the core zone of the Japanese economy around Tokyo, productivity growth and technological change have been bearing down on prices (these trends are not apparent in the national data due to the falling behind of regions distant from the capital).

In the age of Abenomics (starting in 2013) the Bank of Japan ramped up the inflation target to the global 2% level. Accordingly, the carry trades in their various forms have boomed. The speculative hypotheses to justify these have waxed and waned through time. Some market critics think the latest to be waning is the FANMGs (equities in Facebook, Apple, Netflix, Microsoft, and Google) into which Japanese investors have poured funds in many cases via so-called structured products (notes which are a hybrid between fixed-interest paper and a kicker in the form of pay-outs related to the performance of a given index or stock price, in effect an option-type product).

The popularity of certain investment tools adds to the momentum of carry trades in Japan. Market practitioners (including hosts of retail investors) study charts and the trend lines there; the trend is the friend, make no mistake, until the trend brakes. Under monetary stability the flaws of such tools would most likely remain contained. But in the vast domestic and global monetary disorder such as now exists and which fans irrationality Japanese carry-trades become even more prominent.

Shinzo Abe if he thinks about this, and he has praised repeatedly the booming Tokyo stock market, must doubtless hope that global asset price inflation including its Japanese component will remain in its present sweet phase through the elections next year, first for LDp President and then for the Lower House of the Diet (December).


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GUS100CORRINA's picture

Can Japan Ever End Its Easy-Money Addiction?

My response: No, never, not in my life time, can't be done because the mathematics say it is IMPOSSIBLE!!!!


evoila's picture

Who cares, the people are so polite there is no risk of them rising up. Unlike this country where it's going to be I am Legend time.

Blue Balls's picture

All those The conformist learned all those keynesian lessons in college and believed the bull shit. Poor bastards.

rtb61's picture

Oddly enough it can, when the worlds money markets collapse about it. First to go will be the US dollar, which will trigger a collapse of many other currencies. New trade blocks will form, surviving ones and those currencies that survive will dominate. Will the Japanese Yen bounce back when the US dollar collapses, probably, Japan makes stuff that people can use, the US creates debt, bad movies and war toys that use people as cannon fodder (likley to go with it the UK amongst others).

rtb61's picture

Oddly enough it can, when the worlds money markets collapse about it. First to go will be the US dollar, which will trigger a collapse of many other currencies. New trade blocks will form, surviving ones and those currencies that survive will dominate. Will the Japanese Yen bounce back when the US dollar collapses, probably, Japan makes stuff that people can use, the US creates debt, bad movies and war toys that use people as cannon fodder (likley to go with it the UK amongst others).

Peacefulwarrior's picture

Nothing Left for Shinzo to do but shoot the Moon and distort asset prices further. Waning population, a super-cycle of deflation, a good chunk of Japan toxic with radioactivity... They're eventually doomed... BUT Take Away crazy carry trade etc. they're doomed tomorrow morning!

silverer's picture

Good choice voters. Now you only need about 20 more years to dig out.

Rick Cerone's picture

JAPAN IS A 30 YEAR ADDICT (1987 - 2017)

Put it out of its missery. It's starting to grow tumors.

Too-Big-to-Bail's picture

The game, it seems,  has changed from musical chairs to keep the music playing for as long as possible and who can kick the can farthest down the road


This should give you an idea of the severity the next crisis will entail


"LGDP" or whatever the jap faggots are called should have been drowned. its sad to see abe ever entered office but thats what usa has ordered and therefore the root of the trouble is serach within the own borders.

Budnacho's picture

The country that invented the idea of flying planes into ships and you ask if they can be radical.....

Yen Cross's picture

  Eventually the addiction destroys the host--- "therefore rendering", any additional injections MOOT!   Bitchez

Rick Cerone's picture

Can US banks ever end its free-money addiction? No.

spiral galaxy's picture

Ha! Ha! Ha!! Ha!!! Ha!!!!
Ha! Ha! Ha!! Ha!!! Ha!!!!
Ha! Ha! Ha!! Ha!!! Ha!!!!

Probably the stupidest AND funniest ZH article ever!

MEFOBILLS's picture

BOJ has a consolidated balance sheet with Treasury now:

Public debt is being paid down.

Without immigration Tokyo doubles its space/person:

What caused 80's Japanese property Bubble to begin with?  It was BOJ, and of course the IMF was in background (probably making threats) with Stanley Fischer rubbing his hands in glee:

itstippy's picture

The great bearded one first said:

"We will never monetize the debt." (To which the ZH crowd replied, "Bullshit.")

Later he said: 

"The extraordinary stimulus measures will be brief, limited, and targeted."  (To which the ZH crowd replied, "Bullshit.")

Recently he said:

"Rates will never normalize in my lifetime."  (To which the ZH crowd replied, "No shit.")

At least the "inscrutible" Japanese haven't promised to do anything other than print for the past 30 years.  They're honest about it.

zzzz88's picture

from the strategies japan used in whole ww2, we can see japanese like to bet big.

for a very long time, they won big too.

but in the long run, it is suicide strategy.

they won many battles, but they lost the war.

this time, in economy, the final result will be the same---

japan printed at least 20+ years, they already won many battles.

but they will lose the ecnomic war again, very very very BADLY. just like ww2

MEFOBILLS's picture

Japan has been in the crosshairs recently. BOJ actions in the 80's were undoubtably due to coercion.

More recently:

Here we have reactor 3's guts laying out in the open, with the core spray system still trying to function. Notice all the dust mixed in with the debris, dust which could never have happened from a mere hydrogen blast. A large portion of this dust is reactor core material as indicated by it's color, and the rest is concrete. It is important to know that it takes a detonation (supersonic explosion) to turn concrete into dust, and even under ideal conditions with a perfect oxygen/hydrogen mixture, an open air hydrogen ignition never achieves the shock wave speed of a detonation. The dust alone proves that something other than hydrogen did this.

Similar to the pulverized concrete dust of twin towers on 911.

addition:  Japan is also not taking in "colorful and enriching" immigrants.  

uhland62's picture

The M-Fund (coming from the Yamashita Gold loot) must have been used up. 

Yen Cross's picture

  The $usdx is completing the fifth leg of it's daily chart selloff.  The bottom is in, and the only reason $usd equities are at current levels is because of "nominal" yield. >delta/beta<

 The $usd has dropped almost 8.00% since December of '16. This situation is not unlike the Nikkei, Dax, moves on previous currency selloffs over the last (2) years.

  The race to the bottom is accelerating, and bond yields reflect that.  The corporate debt market is going to double top [ 12 month chart] and quality sovereign demand is increasing again.

  At this point in the cycle, any currency depreciation will be met with stagflation, as the consumer is bankrupt.

  Just over a week ago I suggested gold and silver were at their lows for '17.  That's been a profitable trade.

Last of the Middle Class's picture

Only after they reach the million yen to the dollar mark.

Bunga Bunga's picture

At 200% government debt/GDP good luck when rates are rising. Government would go bankrupt in no time. It's an illusion that Japan can ever tighten.

TheSilentMajority's picture

Abenonsense Summary - legislate NIRP and print unlimited digital cash to buy all stocks and bond floats.