Japan continues to dominate the economic news. The latest move concerns Prime Minister Abe’s new economic policies to cut corporate taxes. He also announced plans to run a shakeup at Japan’s political ministries.
This is “Plan B” for Abe who has found that his policy of “Abenomics” or pushing the Bank of Japan to print even more money has failed to stimulate Japan’s economy.
Abe won in a landslide last September on his platform of urging the Bank of Japan to do more. This platform ignored the failure of QE to stimulate growth in Japan in the previous 20 years (Japan had already engaged in QE programs equal to 25% of the country’s GDP). It also ignored the risks of unfettered money printing, namely higher inflation.
Sadly, Abe has discovered that ignoring both of these key issues, while good politically, has been disastrous economically. Abe won the election and the Bank of Japan announced a record $1.4 trillion QE effort in April 2013. To put this number into perspective, this would be the equivalent of Ben Bernanke announcing a $3.75 trillion QE plan in the US. Suffice to say it was a “shock and awe” move.
Unfortunately, it hasn’t worked. Japan’s industrial production fell 3.3% month over month in June. At the same time, Japan’s consumer price index registered its first increase in 14 months in June. The pace of increase was the fastest since 2008 when commodity prices were at record highs.
In plain terms, the Japanese economy is failing to respond to Abenomics. This is the single most important issue for the global financial system today.
The economy and financial markets have been moving in a zig-zag pattern ever since 2008 with drops in asset prices and GDP being met by intervention and stimulus by the world’s Central Banks.
However, thus far no Central Bank has gone “all in” with QE. The larger efforts have been focused on specific timelines (six months to a year) and the ongoing efforts have been tied to economic developments (the Fed claims it will taper QE when US employment falls to an acceptable level).
Never before has a Central Bank stated point blank that it’s firing a bazooka at the economy. Japan has done this. It has failed. And this failure has effectively been the “Emperor has no clothes” moment for Central Bank interventions.
And the markets are taking note.
Traders and investors do not respond to sea changes instantly. The smart ones take note and begin adjusting their portfolios and hedging their bets. This doesn’t result in massive market moves as these investors are sophisticated enough to move out of old positions and into new ones without drawing too much attention
It’s only when the investment herd en masse realizes that something has changed that you begin to see market Crashes.
This process has begun in the world. The smart money is leaving the market. And the market rally is being driven by fewer and fewer companies. This is classic Bubble Topping signals.
This is not to say that the market will crash tomorrow. But the sea change has hit and it’s now a matter of time. The likelihood of a full-scale market Crash similar to 1987 occurring in the coming months has increased dramatically.
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Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research