Japan’s Last Stand - Portent Of Keynesian Collapse

Abenomics 'hope' and 'reality' explained by Diapason Commodities' Sean Corrigan - do you believe in miracles? After last night's Japanese GDP print, hope is all that is left (dripping with sarcasm)

So, if the BOJ can just move prices up for long enough, people will start to demand higher wages while companies will gladly accede, since they will be able to count on the Bank printing enough new money for them to meet the extra expense. As such higher wages are spent, this will mean that both the employers’ sales and, miraculously, their profits will increase to the extent that they will soon be jostling to hire more of these nominally costlier workers.


Somehow or other, in one of those Deep Purple, ‘I want everything louder than everything else’ moments, wages will outstrip prices (so avoiding a disastrous fall in real incomes) yet payrolls will rise alongside wages since profits will outpace the gain in the outlay on labour.


Moreover – and here we get to the crux of the issue - though all this new cash is being generated by monetizing vast, ongoing government deficits, the debt stock will rise more slowly than prices, so postponing, if not indeed averting, the nation’s long feared budgetary implosion as it is painlessly inflated away.


Oh - and there will be no first-user Cantillon inequities, no unintended consequences, no spill over to other countries, no undue enrichment or undeserved immiseration of any member of the domestic populace along the way.

Truly Kuroda-san is a mage of the highest order!

As Corrigan continues...

Sadly, however, the government’s own figures show that real wages have been falling ever since the start of 2012 and now lie more than 7% below the pre-Crash level and 12% beneath the mid-90s peak.


Hours worked, too, are struggling to stabilize at levels less than 1% above the Crisis lows, 4% below the previous high and fully one sixth below their Bubble best.

As for profits, well the Tokyo Shoko Research institute revealed that the rise in costs principally associated with the weaker yen had led to a 140% jump in recorded bankruptcies of SMEs, 40% of those being (unsurprisingly) in the transportation industry, and around 20% in each of manufacturing and wholesale.

Meanwhile, the Nikkei news reported that, among their bigger brethren, life was not entirely a bed of roses, either.

While overall group profits were up 10% yoy (if only in depreciated yen terms) for the 1,106 listed companies that had filed reports for the fiscal first half. However, closer inspection shows that just one of these – Softbank, luxuriating in its participation in the gangbuster Alibaba IPO – was alone responsible for more than a quarter of the Y1.34 trillion increment, while the next nine most profitable – mostly the giant export concerns, of course, accounted for another 55% of the improvement. That left a paltry Y240 billion uptick to be shared out among 1,096 others for an average gain of Y219 million or $1.9 million at current exchange rates.


Is it any wonder there is no real improvement in well being or that Kuroda came within a whisker of being the only governor in BOJ history to lose such a vote last month when he bounced his colleagues with his intention to double down?

One could be cynical here. It may well be that the regime has a bare plurality of arrows – and Abe may even stop one of those (the one which carries the sales tax hike) in mid-flight - but it is also clear that it has decidedly only one string to its bow. Thus, the suspiciously-timed complement to this exhibition of monetary monomania came in the form of the long-awaited shake up of the giant GPIF pension allocation.

Conveniently, this redistribution will both ensure a ready supply of JGBs for the Bank to rake in and temporarily enrich local shareholders and ESOP executives as the equity market receives the proceeds, all the while keeping downward pressure on the Yen .


As our good friend Jim Walker asked, just when did Central Bankers become world media superstars and when - here we paraphrase – when do we get to put them back in their box? We could not agree more. Strutting the world stage, flitting from press conference to rubber chicken dinner, dispensing what passes for wisdom and prognosis as if the court astrologers have toppled the mighty Nebuchadnezzar and now rule in his place. Whatever happened to discreetly overseeing the balance of payments and facelessly staunching the worst panics only when absolutely necessary? The Committee that Saved the World, indeed!

Partly one could argue that their emergence into the limelight is a reflection of Generation Twitter's carefully cultivated hunger for comic-book plots and spandex-clad superheroes to protect us poor sheep from terrors beyond our limited ken - though I am doing the writers of much of the genre a disservice by comparing their often multilayered work to the crude, Statist narratives peddled mindlessly by the mainstream Western press.

Partly, too, it's symptomatic of the general drift to reliance on one-eyed, one-size-fits-all policy making, replete with gross unconstitutionality and Full Spectrum Führerprinzip of which our friend in the Kremlin so rightly accuses his American adversaries. Think QE instead of the cluster bomb as the weapon of choice.

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But we leave it to Michael Pento (author of the book "The Coming Bond Market Collapse") via Pento Portfolio Securities to explain why Japan's Last Stand is the portent for Keynesian Collapse...

There is a popular American military term called a “last stand”, which is meant to describe a situation where a combat force attempts to hold a defensive position in the face of overwhelming odds. The defensive force usually sustains very heavy casualties or is completely destroyed, as happened at Custer’s Last Stand. General Custer, misreading his enemy’s size and ability, fought his final and fatal battle of Little Bighorn; leading to complete annihilation of both himself and his troops.


The Japanese government is now partaking in a truly incredulous measure to expand its QE program in a desperate attempt to de-value its currency and re-inflate asset bubbles around the world.  In other words, Japan is constructing its own version of a “last stand”.


In a final attempt to grow the economy and increase inflation, Japan announced a plan to escalate its QE pace to $700 billion per year. In addition to this, Japan’s state pension fund (the GPIF), intends to dump massive amounts of Japanese government bonds (JCB’s) and to double its investment in domestic and international stocks. All this in a foolish attempt to increase inflation, which Japan mistakenly believes will spur on economic growth. But these failed policies have now caused Japan to enter into an official recession once again, as GDP fell 1.6% in Q3 after falling 7.1% in the previous quarter.


Japan is now guaranteed to be successful in the total destruction of its currency, the complete destruction of its economy and the collapse of the markets it is attempting to manipulate around the world. To fully understand its misguided reasoning, we have to explore how Japan got here in the first place.


Coming out of WW II, Japan enjoyed a three-decade period referred to as its “Economic Miracle”.  This “miracle” was instigated by a booming post-war export economy helped by prudent fiscal policies, which was meant to encourage household savings. Japan’s standard of living soared among the highest in the world.  Japan sailed into the 1980’s on the wave of robust economic growth.


However, if we have learned one thing after all these years, it’s Government’s insatiable need to meddle with the free market, even when they don’t need to.  Accordingly, the 1985 Plaza Accord was sought to weaken the U.S. dollar and German Deutsche Mark against the yen.


The Bank of Japan, in an attempt to offset the rising yen, drastically reduced interest rates. The BOJ’s loose monetary policy in the mid-to-late 1980s led to aggressive speculation in domestic stocks and real estate, pushing the prices of these assets to astonishing levels. From 1985 to 1989, Japan’s Nikkei stock index tripled to 39,000 and accounted for more than one third of the world’s stock market capitalization.


By the late 1980s, Japan had transitioned from a “miracle” economy to its infamous bubble economy, in which stock and real estate prices soared to stratospheric heights driven by a speculative mania. Japan’s Nikkei stock market hit an all-time high in 1989, then crashed, leading to a severe financial crisis and long period of economic stagnation that Japan is still entrenched in. It has now become known as Japan’s “Lost Decades.”


Shortly after the bubble burst, Japan embarked on a series of stimulus packages totaling more than $100 trillion yen–leaving an economy that was once built on savings to eventually be saddled with a debt to GDP ratio that now exceeds 240%–the highest in the industrialized world.


Making matters worse, the BOJ has more recently engaged in an enormous campaign to completely vanquish deflation, despite the fact that the money supply has been in a steady uptrend for decades. At the end of 2012, we were introduced to Abenomics, which is Premier Shinzo Abe’s plan to put government spending and central-bank money printing on steroids. His strategy is crushing real household incomes (down 6%) and caused GDP to contract 7.1% in Q2.


With the rumored delay of its sales tax, Japan is clearly making no legitimate attempt to pay down its onerous debt levels. Therefore, one has to assume this huge addition to their QE is an attempt to reduce debt through devaluation and achieve growth by creating asset bubbles larger than the ones previously responsible for Japan’s multiple lost decades. This will not return Japan back to the days of its “economic miracle”, where the economy grew on a foundation of savings, investment and production.

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As Pento concludes,

The sad reality is that Japan is quickly surpassing the bubble economy achieved during the late 1980’s. Its equity and bond markets have become more disconnected from reality than at any other time in its history. The nation now faces a complete collapse of the yen and all assets denominated in that currency.


This is clearly Japan’s last stand and there is no real exit strategy except to explicitly default on its debt. But an economic collapse and a sovereign debt default on the world’s third largest economy will contain massive economic ramifications on a global scale. Japan should be the first nation to face such a collapse. Unfortunately; China, Europe and the U.S. will also soon face the consequences that arise when a nation’s insolvent condition is coupled with the complete abrogation of free markets by government intervention.