In order to press his individual agenda of preserving optionality to intervene in the FX market and push the Yen lower (using increasingly more desperate measures), Japan's Prime Minister had just one task in the latest G-7 meeting: to have the Group of Seven leaders warn of the risk of a global economic crisis in the final communique issued as the summit wrapped earlier today in Japan.
He failed. In fact, the final statement went the other way and declared that G-7 countries "have strengthened the resilience of our economies in order to avoid falling into another crisis. The global recovery continues, but growth remains moderate and uneven, and since we last met downside risks to the global outlook have increased," the statement says. "Weak demand and unaddressed structural problems are the key factors weighing on actual and potential growth."
The communique urged a coordinated, albeit differentiated, response to storm clouds gathering over the global economy. Leaders pledged to use a mix of tools depending on their circumstances.
The G-7 statement compromised on the austerity-versus-stimulus debate by leaving each country’s road map open - saying they will take "into account country-specific circumstances" as they move to use "all policy tools, monetary, fiscal and structural, individually and collectively to strengthen global demand and address supply constraints while continuing our efforts to put debt on a sustainable path."
As Bloomberg adds, Japan had pressed G-7 leaders to note "the risk of the global economy exceeding the normal economic cycle and falling into a crisis if we did not take appropriate policy responses in a timely manner." On Thursday, Abe presented documents to the G-7 indicating there was a danger of the world economy careering into a crisis on the scale of the 2008 Lehman shock.
This is not surprising: this past weekend we wrote that following the G-7 meeting of finance ministers and central bankers which also took place in Japan, Japan ended up 'humiliated" due to a "sharp rift over Yen intervention" with Jack Lew and the rest of the G-7 making it abundantly clear that Japan no longer has sole authority over its own monetary policy. The reason: fears that any unilateral action by Japan, such as the country's still inexplicable descent into NIRP, would push China over the edge and lead to another uncontrolled round of global currency turmoil.
Meanwhile, the kindergarten that is Japan's government finds itself increasingly the laughing stock of the world. As a reminder, Abe has frequently said he would proceed with a planned increase in Japan’s sales tax in April 2017 unless there is an event on the scale of Lehman or a major earthquake. He is expected to announce next week he is deferring the tax rise, Japanese media reported.
However, the lack of the G-7 endorsing his gloomy version of the world, has made the Japanese PM lose even more face with the global community because while Japan will certainly delay the sales tax increase, it now has lost its doomsday justification for doing so.
Abe can thank China for being relegated to the very bottom of the developed world scrap heap. According to Glenn Maguire, Asia-Pacific chief economist at Australia & New Zealand Banking Group, "Asia is feeling the brunt of the Chinese slowdown given its trade exposure, with a more marginal impact so far on the U.S. and Europe."
"Hence it is not entirely surprising that a coordinated response to an unevenly felt dynamic could not be reached at the G-7 negotiating table," Maguire said. "Moreover, the G-7 is obviously aware of the ‘announcement effect’ the official communique has,” he said. "In such a situation, warning of negative risks and sentiment can become self-fulfilling."
The biggest irony is that Abe is absolutely correct in asking for a warning, however just like in Europe's relentless war against Grexit in the 2010-2014 period, the mere admission that this was a possibility would create a self-fulfilling prophecy that would accelerate the process.
We have now gotten to the point where the world's leaders are too scared to admit the truth over fears it will merely accelerate its inevitable arrival.