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How is the Abenomics economic experiment going in Japan?

How is the Abenomics economic experiment going in Japan? Mindful Money

Last Monday saw plenty of action in the markets of the Far East with the price of Silver falling by 7% at one point before recovering to around 4% down at US $21.40 as I type this. However if we move to my subject of today there were also wild swings in the exchange rate of the Japanese Yen which were initially triggered by these words uttered on Japanese television by economy minister Amari.

It’s being said excessive yen gains have been corrected a lot...If the yen extends losses a lot, people’s lives will be negatively affected. It’s our job to minimize that.

Actually Mr. Amari has in fact just criticized one of the planks of the economic strategy now called Abenomics via the section I have highlighted as it has relied on falls in the value of the Yen. But as ever no-one seemed much bothered by analysis and instead responded in a knee jerk fashion pushing the Yen back sharply towards 102 versus the US Dollar. I also thought that the recent G7 meeting ended with Japan promising not to do this sort of thing.

Equity Markets


This is another of the planks of Abenomics where a virtuous economic cycle is expected to emerge from the rises in the Japanese stock market. This was added to today by a further 1.5% rise in the level of the Nikkei 225 equity index taking it to 15,360 making it a rise of just under 49% in the year so far and a 5 year 5 month high.

So whilst the gains are much smaller for foreign investors (due to the fall in the Yen) domestic Japanese investors have done very well over the past six months. As one of the central themes and objectives of economic policy these days is rises in stock markets both the Japanese government and the Bank of Japan must be very satisfied with the results so far.

Of course there is the cautionary note that we have seen stock markets rise in countries which do not have any economic improvement.

Japanese Government Bonds


Here we have seen extreme volatility since the Bank of Japan announced its new monetary policies back on April 4th. We had a conventional response initially to the expansion of Quantitative Easing with the Japanese ten-year bond yield falling as low as 0.45% in the initial euphoria. So a simple start of price rises in expectation of more Bank of Japan buying.

However we then moved to what you might call the dark side of modern QE. Japanese Government Bond prices then began to fall, gradually at first but in recent times some days have been marked by heavy price falls. The net effect is that the ten-year yield is now 0.85% and prices are lower and yields higher than when the expanded QE was announced.

Let me give you the two polar opposite views on this. The first is from Max Keiser who portrays this as something like the end of the financial world and the other is from Daiwa who tell us this.

And the ultimate sign of success for the Japanese authorities will be a 10-year yield above 3%, reflecting 2% expected inflation

Really? Anyway there has been a lot of turbulence and if we recall the fact that Japan not only has a very large public sector debt heading towards 250% of her economic output but also that it is of short duration/maturity then further price rises and yield falls would be expensive for her.

What about the real economy?


Economic Growth
These numbers looked rather good if taken at face value. The first quarter of 2013 saw a rise in real Gross Domestic Product of 0.9%. But much of this was due to the fact that the rate at which prices fell in Japan accelerated as the GDP implied deflator was recorded at -0.5%. Apologies for the way one has to think of double negatives but falling prices are at the nub of Japan’s lost decades. So  nominal GDP growth at 0.4% was substantially lower than real growth.

So we find that many are lauding Japan for growth which was caused by prices falling even more quickly than before. The possible “rub” here as Shakespeare put it is that Abenomics is supposed to raise the inflation rate and so it benefiting from a further fall in inflation is somewhat awkward to say the least.

Also the Japanese economic growth series is troubled (by this I mean more troubled than normal…) and so we will have to wait for more reliable numbers.

Machinery Orders
These were released on Friday and they showed quite a surge according to the Japanese Cabinet Office.

The total value of machinery orders received by 280 manufacturers operating in Japan increased by 27.8% in March from the previous month on a seasonally adjusted basis. In January-March period it rose by 7.1% compared with the previous quarter.

So strong numbers which many have trumpeted from the rooftops. However if we bother to look back we see that March is a strong month in this series so that the year on year change is more like 10%. This time last year one might have cheered for a 7.5% year on year rise in this series in March and as Abenomics was perhaps only a twinkling in Abe-sans eyes we can see that declaring victory on the basis of these numbers is unwise at best and reckless and misleading at worst.

Oh and of course as these numbers are for March they preceded the April 4th move by the Bank of Japan.

What about machine tool orders?


These are even more inconvenient for those who trumpeted the series above as they showed a year on year fall of 23.6% in April. Ooops! They had also fallen by 26% in March.

Department Store sales
The numbers for April were released this morning and after three months of rises they showed a fall of 0.5% on a year on year basis. So as of the latest numbers we return to what is a very familiar theme for Japan which is the struggles of domestic demand and its very weak pattern. This was reinforced by the numbers for convenience store sales which fell by 2.6% on a year on year basis.

The Outlook?
This morning the Japanese cabinet office has released a report where it has upgraded some of its forecasts. Mind you I would imagine not so doing might get you relegated to whatever is the modern equivalent of being a Kamikaze pilot.

The actual indicator numbers for business conditions give a mixed picture. The leading index number has risen to 97.9 but as equity prices feature in that we see that the Nikkei surge will have influenced this. What is called the coincident indicator also rose in March but at 93.8 it is below the 96.7 of a year ago and well below the benchmark of 100 for 2005.

Is rising inflation good for Japan anyway?


The clear gainer from this is the Japanese government which would love to see this inflated away but whilst economic theory predicts that higher inflation will lead economic agents to act more now I suspect it will not be this clear cut.

Consumers
What about price rises in basic products such as food and energy? The falling Yen will lead to price rises in many basic staples which just like has happened in the UK may lead to a contractionary effect on demand. Perhaps Japanese companies will raise wages but that would be quite a change and we have the issue that their costs would rise eroding the competitive gains.

Also the gains for Japanese businesses are not as clear cut as you might think as for example the rise in the Yen made them shift production abroad on a large scale. Here is the Nikkei newspaper on this subject.

In the past, as the yen grew stronger over the course of decades, Japanese manufacturers have shifted a large share of their production operations to other countries. They have taken steps to balance their currency risks by offsetting foreign-currency assets and liabilities, and their holdings of cash dollars have dwindled. As a result, the impact of currency fluctuations on operating profit has diminished.

Demographics
Aging populations in the western world are an issue for many nations but Japan has the further nuance of a declining one too. Today’s data shows a fall from 127.49 million six months ago to 127.3 million now. Also we see that the over 75′s as a proportion rose from 12.1% to 12.2% and children fell from 13% to 12.9% in a trend which poses its own problems.

Comment


The fundamental tenet behind Abenomics is in many ways very Japanese in its concept that you can (figuratively speaking) twiddle a few economic knobs in a dirigiste fashion and hey presto what have been the problems over over twenty years will be reversed! A doubling of the monetary base and soon perhaps the equity market too will have an impact as will the fall in the Yen. But whilst the Japanese government hopes and plans for an improvement in its circumstances and some Japanese manufacturers will likely benefit will the ordinary Japanese if they do end up facing inflation see this as a type of financial repression?

Also if monetary expansion is the answer why has it not worked before in Japan?

This blog was originally published in Mindful Money under the title: How is the Abenomics economic experiment going in Japan?

Tags: Economy , GD , GDP , GDP growth , General Economics , growth , inflation , Japan , Japan's Economic Situation , quantitative easing
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