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What to do about the problem that is Japan and its economy?

What to do about the problem that is Japan and its economy? Mindful Money

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Friday was certainly the morning after the night before, although the loud thunderstorms which passed over London in the middle of the night turned out not to be a forerunner of a Yes vote for Scottish independence. The UK remains and reasonably convincingly so too, but as suggested, issues like the West Lothian question and indeed whether Westminster politicians will keep their promises to the Scots will continue on. If we move to the financial markets then the UK Pound has surged, singeing the fingers of those who sold it as it has touched US $1.65 overnight and is at 1.275 Euros, although the position remains volatile. However it has really surged against the currency of my subject of the day which is the Japanese Yen and reached 180 Yen briefly. It is quite a turn-around from the 170 seen as recently as the 8th of this month.

The Yen plummets

It was only yesterday that I discussed a fall in the value of the Japanese Yen and it has continued. It has fallen as low as 109.46 Yen to the US Dollar overnight, and touched 141 Yen to the Euro. So the Bank of Japan is currently “winning” the currency devaluation tug of war with the European Central Bank. However, for now I will simply point out that the policy of Abenomics is getting what it wants which is a falling value for the Yen.

The Nikkei 225

This has been a mirror image for the Yen in the Abenomics era as it has rallied in response to the Yen’s fall. The economic argument is that a lower currency provides an economic boost. The fact that the numbers and results have not entirely backed that up has not deterred those trading the Nikkei 225 equity index which pushed above 16,000 earlier this week and rose another 253 points this morning to 16,321. This is in fact a doubling of the index since the credit crunch lows if not quite a doubling since the Abenomics-inspired rally began.

So at this point, Abenomics fans will see two of their favorite economic mechanisms in play. Although, as you can see below, they are also attempting to rig the game too. From Bloomberg:

"The Government Pension Investment Fund must review its asset allocations as soon as possible, Prime Minister Shinzo Abe said today, while Health Minister Yasuhisa Shiozaki said the fund was considering expediting the revamp."

Remember the Bank of Japan is buying the stock market too via its purchases of exchange traded funds or ETFs. As you can see below, the conventional view of this has been provided by Bloomberg:

"Japan’s household wealth rose to a record as Prime Minister Shinzo Abe reflates the world’s third-biggest economy, giving a cushion to consumers facing higher costs of living.

"Household assets increased to 1,645 trillion yen ($15 trillion) at the end of June, up 2.7 percent from a year earlier."

It does not seem to occur to them that those with the wealth increase may only be a small part of those facing the inflation increase.

Japan’s Cabinet Office is not so sure

Japan’s Cabinet Office released its report for September, and as you can see it was rather downbeat:

"Private consumption appears to be pausing recently, while it remains in picking up:

* Business investment shows some weak movements recently, while it is on the increase.

* Exports are flat.

* Industrial production is in a weak tone with a reaction after a last-minute rise in demand before a consumption tax increase."

Then we got a combination of a euphemism and a "blame the foreigners" summary of the risks going forwards:

"However, attention should be given to the downside risks of the Japanese economy such as lengthening of the reaction after a last-minute rise in demand and slowing down of overseas economies."

The picture was finishing of by this which is these days a standard statement but considering what had gone before I wonder if it is a type of nudge:

"The Government expects the Bank of Japan to achieve the price stability target of two percent at the earliest possible time."

Of course, with its monetary expansion and the plummeting Yen, it may reply it is doing all it can! A different tone was set by a spokesman who pushed the idea of rising wages in Japan. Perhaps no-one had told him that the latest rise in scheduled wages has just been revised down from 0.7% to 0.3%. Or that real wages fell at an annual rate of 1.7% in July.

What is the outlook?

If we move to the actual data then this too is looking rather downbeat. The coincident index of business conditions is described by one word:


The Economy Watchers survey for August saw a fall in expectations too:

"The DI (Diffusion Index) for current economic conditions in August fell 3.9 points from the previous month to 47.4 for the first drop in four months."

We are also left wondering as to exactly what statements like this mean:

"Retail stores and restaurants have no longer felt any large impact of the consumption tax increase. But difficulties still remain (Tohoku: Shopping street)."

Department store sales fell overall by 0.3% in August.

The monthly Reuters Tankan survey was released and it echoed by now familiar themes:

"The sentiment index for manufacturers fell to 10 in September from 20 in August and down from 19 in June. It is forecast to rise to 16 in December.

"The Reuters Tankan service-sector index rose to 22 in September from 19, the first increase since June, but still well below 29 that month. It is forecast to fall back to 20 in December."

The Bank of Japan

The Bank of England may not have been the only central bank burning the midnight oil last night. The Bank of Japan is already buying Japanese government bonds like they have gone out of fashion and watching the Yen plummet, and yet the siren calls are beginning for what Andrea True Connection summarized thus:

"More, More, More..."

It will also be noting that exports fell year on year in August and that Japanese businesses are more frequently saying that the Yen’s fall is affecting them adversely. So, it is somewhere between a rock and a hard place right now! After all, if currency depreciation and monetary expansionism is the way forwards, why has it not worked so far?


Japan is also coming under international pressure to “do something”. From Reuters at the G20 meeting:

"U.S. Treasury Secretary Jack Lew said he told Japanese Finance Minister Taro Aso that Japan must remain committed to calibrating all three arrows of its economic policy to sustain healthy domestic growth."

Nice of him to implicitly refer to the third arrow which was economic reform. The many supporters of Abenomics have been very quiet on that front lately. Even supporters of Abenomics like the Economist magazine have started to wonder what progress has been made. Of course, it should have surprised no-one that the 2014 rise in the consumption tax has turned out to have rather similar effects to the 1997 one, but in reality it has.

Meanwhile, even Germany cannot avoid pointing out one of Japan’s fundamental problems. From Destatis:

"Demographic change: many old people especially in Japan and Germany.

"Germans are becoming ever older: according to World Bank data, 21% of the population was above the age of 64 in 2012 – there was a higher percentage only in Japan (24%)."

There is of course the issue of how a shrinking and ageing population fits with a national debt of around 240% of annual economic output, and of course it does not. Trying to help fix that via consumption tax rises is not going so well, as discussed above, and the chess term for this situation is called being endgamed.

Of course, the strongest confirmation of anything is an official denial and on that front I bring you Prime Minister Shinzo Abe in the Wall Street Journal and the emphasis is mine:

"Some have said that Japan’s structural reforms—what I call the “third arrow” of Abenomics, alongside the first two “arrows” of monetary and fiscal policy—are at a standstill and that wage increases aren’t keeping up with price increases. But there is no reason for alarm. We remain on the path toward a revitalized Japan we began in December 2012."

Although, after an annualized fall in economic growth of 7.1% in the second quarter of 2014 this may be the best bit of all:

"My administration’s growth strategy is paying off."

This article was written by Shaun Richards and originally published in Mindful Money under the title: What to do about the problem that is Japan and its economy?

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