Sunday, September 08, 2013
Japan and Abenomics
Japan's ability to use monetary policy to reverse its long deflation is limited, because it is very hard to execute when you have to import the basics, esp. energy. The decisive turn for Japan really occurred on 3/11 with the earthquake/tsunami disaster followed by the Fukushima Daiichi meltdown.
The consequence - unavoidable - was that an economy dependent on nuclear energy was converted to an economy dependent on imported energy.
If 3/11 had not happened, it is possible that cheapening the yen could increase exports and perhaps buy Japan some time and space. But 3/11 did happen, and at least half of the nuclear plants will never reopen.
Earlier in this sequence I kept reading articles about how Japan's exports were rising and how this showed the brilliance of Abenomics. But it doesn't, because when you devalue your currency to boost exports, the trade-off is that necessary imports must drop in order to actually achieve something. The coverage is beginning to become more realistic now.
The chief domestic debate at this time seems to be about the scheduled sales tax increases (needed to cover interest expense). Well, if you read the link you'll note a lot of optimism, but look at wages:
Not a lot of space there to increase real consumption, is there? Wages in manufacturing would be the first sign of a real renaissance:
Of course that's nominal - CPI is already rising:
But not by much, huh? Because there is not really a lot of money to go around, is there? The one very, very sure thing Abenomics does is this:
So the theory is that since exports are rising companies will make all this money and invest all this money and that will expand the real economy. Looking at new orders:
Hmm. Lending is way up:
If the situation were not so tragic, I would cattily remark that half of that must be to TEPCO.
More seriously, this does support the idea that some reflation is going on, but it also begs the question of how long it can continue. Government debt is so high that lending like this must be repaid under difficult circumstances and there is a natural limit, which seems to be rapidly approaching due to this:
And its natural consequence, this:
Current account is the broadest measure of a nation's trade balance. It includes income received and income paid abroad. In order to carve a way forward, Japan would have to inflate its government debt substantially away without increasing interest costs enough to offset the gains. This is hard to do when you are in this situation:
And doing this:
Thus, the government feels impelled to raise revenues in a real sense, which implies domestic deflation.
Don't forget that Japan is still struggling with the aftermath of the devastating 3/11 disaster. Less than a month ago the last of the areas without power were reconnected. Japan had a structural governmental deficit before then, but since it has accelerated.
If it were not for the demographic situation, perhaps Japan could inflate its currency sufficiently to deflate away a lot of its government debt in real terms. But it is not clear how this can happen when pension funds will have to shift investments to compensate! BoJ will have to keep buying, but this has never ended well for any country.
The logic is that it will inflate stocks, and perhaps it will. But as nominal money value diminishes, the relative influence of shifting private savings from bonds to stocks will naturally dwindle, indicating that there is an upper limit. Business investment is rising, but not hugely, and there is a natural limit there as well. The natural strategy for Japanese investors is now to outsource capital - to buy overseas bonds and equities - so as to profit from the currency changes. This is not a recipe for long-term optimism.
Japanese disposable personal income will naturally drop as a result of the tax increase, and retail sales and consumer confidence will as well.
The question I've been looking into is whether the U.S. or the EU will be the next to fall.
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