May 272013
 
 May 27, 2013  Posted by at 3:15 pm Finance
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Detroit Publishing Co. Revels of Japan teahouse 1904
"Dreamland Park, Air Ship Building, Coney Island"

The reactions to the $314 billion, 7.3% plunge in the Nikkei last week were, let's say, for the best part amusing. The army of experts and analysts stood at the ready to name the external factors that made it happen (by the way, that army seems to have grown a hundredfold or so over the past 5 years, or is that just me? So where's the added quality?). Some blamed it on something Bernanke did or did not say, some on the Dow's drop (0.5%?!) the day before, and others on weakish China's manufacturing numbers. Very few addressed Japan's own internal issues. But that's still where Japan's problem lies, and what can and will lead to more of that volatility.

One thing should be clear: The Bank of Japan is not pumping money into the economy, it's pumping credit into the banking system. They are not the same thing. To tackle deflation, PM Abe and BoJ chief need to increase the velocity of money, and quite dramatically too. Those out there who didn't know it already are now also being forced to consider that no central bank in the world controls the velocity of money, even if most will continue to deny it.

Limitless credit for the banking system will not achieve the stated goal of a 2% rise in overall prices. Not unless the feet on the ground start moving, and spending. But the feet on the ground don't actually have any more money than they had before, during the deflation decade(s), so why should they start spending now? Or does anyone believe the Japanese will start borrowing in huge numbers? After all those years of deflation? Deflation scares people into a deep freeze, and it takes a long time to defrost them. Abe would have much more chance of success if he handed out money to the people than he does with his present policy of handing it to banks, but that's sacrilege.

What seems to have gotten lost in translation very rapidly is the appreciation of how big the gamble is that Japan is taking. And even more how desperate it is. Abenomics is a bet on perception, the perception that Abe and Horuda have control over – virtually – all aspects of all possible outcomes. They do not. As a matter of fact, they have pushed themselves, and their people, into a "doomed if you do, damned if you don't" quandary.

If they should somehow manage to achieve that 2% price rise, they will lose control over interest rates no matter what they try – it would simply be the price to pay – most harmfully of all those on Japanese sovereign bonds – JGB -. And if the opposite happens and prices don't rise, well, the markets will come after those bonds too.

The plummeting yen may cause a short term export boost, but that can only be a self defeating phenomenon. First because too much of the world has too much in debt to buy more, second because the more Japanese exports would rise, the more China, Europe and the US will be, and feel, forced to devalue their currencies as well. President Obama announced a few years ago that he wanted US exports to double over 5 years, and so far that goal has been spectacularly missed. China's exports rise far too little to achieve the economic growth needed to prevent their economy from hitting a wall. And Europe's exports are being demolished by the high value of its currency (among other things).

It's therefore – inevitably – only a matter of time before the currency race to the bottom takes off for real. Beggar thy neighbor on steroids. If one party starts, the rest can't stay behind. What we've seen so far is just background rumbling. The US has given "benign" warnings that Japan's financial policy must not be directed at pushing down the yen, but those warnings have no meaning: it was always obvious the yen would fall. And already today, Abe is beginning to realize he has to do more, and not too long from now he will. That will cause a lot more friction with the other three than we've seen so far; the warnings will move way south of benign.

Abe's gamble is based on the perception that markets have of the Japanese economy, of Abenomics, of the Bank of Japan's control over interest rates and prices, and of the reaction of the rest of the world to what Abe and Horuda do. The markets predictably play along for a while, since in early goings there's money to be made, but they're very aware that Abe and Horuda are executing a desperate gamble, and they'll be out in a wink when they get nervous. That will leave the fate of Abenomics in the hands of global greater fools, and chances are there's not enough of them to go around.

Time will play a crucial role as well: if results don't show fast enough, pressure will increase rapidly on Abe to deliver ever more of the same. But there is no limitless pile of yen and bonds at Tokyo's disposal, even if Abe likes to create that impression; "we'll do whatever it takes" is not a timeless entity. The longer the velocity of money in the Japanese economy remains at levels that don't allow for consumer prices to rise, the higher the risk that investors will turn their backs on Abe and start selling bonds and/or equities. And when they start doing that in large enough quantities, the outcome of Abenomics may turn out much more harmful than anyone seems willing to consider today. And not just for Japan either: the country’s easily large enough to have its weight squash other economies too.

When Abe – and the rest of the world – find out that the Bank of Japan does not really set interest rates, which happens when those rates rise beyond what bank and government want, the cost to Japan of servicing its debt can quickly grow beyond its grasp. Even before Abenomics that debt was second to none in the developed world; if and when JGB yields rise and values plummet, the squeeze can have only a further deflationary influence on the economy (and suffocate the government). The recent rise from 0.32% to nearly 1% in 10-year JGB is merely a first sign on the wall (and is temporarily manageable because rates are extremely low). Another near tripling could see that same wall crumble to pieces. Even a doubling would shake its very foundations.

Abe and Horuda have wagered the bet of all bets, but the house (the global economy) never loses. Seen from that point of view, it's not even a bet, since that implies a chance of winning. Hence, in final analysis, there's only the perception of a bet. It's all nothing but sleight of hand. And even if the greater fools fall for it, the Japanese people will not; their fear won't thaw anywhere near fast enough.

Abenomics can not last, and it can not succeed. And you can safely disregard anything anyone says that begs to differ. Paul Krugman and Christina Romer claim that rising prices can lead to falling real interest rates, but they amazingly and completely ignore the reaction their very own government will have that will make sure no such thing can happen. It just sounds like they keep on talking their Book of Stimulus no matter what, despite all the stimulus that has occurred already, and all the positive effects that haven't. They want to believe in Abenomics so much it keeps them from thinking, all for the further glory of their own spending mantras. From an intellectual perspective, that's so disappointing it's enough to bore a man to tears.

Even John Mauldin, though he's far more careful than that, leaves open the option that Abenomics could work. Although if Mauldin really believed his own words, he'd be out of his short position in no time. Think it through guys, don't just stop at some random point that seems to suit you and then present that as analysis. Just because you find something that seems to fit well with what you've been saying for decades, doesn't make it true.

And stop referring to inflation without implicitly including the velocity of money, it turns inflation into a meaningless term, and certainly in this case, where velocity of money is the key to understanding the entire inevitability of the spectacular disaster Abenomics is guaranteed to be. Because if you're Japanese, spending what you have left in wealth is the last thing you want to do today AND tomorrow after 15-20 years of deflation and your falling wages under huge pressure. How is that not obvious?

 


Home Forums Japan : It's Not A Bet If You Can't Win

This topic contains 0 replies, has 0 voices, and was last updated by  Raúl Ilargi Meijer 1 year, 6 months ago.

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May 27, 2013 at 3:15 pm #8380

Raúl Ilargi Meijer

Detroit Publishing Co. Revels of Japan teahouse 1904 "Dreamland Park, Air Ship Building, Coney Island" The reactions to the $314 billion, 7.
[See the full post at: Japan : It's Not A Bet If You Can't Win]

May 27, 2013 at 8:41 pm #7629

Ken Barrows

I don’t see interest rates going up in Japan, the USA, or the EU. Economies would suffer greatly.

But it means The Automatic Earth is spot on. The central banks will keep the stimulative policies in place until some exogenous factor (oil) forces their hand. Then, the interest rates stay low because the demand of money plummets along with the supply. Deflation really takes hold; cash is king; interest rates remain at the floor; and any healthy banks scoop up assets at pennies on the dollar.

May 27, 2013 at 8:50 pm #7630

ChartistFriendPgh

Lands Of The Setting Suns http://chartistfriendfrompittsburgh.blogspot.com/2013/05/lands-of-setting-suns.html

May 27, 2013 at 8:58 pm #7631

p01

Industrialization does not pay unless you make a nice EUnion and indebt everyone else in it into buying your products (mostly carrzzzz). Even then it does not pay, it just appears to do so for a while, until the exported insolvency hits the fan.
Considering the level of debt and the inability to grow more than 39% of the food they eat, Japan can be considered (radio)actively extinct. They should not even try anything anymore.

May 27, 2013 at 10:21 pm #7632

ChartistFriendPgh

“no central bank in the world controls the velocity of money” indeed http://research.stlouisfed.org/fredgraph.png?g=iUD

May 27, 2013 at 11:34 pm #7633

Raúl Ilargi Meijer

Apologies for misspelling the name of the BoJ chief. Corrected.

May 28, 2013 at 3:48 pm #7634

Golden Oxen

Because if you’re Japanese, spending what you have left in wealth is the last thing you want to do today AND tomorrow after 15-20 years of deflation and your falling wages under huge pressure. How is that not obvious?

Probably a correct assumption, but not a given in my view.

Perceptions based on “Confidence Only”, can change quickly and decisively. Who was it that said Confidence is Suspicion sleeping?

It could be possible that a government hell bent on creating inflation and destroying the purchasing power of it’s currency could start enough people to lose confidence and go on a spending borrowing binge to escape inflation’s ravages. This type of activity has a way of spreading quickly.

The yen has fallen considerably in value against the dollar recently, about 20% in a very short period of time which is inflationary in my book. Japan’s problems however are so serious; and as you say sir, “Sell to Whom” that it is most likely and exercise in futility.

May 28, 2013 at 6:47 pm #7635

gurusid

Hi Folks,

Its all been tried before anyway, as Mizuho’s Securities chief economist simply explains.

He states they need 6% pay rises – average forecasts are for 1.8-1.9% – i.e. to get real money into the hands of people so they can spend it. Instead as energy prices rise as the Yen falls, people will end up paying more for energy and a whole load of other things, thus having the exact opposite effect on the real economy by drawing even more money out of the discretionary spend and into the essential only – if they can even afford those items, thus actually increasing deflation. Thus in the short term people will end up putting what little cash they have left into the energy price increase due to currency devaluation. Way to go Abe! :woohoo:

L,
Sid.

May 29, 2013 at 2:01 am #7636

rapier

Nothing has changed until interest rates rise. When they do rise everything will change. The bond bull is 31 years old. A bond bull market is the ultimate tailwind for the financial world since it means the value of all existing paper is rising so it can be sold at a profit or marked to market as a gain.

The belief that central banks control interest rates is nearly universal. They effect them for sure but that isn’t the same as control. The loss of belief in their control would be the largest and worst loss of faith possible for the system.

One can see the last few weeks a hint that the long long overdue turn in Treasuries may be upon us. I am not saying the turn is here but it could be and identifying that trend is the key to ID’ing the whole big enchilada.

June 1, 2013 at 4:33 pm #7638

gurusid

HI Illarghi,

When Abe – and the rest of the world – find out that the Bank of Japan does not really set interest rates, which happens when those rates rise beyond what bank and government want, the cost to Japan of servicing its debt can quickly grow beyond its grasp. Even before Abenomics that debt was second to none in the developed world; if and when JGB yields rise and values plummet, the squeeze can have only a further deflationary influence on the economy (and suffocate the government). The recent rise from 0.32% to nearly 1% in 10-year JGB is merely a first sign on the wall (and is temporarily manageable because rates are extremely low). Another near tripling could see that same wall crumble to pieces. Even a doubling would shake its very foundations.

Even if they get what they want – interest rates at a paltry 2.2% will take away all gov’t income:

From Things That Make You Go Hmmm… article on “Bizarro World” where everything is backwards:

Currently,debt-service costs take up 24% of GDP — and should Esenapaj yields rise to just 2.2%, a staggering 80% of government revenue will be needed to pay the interest cost on the country’s debt.

Must be the Esenapaj government version of Ukuppes… :dry:

L,
Sid.

June 11, 2013 at 9:52 pm #7724

gurusid

Hi Illarghi,

As was suggested earlier (comment above):

The Painful Side Of Japan’s “Growth Strategy”
Submitted by Tyler Durden on 06/10/2013 13:43 -0400

“Following last night’s ‘surprising’ upward GDP revisions, Japan’s trade balance plunged to near-record deficit levels (but that didn’t matter) and while China’s trade data is questionable at best (and now proven ‘false’), Japan is facing a much more considerable worry at home. Abenomics’ goal to reduce the value of the JPY to improve competitiveness and spur a renaissance has had a rather nasty side-effect for all the Japanese people who eat, drive, or in any way use energy. The cost of Japan’s crude basket has risen 35% in the last six months and is now at its highest for the domestic energy user since 2008 (which sparked the last collapse into deflation). As Bloomberg notes in this brief clip, this surge is not related to demand or the price of oil, but to the devaluation of the Japanese currency and leaves both the refiner crushed on margins and the consumer more cash-strapped.”

(bold in orig)

…”more cash strapped” = more deflation.

What bit of TINWO (There Is No Way Out) do they not understand? Karmic payback for the TINA (There Is No Alternative) days?… :dry:

L,
Sid.

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