Arnold Genthe 17th century Iglesia el Carmen, Antigua, Guatemala 1915
I know I’ve written a lot about Japan lately, and that for some it’s been enough for a while, but still, what happens today under the no longer rising sun is going to have such repercussions worldwide that it would be foolish not to pay attention. Moreover, there’s something about what Bank of Japan Governor Haruhiko Kuroda said this morning that both perfectly and painfully illustrates to what depths, economically as well as morally, the country has sunk.
Bank of Japan Governor Haruhiko Kuroda, who last week stunned global financial markets by expanding a massive monetary stimulus program, said the central bank is ready to do more to hit its 2% price goal and recharge a tottering economy. Kuroda stressed the BOJ is determined to do whatever it takes to hit the inflation target in two years and vanquish nearly two decades of grinding deflation.
“There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind,” the central bank chief said in a speech at a seminar on Wednesday. “There are no limits to our policy tools, including purchases of Japanese government bonds .. “The BOJ shocked global financial markets last week by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.
Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set.
“In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms ..” While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.
The Japanese economy was hit hard in Q2, suffering its biggest slump since the global financial crisis after an April sales tax hike dented consumption, and is expected to rebound only moderately in the third quarter as the effects of the higher tax take time to wear off.
Kuroda stuck to his view that the pain from the tax hike will gradually subside, but warned that the BOJ must be mindful of how the higher levy could affect companies’ pricing power, particularly if household spending stagnates. On the yen’s plunge against the dollar after last week’s monetary expansion, Kuroda reiterated his view that overall, a weak yen was positive for Japan’s economy.
You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.
What Kuroda in effect says is that he won’t allow the Japanese to profit from, or even feel the relief of, lower oil prices, because they can’t be trusted to spend it. The Japanese government and central bank have no confidence at all – anymore? – that people will spend the money which they save on gas, on something else. They expect for people to, exclusively, sit on those savings. And they’re probably right, which says plenty about how the Japanese people feel about their economy: there is no confidence left whatsoever, not in Abe, not in Kuroda.
Moreover, of course, many, the poorest, the indebted, simply won’t have any extra spending cash even if they do save a few yen on gas. For them, Kuroda’s policies are very damaging. Which further undermines their confidence, and makes more people sit on more money. This goes way beyond a central bank pushing on a string. This is the picture of the trust between a government and its people having been irrevocably broken. And Abenomics doesn’t repair that trust, it only damages it further.
The people don’t trust the government, and the government doesn’t trust the people. Neither thinks the other will deliver what it desires. And since it’s ultimately the government which hold the reins of power, it’s using those reins to throw the people under the bus.
Abe and Kuroda’s ‘logic’ is ‘if the people don’t do what I want them to do, why should I take them into account, or care about them’? The line of thinking is borderline psychopath.
Adding insult to injury, a beggar thy neighbor fall in the yen is supposed to be good for exports, even though that hardly pans out at all so far. It also, and more importantly, makes imported goods more expensive. In Abe and Kuroda’s twisted logic that should drive up prices, but in reality it means people buy even less than before, which accentuates deflation instead of ‘solving’ it. Who do you think Abe blames for this?
And the psychopaths are not done with their people. They not only control the monetary base through what is by now QE9 (not of which, just like in the US, reaches main street), they have also seized control of Japan’s pensions. The rationale is: we’re going to take their pensions and spend them in the casino disguised as the global stock markets, because that MIGHT give a better return that sovereign bonds, especially Japanese ones.
If there’s one thing that’s kept Japan more or less standing upright over the past 25 years, it’s that the vast majority of its wealth was invested domestically. No more. And you might argue this is Japan exporting its deflation across the globe, but at the very least that’s not what pension beneficiaries will experience. They will simply, when markets tumble, see their pensions vanish into thin air.
U.S. assets will be the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%, analysts say. The changes to the $1.1 trillion pension fund coincided with the Bank of Japan’s shocking decision to ramp up stimulus on Friday, which sent global equity markets soaring.
“The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, said Levkovich, noting that stocks on Wall Street should start to feel the benefit this year.
“Foreign investors typically buy large cap stocks which have greater index impact,” he said. “Thus, one cannot ignore the possibility that stock prices jump above our year-end 2014 S&P 500 target on this news.” Other analysts agree. “It’s pretty realistic [that the U.S. will receive most of the benefit] if you look at where the Japanese feel comfortable investing their money,” Uwe Parpart, managing director and head of research at Reorient Financial Markets told CNBC.
“This is a pension fund making the investment they are not going to punt into small caps or anything of that sort, they need large, liquid stocks that over decades have had a reliable return,” he said. But Parpart is not convinced the inflows would make a huge difference to stock market performance. “$30 billion sounds like a lot of money, but stretched over a period of time it’s not going to move markets,” he said. “But obviously it’s a nice shot in the arm.”
Furthermore, an increase in the pension fund’s international bond allocation to 15% from 11% should boost demand for Treasurys, driving further inflows into the U.S., analysts at HSBC said in a note published Tuesday. Meanwhile, the GPIF will reduce its domestic bond allocation to 35% from 60%. “The BoJ’s increase in asset purchases should be more than enough to cover the aggressive reduction in Japanese Government Bond (JGB) holdings planned by the GPIF, allowing JGB yields to stay pinned down,” said Andre de Silva at HSBC.
“Ultra-low JGB yields imply that the relative valuations for other core rates ie. U.S. Treasuries and other bond substitutes have been further enhanced,” he said. “Demand for yield-grabbing would intensify amongst Japanese investors, boosting overseas investments.”
De Silva estimates that over $100 billion could be reallocated into foreign bonds as part of this trend and highlighted U.S. Treasurys as the most attractive for Japanese investors. France, Australia, India and Indonesia government bond markets are attractive alternatives, he said. Japan’s pension fund is under pressure from Prime Minister Shinzo Abe to shift funds to riskier, higher yielding investments to help boost returns, at a time when his Abenomics agenda appears to be running out of steam.
So tell me, what do you think, is this still an attempt to fight – domestic – deflation, or has it become a revenge on the Japanese people for not doing what Abe ‘ordered’ them to do? Note that early this year, he said Abenomics would work if only the people believed it would.
In his view, they let him down. In their view, he’s an abject failure. He is. Unless the Japanese people get rid of Abe and Kuroda real fast, they’re going to cause a lot more destruction. We need to see this in the context of a society in which obedience is considered much more important than in the west.
In Abe and Kuroda’s eyes, the people fail, because they fail to obey their edict of increased spending. The people, too, have a hard time not obeying, but after 20 years of deflation, they find it too risky to go out and spend. That’s not just a deflationary ‘mindset’, as the powers that be would have you believe, it’s something much more real than that.
If the global markets start leaning on Japan, something that may happen any moment now because of its behemoth debt levels, the entire country could start going up in smoke. Abe has given signs of seeking to take the blame for his failures out on China, and the nationalist streak in the population may follow him to an extent, but it doesn’t look like there’s enough trust left.
In that regard, it’s undoubtedly for the better (though we don’t know who will succeed Abe). But it’s still a highly volatile situation that Japan finds itself in, with huge potential downside effects for the whole world because it’s such a large economy that’s failing here.