Japan Getting Some Attention at Davos After All

The Japan news published by the Yomiuri Shimbun reports that Shinzo Abe's presentation did after all get some attention at Davos, much of it evidently misguided:

“Japan attracted global attention in the recent annual meeting of the World Economic Forum for two reasons—the first was the package of economic measures pushed ahead by the administration of Prime Minister Shinzo Abe under the banner of Abenomics, and the second was the heightening tensions between Japan and China. Concern about the latter was stronger than anticipated.

On Jan. 22, the first day of the four-day forum, Abe delivered the first keynote speech by a Japanese prime minister, and stole the show.

His speech pledging to push through a variety of regulatory reforms was highly regarded by many listeners as “powerful.” Klaus Schwab, founder end executive chairman of the WEF, lauded Abe’s speech, saying, “Japan is back.”

He's been pledging and pledging, but so far no regulatory reforms have occurred. We have of course heard it all before when Koizumi and various other prime ministers attempted to inflate Japan back to prosperity and promised reforms that never happened. In other words, it is the same old song and it once again manages to take people in who should know better. Talk is cheap. What reforms have been undertaken so far are mainly hallmarks of Abe's true agenda, such as e.g. the recent introduction of the highly controversial state secrecy law.

Japan also attracted attention due to its frictions with China. Unfortunately, the reaction China's own rather one-track views on the subject received are likely to have emboldened Abe. While there seems to be a lot of concern over the Japan-China confrontation, Abe could at the end of the day rest reassured that he can continue to pursue his nationalistic-militaristic path without having to fear any major diplomatic backlash from the world ex China and Korea.

“But in a different session held on the same day to discuss security, Japan became a focal point in a completely different context. U.S. and European experts expressed concern about the possibility of an armed clash over issues such as sovereignty of the Senkaku Islands in Okinawa Prefecture.

Ian Bremmer, a U.S. political scientist, pointed to potential confrontation between Iran and Saudi Arabia and the tensions between Japan and China as the biggest risks for global security. Of the two, the evolution of Tokyo-Beijing relations is seen as being of greater concern.

Similar anxieties were expressed by John Chipman, director general and chief executive of the International Institute for Strategic Studies, a British think tank, and Javier Solana of Spain, who served as the European Union’s high representative for the common foreign and security policy.

It was a surprise that so many experts were more apprehensive about the face-off between Japan and China than the Middle East, where conflicts and terrorism are ongoing.

Such an apprehension grew following a British media report on Abe’s remarks. Speaking to both Japanese and foreign reporters ahead of his speech in Davos, Abe referred to Britain and Germany that fought in World War I despite their strong economic ties. He intended to say that Japan and China should not repeat past mistakes like that of Britain and Germany. However, the British newspaper Financial Times reported that Abe did not rule out the possibility of Japan and China heading to a military confrontation.

[…]

Meanwhile, China continued to lash out at Japan as the larger country’s foreign minister, Wang Yi, slammed Abe’s visit to Yasukuni Shrine, and made moves apparently intended to isolate Japan in the international community. One such move was a debate session organized by China Central Television (CCTV), under the heading, “China, Europe, U.S.: The Competition Challenge.” During the session, the Chinese moderator said collaborative arrangements among the top three economic powers—the Untied States, China and Europe—could help resolve various international issues, including security matters. Japan appears to have been left out intentionally.

However, Joseph Nye, one of the speakers in the session, who is well-versed in Japan, objected. “Why not include the fourth-largest economy? You shouldn’t let the politics of relations between China and Japan or other countries interfere with this [economic debate].” Chinese property tycoon Wang Jianlin, chairman of Dalian Wanda Group, criticized Nye’s comments, calling them “not polite.” He argued that Nye made a “political” comment in an economic debate.

Similar barbs were traded among speakers during a Davos panel on global security as well. After Wu Xinbo of China’s Fudan University, branded Abe as a “troublemaker,” Bremmer argued Beijing has made a greater number of controversial remarks.

Given these reactions, China’s attempt to expand support and sympathy for its criticism of Japan did not necessarily prove successful.

At another panel discussion held on Jan. 25, the final day of the Davos meeting, Jiang Jianqing, cochair of the meeting and chairman of the Industrial and Commercial Bank of China, called Japan “the Nazis of Asia” and described China as a country that loves peace, a comment that drew giggles from some in the venue.”

(emphasis added)

So much for Davos – the usual platitudes re. Abenomics, and nothing seems likely to change w.r.t. Abe's militarism.

Abenomics and the Nikkei

We recently opined that it takes a decline of between 1,500 to 2,000 points in the Nikkei to raise doubts about 'Abenomics' (i.e., hoary inflationism combined with deficit spending). In order to test that hypothesis we surveyed a few headlines that have appeared in the press between November and January. Apparently even smaller declines in the Nikkei tend to sow doubt. It is really quite amazing how the stock market almost literally 'writes the news'. The same goes of course for the US and Europe – all the talk about 'recovery' is mainly motivated by rising asset prices. In other words, people mistake the temporary effects of massive monetary inflation for a sign of 'growth'. It isn't. Rather, it is a sign that scarce capital is likely being consumed.

Anyway, here is a chart of the Nikkei with accompanying newspaper headlines – it is really quite funny:

Abenomics: lauded when the Nikkei rallies, doubted as soon as it begins to correct – click to enlarge.

Of the articles listed in the chart above, the following struck us as especially interesting, as it reflects the  current consensus view quite well: “Abenomics Needs a Booster Shot”. Note that the article fails to mention a very important point: the rate of growth of Japan's money supply remains subdued, as the BoJ's 'QE' modus operandi tends to massively increase bank reserves, but fails to boost the money supply directly. Other than that, the article points out that further measures from the BoJ should be expected, as it will attempt to 'balance out' the effect of the coming sales tax increase. That it is basically sheer lunacy to expect genuine growth to result from a combination of inflationism and mercantilism is of course not discussed.

The Nikkei has meanwhile arrived at a crucial support level – a bounce from here seems likely. Conversely, if this support level fails, it would have to be seen as a big short to medium term negative in our opinion:

The Nikkei currently resides near converging support lines – click to enlarge.

JGB and Yen

We just came across an article published in 2009 about the 'impending big crash in the  JGB market'. The risks to JGBs are currently no doubt greater than they have been in quite some time, but this example shows why shorting JGBs has become widely known as the 'widow-maker trade'. Time and again the crash of this market has been expected and speculated on – and yet, JGBs remain only a smidgen below their all time high:

10 year JGB: at 144.86, it is only a little over one point below its all time closing high – click to enlarge.

So far, there's still only one JGB crash:

'Crash' – a novel by JG Ballard (or JGB for short).

Clearly, the JGB market doubts that 'Abenomics' will manage to produce a lasting increase in inflation, in spite of the recent uptick in consumer prices on account of yen weakness.

It also seems that the yen continues to move closer to the minimum target range for the upward correction we recently discussed:

The yen continues to look perky. Money supply growth in Japan remains very low compared to that in other developed nations, and the entire decline in the yen seems to have been driven by a change in sentiment alone – click to enlarge.

Conclusion:

We are still wondering what Abenomics is supposed to achieve. With a graying population and consequently a shrinking work force, inflationary policies seem especially ill-conceived in Japan. Given that unemployment was already very low when Abe came to power, there seems to be no point in employing the Keynesian trick of lowering the real incomes of workers even from the point of view of those who normally support such policies (which sadly includes most of the economic mainstream). 

If the BoJ were to alter its modus operandi and actually boost the money supply directly, an upset in the the JGB market would become increasingly likely.  Maintaining the market's calm is predicated on the belief that the inflationary policy pursued  by Abe/Kuroda will actually fail. Moreover, Japan's government can simply not afford higher borrowing costs, as 25% of its tax revenue is already going toward merely servicing interest costs on its current outstanding debt. In other words, Japan's government bond market is a glaring example of a Ponzi scheme (actually, all government bond markets are, but Japan's is topping the list among industrialized nations). If the BoJ 'succeeds', this might ultimately be the consequence:

Elbonian inflation: purchasing a potato becomes a complex task.

(Cartoon by Dilbert)

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