Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Abenomics Stagflation - It's in Shinzo Abe's (Political) Genes

Economics / Stagflation Apr 06, 2014 - 05:06 PM GMT

By: Richard_Mills

Economics

Japanese Prime Minister Shinzo Abe's "Abenomics" goal was to end a long miserable decade and a half of deflation by kick starting the economy. This was going to happen because of massive yen creation. The fiat balloon would induce consumers to spend and corporations to reinvest profits, convinced by a rising stock market and surging exports that all is well.

The Bank of Japan pumped liquidity into the economy at a pace even faster than the U.S. Federal Reserve - $60 billion a month versus $85 billion (the U.S. economy is three times larger than Japan's).


The flood of fiat did depreciate the yen, over the first six months of 2013 the yen weakened the most against the U.S. dollar since 1982.

The yen also dropped 12 percent against the euro and seven percent against the sterling, threatening European trade.

As Japanese efforts started paying off factory output rose, retail sales slowly started climbing and some inflation came creeping into consumer prices.

The weaker yen also drew investment away from emerging markets and toward Japanese equities - the Nikkei 225 soared.

"His plan, one of the world's most audacious experiments in economic policy in recent memory, combines a flood of cheap cash (doubling the money supply in two years), traditional fiscal stimulus and deregulation of Japan's notoriously ingrown corporate culture. The hope is that this will yank Japan from a debilitating deflationary spiral of lower prices and diminished expectations, stirring what Keynes called the "animal spirits" of investors and consumers.

And so it has. The stock market has soared more than 60 percent over the past year, and the yen has lost more than a quarter of its value, lifting corporate earnings in a country that is dependent on exports." Martin Fackler, 'Japan's New Optimism Has Name: Abenomics' The New York Times

The Real Deal

Many became convinced that Abenomics was the real deal meal because Japan had five quarters of high growth.

Unfortunately the wheels seem to be falling off. Japan's GDP expanded at just an annualized one percent during the last three months of 2013. On a quarter-on-quarter basis that's just 0.3% growth, the same as during Q3.

The Nikkei 225-stock index has fallen 8.98 percent in the quarter ending March 31, ending a five-quarter winning streak that still has the market up 68.8 percent since November 2012.

Bloomberg says foreign investors sold 975 billion yen ($9.5 billion) of Japanese shares in one week in March, the most since the crash of 1987.

According to Japan's Ministry of Finance foreign asset managers have pulled more than $21 billion out of the nation's equities so far in 2014.

Most alarming is that Japanese salaries have dropped 15 percent over the past 15 years and the trend is expected to continue...

"Japanese employers will fail in the next fiscal year to heed Prime Minister Shinzo Abe's goal of wage increases that outpace inflation, highlighting risks that the nation's recovery will stall, surveys of economists show.

Labor cash earnings, the benchmark for wages, will increase 0.6 percent in the year starting April 1, according to the median forecast in a poll of 16 economists by Bloomberg News. Consumer prices will climb five times faster, increasing 3 percent, as Japan raises a sales tax for the first time since 1997, a separate Bloomberg survey shows.

The squeeze on consumers from higher prices risks undermining public support for Abenomics and dragging on retail spending." James Mayger and Cynthia Li, Bloomberg 'Japan Consumer Prices Seen Rising Five Times as Fast as Wages'

What's a prime minister to do? Well it's this authors opinion Abe will continue to print and debase the currency along with adding more fiscal stimulus.

These are the first two arrows in his much talked about three arrow Abenomics quiver. The third arrow, structural reform, has received little attention from the government.

That's an unfortunate circumstance because for nearly twenty long years demand has remained far below potential supply capacity - what's known as a deflationary gap. The only sustainable way out for the Japanese economy is for the government to increase growth potential through higher efficiency.

That will be almost impossible because of demographics.

Japan most serious problem is demographics, the ageing and shrinking of Japan's population is a significant demographic drag on growth. Japan's productive age population (15 - 64 years old) is projected to shrink by roughly 25 percent, some have the figure as high as 40 percent, by 2035.

Today the ratio between working-age people and retirees is roughly 4 to 1, but it will be 2 to 1 in 20 years.

This creates two very obvious problems:

  • Many industries will have to be scaled down - an aging society is not one predisposed to increasing consumption nor will the existing workforce be able to keep up the pace in an export dependent economy.

  • Controlling social security expenditures in the face of a rapidly aging population is going to be extremely difficult without raising taxes on those still working. And raising taxes will have a hugely negative impact on growth.

Whether you consider Abenomics a success, or not, many experts are questioning its sustainability.

Real term wages are set to drop by two percentage points in 2014. The domestic consumption tax is set to rise from five percent to eight percent this month. These two factors will cause a drop in consumption and a slowdown in economic growth activity.

"The real risk it that the consumption tax will exacerbate the central problem with Abenomics -- a blow to household wealth and spending power as price rises accelerate ahead of income." Tom Orlik, Bloomberg economist in Beijing

A tax increase in 1997 has been credited with kick starting 16 years of economic shrinkage. The government has designed a 5.5 trillion yen stimulus package to counter the expected decline in consumer spending.

Add one part continued currency debasement, drop in two parts of fiscal stimulus, stir a cup or two of worsening demographics into this economic witch's brew and you've got the perfect recipe for Japanese stagflation.

Conclusion

The to do list of structural reforms needed in Japan is a huge mountain to climb:

  • Greater international competition
  • Higher female labor participation
  • Employment deregulation
  • Lower energy prices
  • Corporate taxation

Whatever fiscal/monetary moves the government makes today will be continually undermined by Japan's demographics. Structural reforms are necessary now.

Unfortunately while talking a lot about the need for reform the reality on the ground, and in the boardrooms is there's been precious little actual reform. And this author doesn't expect much from Abe's revised 'third arrow' plan due in June 2014. The fact is Abe has been weak on reform and that's not going to change, you see it's built into his political genes.

Arch-conservatives have long dominated Japan's politics. They've made the Liberal Democratic Party (LDP) their home and have stamped out almost every effort at social reform. The founder of the LDP, and its most important leader was Nobusuke Kishi - Shinzo Abe's maternal grandfather.

The road to Japanese stagflation is being played out in real time on all our radar screens. It's playing on mine, is it on yours?

If not, it should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you're interested in learning more about the junior resource and bio-med sectors please come and visit us at www.aheadoftheherd.com

Site membership is free. No credit card or personal information is asked for.

Richard is host of Aheadoftheherd.com and invests in the junior resource sector.
His articles have been published on over 400 websites, including: Wall Street Journal, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Pinnacledigest, Uranium Miner, Beforeitsnews, SeekingAlpha, MontrealGazette, Casey Research, 24hgold, Vancouver Sun, CBSnews, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, Financial Sense, Goldseek, Dallasnews, Vantagewire, Resourceclips and the Association of Mining Analysts.

Copyright © 2014 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard (Rick) Mills Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in