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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's 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, maybe it should
be.
Richard lives with his family on a 160 acre ranch in northern British
Columbia. He invests in the resource and biotechnology/pharmaceutical sectors
and is the owner of Aheadoftheherd.com. His articles have been published on
over 400 websites, including:
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***
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