Abenomics: Japan's economic revolution will rock our world. BOJ blows big bubble say experts.; Japanese people have a bubble every 50 years. Once Japan does have a bubble they do it really big.
Tweet Topic Started: 22 Jan 2013, 12:01 PM (13,755 Views)
As for higher yields these will not make much difference to the current total interest payment for many years to come, so even if there is a huge spike in inflation before it gets brought under control it is not a big deal.
Andrew please study this chart, I have a feeling you really do not understand the problem, 60% of this debt is due to be rolled over in the next 5 years.
We are talking about a 10 trillion dollar Bond market the second largest in the world the next highest is Italy at 2 trillion.
Enjoy The Ride!
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.” ― Friedrich A. von Hayek
"I, on the other hand, am a fully rounded human being with a degree from the university of life, a diploma from the school of hard knocks, and three gold stars from the kindergarten of getting the shit kicked out of me." Blackadder.
Andrew please study this chart, I have a feeling you really do not understand the problem, 60% of this debt is due to be rolled over in the next 5 years.
We are talking about a 10 trillion dollar Bond market the second largest in the world the next highest is Italy at 2 trillion.
ETR
My points are:
1. Japan has tried huge deficit spending and QE to create inflation for about 15 years now and still has a deflationary problem apparently
2. Rising yields have little impact upon the current cost of interest of the Japanese government
Meanwhile, I can see you are enormously concerned that a crisis is suddenly going to arise in Japan that the Japanese government has little ability to control.
At the moment they are saying they have a two year plan to create 2% inflation. At this point in time, have they got even the slightest tiny bit of inflation??
Is the Bank of Japan creating the biggest pyramid scheme in history? In recent weeks Haruhiko Kuroda has been the toast of the financial world, winning plaudits from Nobel laureates Paul Krugman and Joseph Stiglitz. The move by the BoJ governor to end deflation with large bond purchases has been cheered by International Monetary Fund managing director Christine Lagarde, Asian Development Bank president Takehiko Nakao and the Japanese business establishment.
Yet markets are raising troubling questions about Prime Minister Shinzo Abe's revival plans - dubbed Abenomics - of which Kuroda's bond-buying is a critical part.
On Thursday, the Nikkei 225 Stock Average plunged more than 5 per cent. The broader Topix lost 3.8 per cent, after a 6.9 per cent drop on May 23, its biggest one-day decline since the March 2011 tsunami and nuclear disaster.
The market is now down 11 per cent since May 22. That officially puts Japan in correction mode.
What's going on? Investors, who have driven the Nikkei up 30 per cent since the beginning of the year, are unnerved by bond yields that continue to gyrate despite the huge purchases by the BoJ.
Kuroda has tried to calm fears, insisting that he sees no signs of "excessively bullish expectations" in the stockmarket boom. But the markets are clearly reading his words as pro forma: What else is he going to say, that he suddenly has doubts about Abenomics?
Some of the selloff represents simple profit taking. Some reflects impatience. Investors no longer seem content to wait for Abe to reveal the most difficult part of his strategy - the politically controversial structural reforms that will be necessary to fully revive the Japanese economy.
Although the prime minister had promised to lay out his plans next month, there has been talk that he might postpone the announcement until after next month's elections for the upper house of the legislature, which his Liberal Democratic Party is expected to win handily. Delay is no longer an option: Unless they see details soon, markets will probably remain volatile.
More worrisome for Japan's leaders, investors are also beginning to question the other pillars of Abenomics - Kuroda's bond-buying, and a yen that has dropped 20 per cent in value since November.
Abe's plan was for BoJ largesse to lift equity prices, fuelling what surrogates call a "confidence effect" and spurring consumer spending. Yet the sharemarket boom has largely been driven by overseas investors.
Too few Japanese own stocks, and for those who do, holdings tend to be too small to drive spending. About 40 per cent of stocks are owned by the richest 20 per cent of the population; two-thirds of stockholders are older than 60.
The editor-in-chief of the New York-based Oriental Economist Report, Richard Katz, is among those who think the recent boom has been speculative; it's not as if Japanese companies have suddenly become more efficient or more responsive to shareholder gripes.
"The alleged wealth effect from the stockmarket rally is more of an advertising slogan from the PR firm of Abenomics' happy talk than a serious economic analysis," Katz says.
The BoJ's ultra-loose polices are also proving problematic. As investors consider the possibility of a reflated Japan, they are bidding up yields. Each surge is prompting the BoJ to come to the rescue with a few trillion dollars here and a few trillion there. As the frequency, speed and magnitude of these interventions grow, Kuroda is creating a pattern of moral hazard that the BoJ will be hard-pressed to break.
How does Japan expect bondholders to sit by quietly if inflation increases to 2 per cent, Kuroda's declared target?
One of the questions I have been asked most frequently over the past couple of years is: what happens if, and when, bond yields rise?
I am sure it is a question that has been repeated in many investment conversations since my previous column a fortnight ago.
Many who ask that question automatically assume, or want to assume, that the impact will be negative. They base this assumption on the persistent mood of doom and gloom that has prevailed since the darkest days of 2008-2009.
It is, of course, a very important question, because long-term bond yields are presumably lower than they would be in a “normal” world and, at some point, if the Western world ever returns to normality, they will rise. Needless to say, we have plenty of evidence from some countries inside the eurozone that they can also rise when things are not so normal.
But there is a big difference between the fact that yields are rising and the reasons behind it. Indeed, after a recent rise in Japan’s 10-year bonds to 1pc, the new Bank of Japan governor, Haruhiko Kuroda, argued that if Japanese growth returns to normal, then their economy and system can cope with yields at 3pc. He also pointed out that if yields were to rise without a full-blown recovery, then the consequences for the Japanese banking system would be quite challenging.
Many think that an understatement, given the size of Japan’s sovereign debt – around 230pc of GDP – could make the kind of chaos witnessed by some peripheral eurozone countries look like a garden party.
Japan is important because of the size of its economy and debts; its role in investing elsewhere in the world’s markets; and because of what it could mean, at some stage, for the UK, the US and possibly others, too.
Since the “shock and awe” that came with the appointment of Kuroda at the BoJ, 10-year bond yields have risen: indeed, their levels last week of around 1pc were actually double the lows reached around the time he was starting his job.
Those most bearish about Japan argue that, contrary to the optimism shown by many commentators and the Japanese stock market, this is indeed the beginning of the end for Japan. They see the start of an uncontrollable decline in the yen and a bigger pick-up in inflation than the BoJ desires, both of which, far from contributing to economic recovery, will actually put Japan into a new, more worrying, phase of economic weakness.
In such a horror scenario, it wouldn’t be too much of a stretch to add that major Japanese institutions would either choose, or be forced, to sell many of their foreign assets in order to bring money home, resulting in a major negative phase for many external markets, especially bond markets. Some popular emerging market debt, US Treasuries and a number of European bonds could suffer from such an outcome.
This could be a consequence of Japanese policymakers losing control of their domestic situation, and it is not an impossible outcome, but at this stage, I think it is an unlikely scenario. More feasible is that, as more domestic investors think the authorities are going to succeed with this new policy, bond yields could also rise but in a less damaging way – so long as overall financial conditions remain easier, or ease further.
I believe this to be a crucial point of distinction and I think that many Western central bankers – including some of our own Bank of England members – have misled themselves, as well as others, about measuring the effectiveness of so-called quantitative easing (QE).
Some policymakers, especially in the early days, tried to judge the success of QE by the impact it had on whether long-term bond yields were lower than they would otherwise have been. It always struck me that this was hardly a high hurdle, nor an appropriate one.
In fact, it could be a potentially troublesome criterion once markets believe the economy is starting to do better – as some might now think about Japan – because eventually, if economies return to normal, it would seem quite sensible that bond yields might return to normal.
Most economists would argue normal 10-year bond yields should equate closely to the trend growth rate, plus the inflation performance or underlying inflation expectation, plus some kind of risk premia. So, in an economy where inflation is targeted credibly at 2pc, and the growth trend is 2pc, then 10-year bond yields somewhere at 4pc or above would be normal.
Ultimately, for us here in the UK, 10-year gilt yields between 4pc and 5pc would be normal and, in that sense, would be desirable. Consequently, and in contrast to how some policymakers have measured their policies, I would argue, after each bout of QE, that higher bond yields would be the right yardstick, so long as they were accompanied by stronger equity prices and improved measures of business and consumer confidence.
Returning to Japan and Kuroda’s claim that the economy can cope with 3pc yields, the quicker such a move happens, the better for all of us, so long as it is in circumstances of easy overall financial conditions and improving Japanese confidence.
Jim O’Neill is the former head of Goldman Sachs Asset Management
Kuroda is caught between the mathematical impossibility of low bond yields and inflation.
Enjoy The Ride!
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.” ― Friedrich A. von Hayek
"I, on the other hand, am a fully rounded human being with a degree from the university of life, a diploma from the school of hard knocks, and three gold stars from the kindergarten of getting the shit kicked out of me." Blackadder.
Japan’s Prime Minister Shinzo Abe has revealed a long-term plan to revive his nation’s economy, which includes the setting up of special economic zones to attract foreign investment.
The strategies Abe sketched out in a speech on Wednesday form the third and most important plank in his "Abenomics" platform, which so far has focused on what he calls the first "two arrows" in his arsenal: loosening monetary policy and boosting public spending. He promised structural reforms to underpin growth in the long run as Japan's population ages and shrinks.
"Now is the time for Japan to be an engine for world economic recovery," Abe said. "Japanese business, what is being asked is that you speed up. Do not fear risk, be determined and use your capacity for action."
So far the government has taken only piecemeal initiatives such as loosening controls on online sales of over-the-counter drugs. Abe intends to raise private investment in roads and to set up "strategic economic zones" where private companies will be allowed to operate public facilities such as airports.
"These special economic zones seem like more of a trial instead of full wide-spread implementation so the good news is that they're trying things, making an effort to actually engage in some levels of growth," said Nick Maroutsos, founder and managing director of Kapstream Capital told CNBC.
Abe pledged to raise Japanese incomes by three per cent a year to protect consumers' purchasing power if the government meets its target of boosting inflation to two per cent within two years. However, his speech was short on details of how to achieve that aim after more than two decades of economic stagnation.
He also promised to raise Japan's per capita gross national income by more than Y1.5 million ($A15,592) in 10 years under the upcoming economic growth strategy. It now is about $US45,000 a year.
CNBC reported that the Abe government planned to fully liberalise the retail electricity market and aims to boost power related investment to 30 trillion yen ($US300 billion) over the next 10 years.
The website reported that aim was to attract investment in technology and the human resources industries.
Without sweeping changes to Japan's bureaucratic, agricultural, industrial and labour policies, economists say Abenomics is bound to provide only a temporary boost to growth while vastly increasing its public debt burden. All agree that reforms are needed to break Japan free of the deflationary malaise that has stymied growth since its bubble economy collapsed more than 20 years ago and sustain growth in the future.
Abe has repeatedly stressed his desire to encourage more women to work by improving access to affordable child care and extending parental leave. He also has called for improved English language instruction and loosening of labour regulations that discourage job hopping.
Abenomics is working. Or is it? Japan is going for broke with Shinzo Abe’s ‘‘three arrows’’ plan to reverse more than two decades of economic decline.
In an effort finally to rid the country of deflation, the Japanese Prime Minister has pledged to double the country’s monetary base, to engage in further fiscal stimulus (as if Japan needs more bridges to nowhere), and to shower his country with structural reform (which it certainly does need).
Early signs seem quite promising. Data released yesterday show that Japan grew at an annualised rate of more than 4 per cent in the first quarter, while the much weaker yen helped to double April’s current account surplus from a year earlier. Bank lending is rising and consumer confidence is improving. First set to Abe.
Unfortunately, there is still plenty of scope for things to go seriously wrong. There are three major concerns with Abenomics. The chief one is that by destabilising markets and raising bond yields, it threatens finally to tip the Japanese government into bankruptcy.
A second is the effects on trade. Already Korea, which competes directly with Japan in many export markets, is screaming blue murder over the extent of Japan’s currency depreciation. For America, it’s a bit different.
Given that it has been a pioneer in the application of ‘‘unconventional monetary policy’’, the US is less inclined to complain and, in any case, it welcomes anything that might give the world economy a boost. Yet even in America, there are rumblings, particularly in the still recovering auto industry.
And finally, it is not at all clear that Prime Minister Abe can deliver the structural reform the plan needs to work effectively. Without it, the time bought through monetary and fiscal accommodation will count for nothing in the long run. And what’s been announced to date has been distinctly underwhelming. Many of the reforms needed to make the economy grow again - in particular, removal of barriers to population growth, inward investment and trade - are red line issues for much of the Japanese population.
Yet it is the first of these concerns I wish to focus on, because of its obvious read across to heavily indebted western economies. The breakthrough in Abenomics is the realisation that, unless Japan can get some inflation back into the economy, the government is on a path to certain bankruptcy. The same point was recognised some while back in the US and Britain. Without inflation, the debt burden gets steadily worse.
The eurozone, fast following Japan into deflation, has yet to reach this moment of epiphany.
Net general government debt in Japan has already risen to a breathtaking 200 per cent of GDP. Even acknowledging the fact that the overwhelming bulk of this debt is domestically owned, there is a sense in which the Japanese lend to the government, rather than pay it the required level of taxation - it has plainly reached completely unsustainable levels, and is only affordable as things stand because of extraordinarily low interest rates.
The other side of the coin is that levels of indebtedness among households and companies have fallen to relatively low levels. Banks are also less leveraged than many Western counterparts. For Japan, the problem of excessive private sector debts is largely over, but that’s another story.
IN the five years since the financial crisis crippled the American economy, a favorite warning of those who have urged forceful government action, myself included, has been that the United States risked entering a long period of “Japanese-style malaise.” Japan’s two decades of anemic growth, which followed a crash in 1989, have been the quintessential cautionary tale about how not to respond to a financial crisis.
Now, though, Japan is leading the way. The recently elected prime minister, Shinzo Abe, has embarked on a crash course of monetary easing, public works spending and promotion of entrepreneurship and foreign investment to reverse what he has called “a deep loss of confidence.” The new policies look to be a major boon for Japan. And what happens in Japan, which is the world’s third-largest economy and was once seen as America’s fiercest economic rival, will have a big impact in the United States and around the world.
Of course, not everyone is convinced: though Japan reported a robust 3.5 percent annualized growth rate for the first quarter of this year, the stock market has dipped from a five-year high amid doubts about whether “Abenomics” will go far enough. But we shouldn’t read anything into short-term stock fluctuations. Abenomics is, without a doubt, a huge step in the right direction.
To really understand why things look good for Japan requires not only looking closely at Mr. Abe’s platform, but also re-examining the popular narrative of Japanese stagnation. The last two decades are hardly a one-sided story of failure. On the surface, it does look like there’s been sluggish growth. In the first decade of this century, Japan’s economy grew at a measly average annual rate of 0.78 percent from 2000 to 2011, compared with 1.8 percent for the United States.
BUT Japan’s slow growth does not look so bad under close examination. Any serious student of economic performance needs to look not at overall growth, but at growth related to the size of the working age population. Japan’s working age population (ages 15 to 64) shrank 5.5 percent from 2001 to 2010, while the number of Americans of that age increased by 9.2 percent — so we should expect to see slower G.D.P. growth. But even before Abenomics, Japan’s real economic output, per member of the labor force, grew at a faster rate over the first decade of the century than that of the United States, Germany, Britain or Australia.
China has driven up its investment ratio and depressed consumption. One effect of this is to ensure its excess production has been exported and external surpluses dilated, adding to China’s pool of national savings. These forces are being relaxed, so that as investment falls, consumption can rise and the trade surplus is also falling along with national savings.
In Japan’s case, their export-oriented industrial sector generated large foreign surpluses for many decades which have been partly held as foreign reserves and partly as domestic savings. Just as China has appropriated its savings flows to finance fixed capital investment, Japan has appropriated them to fund its own public works. This spending might count as “investment” in a sense, but at least in Japan has been a form of consumption spending in disguise – a substitute for private consumption.
Having blown its savings flows, Japan now needs to try to revitalise private incomes. But its industrial sector is oriented around providing public infrastructure and on capturing demand from the rest of the world. This is a problem for Japan because of the competition it faces from other export-oriented economies (especially but not only China), and because the growth rate in world trade has atrophied since the GFC.
Perhaps this is the destination for all economies that grow by pursuing export-oriented industrialization with the intention of capturing foreign surpluses. The surpluses have to be applied somewhere. In Germany’s case, they are recycled to debtors in Europe’s periphery. In China, they have been used to fuel modernisation and in Japan they have been used to shelter incomes in large parts of the domestic economy.
It seems that Japan still intends to use public “investment” – consumption spending in disguise – to support demand in the economy. Private investment and incomes and the export sector are now too weak to propel growth in consumption and savings. Since external surpluses are no longer adding to national savings, Japan intends to fund public consumption by printing. As the Bundesbank would say, this amounts to fiscal measures by monetary means, and reminds me of nothing so much as the Weimar Republic.
What Japan needs to do is stimulate private investment in its domestic economy. Policies aimed at increasing inflation and interest rates are most unlikely to do this. Instead, they should adopt measures that will comprehensively liberalise the economy, add to its productive potential, reduce its costs, create competition and, by reducing product prices, allow real wages to increase. This is far more likely to restore dynamism to Japan’s economy than the policies of further financial repression on which they have now embarked.
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