Abenomics: medicine or poison for Japan?

[stevea]

although stevea was referring to the US, this quote is extremely apt for the OP, except the figures are alarmingly higher.

Japan owes more than 20x it's annual tax revenue, and currently uses 25% of the revenue to service this debt, whilst at historically low rates.

One difference - Japan relies almost exclusively on Japanese investors and pensioners for bond sales. They had better hope th epopulation doesn't drop bonds in favor of equites, or they will see some severe taxes & likely inflation.

but hey the Nikkei went up so its all good.

Hapy happy joy joy {sarcasm}

and looks like going down a lot more yet.

+1

Hopefully this isn't the straw that breaks the international camel's back. {serious}. We have a bond bubble in the US and there is no hope Bernanke can over-rule a market panic.

 

[spin0]

'Don't know', as Kuroda said: "We took all available steps we can think of. I'm confident that all necessary measures to achieve 2 percent inflation in two years were taken today."

Interesting experiment going on, and we'll learn it's long term effects later on. Kuroda's simplified presentation and message was about twos (2x, 2a, 2%). I'm not sure if BoJ is committed to this experiment on a long term basis - are they actually ready to do more if their target of 2% is not approaching in two years (3x perhaps?).

ETA: Referring to this

Later we'll see the effectiveness of the monetary policy.

 

[kevsta]

One difference - Japan relies almost exclusively on Japanese investors and pensioners for bond sales.

but much of it institutional isn't it? NYT

60 percent of Japan’s government bonds are held by Japanese banks, insurance companies and pension funds. An additional 20 percent or so is owned by governmental organizations and the Bank of Japan.

institutional fund managers will put profit (and their jobs) before patriotism and will be the first of the first ones out of the door if it looks like they'll be getting negative real rates, surely?

and as I understand it they're struggling a bit with public buying slowing recently.

http://www.telegraph.co.uk/finance/...-girlband-AKB48-to-sell-government-bonds.html

Japan hires top girlband AKB48 to sell government bonds
Japan's cash-strapped government is reportedly turning to popular music group AKB48 to help it sell government bonds, as interest in the low-yield paper wanes.

I wouldn't expect this to reverse as the deal gets worse?

 

[stevea]

but much of it institutional isn't it?

Yes, ~75% by institutions, but these include pension funds and insurance companies. I don't have a breakdown of bank holdings vs these investment institutions. For example consider that the Japanese postal system holds ~$2.1TrlUSD in bonds for individuals and another $1.2TUSD as life insurance; that's 25% of household assets ! My main point is that only ~5% are foreign held (vs ~50% for the USA).

institutional fund managers will put profit (and their jobs) before patriotism and will be the first of the first ones out of the door if it looks like they'll be getting negative real rates, surely?

But if bond demand and prices decline, their yield increases until competitive. I would not anticipate negative real returns, as the US bond bubble has produced.

There are cultural, regulatory, and central bank influences at work. There are also a lack of investment options at the 'retail' level (inefficiency).

I wouldn't expect this to reverse as the deal gets worse?

If J.wages lag behind J.prices (as is likely) then they likely will save less causing a drop in bond sales. Otherwise, I assume that new issue bond prices will decline so that rates incorporate inflation+ to compete with alternative investments. Whether their financial markets are efficient enough to do this is unclear.

 

[kevsta]

My main point is that only ~5% are foreign held (vs ~50% for the USA).

ok, yes, the USA are fundamentally even worse off, long term

But if bond demand and prices decline, their yield increases until competitive. I would not anticipate negative real returns, as the US bond bubble has produced.

but if the yield increases, somebody's selling (sold) ? and if it increases much at all, it's checkmate on the debt service vs tax revenue?

or what am I missing?

There are cultural, regulatory, and central bank influences at work. There are also a lack of investment options at the 'retail' level (inefficiency).

If J.wages lag behind J.prices (as is likely) then they likely will save less causing a drop in bond sales. Otherwise, I assume that new issue bond prices will decline so that rates incorporate inflation+ to compete with alternative investments. Whether their financial markets are efficient enough to do this is unclear.

I think we shall see soon enough, the pace of the global problems seems to be accelerating fast at the moment.

 

[lomiller]

Amazingly shallow thinking.

Yup, that Milton Friedman was such a "shallow thinker"


http://www.hoover.org/publications/hoover-digest/article/6549

 

[kevsta]

Kyle Bass on this a couple of months back. if you dont know Bass he nailed subprime, and he nailed Greece on CDS trades from 2009. He says this is the really big one.

he actually said a while back

this is the most obvious thing I've ever seen in all my career, its only a matter of when.

While Kyle Bass notably remarks that pinpointing the end of a 70-year debt super-cycle is naive, the combination of the resurgence of nationalism (impacting trade with China) and the dreadful impact of the earthquake/tsunami (drastically changing Japan's supply chain) has secularly shifted Japan's trade balance for the worst at a time when the current account is already negative. "They are all in denial," Bass notes as the government has failed to deal with its problems over the last 20 years.

Simply put, Japan needs a Schumpeterian 'creative destruction' moment instead of the constant rolling of debts and expanding of government balance sheets to paper over the cracks. The 'moment' feels like it is now, he notes, expanding that "JPY could hit 200," as they lose control; following two decades of volatility-smoothing, the chance of a disorderly collapse are high.

Critically, he fears, "the social fabric of Japan will tear," as with one-third of the nations at retirement age, the fallout from the policies of Abe-Kuroda could cause them to "lose 30-50% of their life savings." What is perhaps even more concerning, he adds, "you are starting to see the central banks not trust each other."

At a certain point in time, "nationalist interest takes over the global [G7] kumbaya," and that is occurring now.

"When your debts are 24-times your government tax revenue, you have a secular decline in population, and all of the things are finally catching up to you, what happens when you have a debt crisis?"

Central Banks believe "Devaluation is 'supposedly' the way to freedom"


3:00 - Japan's tearing social fabric

4:30 - G7 Kumbaya unwind

6:00 - "There is no way out" for Japan - it's a matter of when not if. And "if there is no way out for them, there is no way out for the rest of us - unless we change the way we operate."

6:30 - "If there is no consequence to the US profligacy [rates not moving against them] well then they will keep spending." - "Central banks are enabling the spending"

7:15 - "The Modus Operandi of the west is running deficits; and what that has meant in the past is runaway cost-push inflation - and I think that is what we are going to see"

8:00 - "Investors are too complacent" - this is the single-most riskiest time to be complacent in our generation - "investing with the typical endowment model... is not going to work"

9:00 - "The insidious nature of a runaway inflation is that it bankrupts the middle class... the poor stay poor, the middle class (with savings in the banks) get wiped out, the wealthy (with productive assets) do the best"

9:40 - ... which leads to social unrest globally - and that is a problem...

 

[Tippit]

One difference - Japan relies almost exclusively on Japanese investors and pensioners for bond sales. They had better hope th epopulation doesn't drop bonds in favor of equites, or they will see some severe taxes & likely inflation.

Where are all the new yen going if not being used to buy japanese government bonds (besides the Nikkei, apparently)?

 

[Puppycow]

One difference - Japan relies almost exclusively on Japanese investors and pensioners for bond sales. They had better hope th epopulation doesn't drop bonds in favor of equites, or they will see some severe taxes & likely inflation.

According to the new plan, the central bank itself will purchase 70% of all new debt issued. So they only really need investors to buy the remaining 30%.

 

[stevea]

but if the yield increases, somebody's selling (sold) ? and if it increases much at all, it's checkmate on the debt service vs tax revenue?

or what am I missing?

You are missing nothing important.

Note that bond prices depend on auction & market pricing, with typical supply/demand issues. So no individual needs to sell bonds to cause a decline, a bad auction is sufficient.

The government of Japan has a sovereign currency and can print their way out of debt (soft default).

Yup, that Milton Friedman was such a "shallow thinker"

http://www.hoover.org/publications/hoover-digest/article/6549

You comments bear no relationship to Friedman's suggestion from decades ago. It's pure Argumentum ad Populum fallacy to conflate your statement's w/ Friedman's argument.

Abenomics involves
- targeting inflation
- new government spending (by 2% of GDP)
- quantitative easing
So Abenomics is not nearly the same as Friedman's prescription. Friedmans position was also in the context of rapidly growing world and Asian economies - certainly not the case today.

The shallow thinking is not Abenomics, nor Friedmans idea but your assertions.

Deflation and very low inflation increase bond values. Bond values will always drop going from these to the modest inflation levels required for economic growth. Meanwhile the value of stocks is tied to economic growth, and they will go up in periods of economic growth.

Those are three trite truisms that don't tell us anything about whether Abenomics will result in real growth. IOW shallow.

IOW these numbers suggest the markets are predicting economic growth.

No - they immediately suggest investors anticipate the obvious yen devaluation.
Strike three, but thanks for playing.

Where are all the new yen going if not being used to buy japanese government bonds (besides the Nikkei, apparently)?

Agreed - the Japanese access to foreign investment seems amazingly underdeveloped. What would you do if you were a Japanese citizen looking to protect a nest egg ?

According to the new plan, the central bank itself will purchase 70% of all new debt issued. So they only really need investors to buy the remaining 30%.

This 'twist' smells familiar (and bad) ....
I don't yet have any good numbers on their expected outlays for bond repurchase, direct spending, and QE, but this is looking pretty scary.

 

[stevea]

Kyle Bass on this a couple of months back. if you dont know Bass he nailed subprime, and he nailed Greece on CDS trades from 2009. He says this is the really big one.

he actually said a while back

Kyle Bass was on CNBC last week and said words to the effect that investing in Japan now is like stopping to picking up dimes in front of a bulldozer.

http://video.cnbc.com/gallery/?video=3000159028

So Bass & lomiller are predicting very different outcomes.
I'm wagering on Bass.

lomiller - care to make any paper trades to prove your point ?

 

[lomiller]

Abenomics involves
- targeting inflation
- new government spending (by 2% of GDP)
- quantitative easing
So Abenomics is not nearly nearly exactlythe same as Friedman's prescription.

Friedman advocated increasing the Japanese base money supply (AKA quantitative easing) until inflation reached a more desirable range. I don't think he gave a specific value but he was probably looking for ~2%

Friedmans position was also in the context of rapidly growing world and Asian economies - certainly not the case today.

Friedmans comments were in the context of a Japanese economy that was showing near zero growth despite near zero interest rates because it was stuck in deflation/ liquidity trap which is nearly exactly the case today.

 

[lomiller]

No - they immediately suggest investors anticipate the obvious yen devaluation.
Strike three, but thanks for playing.

Repeating a false claim doesn’t make it any more true, but thanks for playing...

 

[stevea]

Friedman advocated increasing the Japanese base money supply (AKA quantitative easing) until inflation reached a more desirable range. I don't think he gave a specific value but he was probably looking for ~2%

No - a loose money policy is not QE, you don't understand basic definitions.
http://en.wikipedia.org/wiki/Quantitative_easing
Unless you had a seance channeling Friedman your other claim is nonsense.

Repeating a false claim doesn’t make it any more true, but thanks for playing...

Then YOU should stop repeating all your silly falsehoods on this forum.

YOUR claim about forseeing growth is not the most reasonable conclusion based on the evidence. It fails Occams razor. Your after-the-fact assertion that your statement is a result of Friedman's 30yo suggestion is not just nonsense based on the facts at hand, but an ad Populum fallacy a well. You can't even accurately distinguish Abenomics policy from Friedman's idea. It's genuinely ridiculous for you to assert that long-dead Friedman would still support that same policy idea today.





You failed to address my suggestion that we test out claims by means of a paper trade.

lomiller - care to make any paper trades to prove your point ?

So you believe this policy will result in Japanese growth.
I'll suggest that you take the Nikkae225 index as your proxy.
Pick another proxy for Japanese growth if you wish.

I believe that we will see yen devaluation, and I'll take
YCS (ProShares UltraShort Yen ETF) as a proxy.
(somewhat thinly traded & volatile, but ...)

Both converted to any common currency for comparison.
Let's say we start 4/15/2013 /?

 

[kevsta]

I would just like to say how nice it is to have somebody to discuss actual performance instead of *theoretical academic* all the time.

I have taken some stick here over the years for putting more credence into fund managers who actually perform, rather than talk about vagaries.

You failed to address my suggestion that we test out claims by means of a paper trade.

So you believe this policy will result in Japanese growth.
I'll suggest that you take the Nikkae225 index as your proxy.
Pick another proxy for Japanese growth if you wish.

I believe that we will see yen devaluation, and I'll take
YCS (ProShares UltraShort Yen ETF) as a proxy.
(somewhat thinly traded & volatile, but ...)

Both converted to any common currency for comparison.
Let's say we start 4/15/2013 /?

the Yen devaluation is just easy money so far, as long as you can get in safely.

against the Euro the question du Jour is

"can the BOJ firehose "money" faster than the Euro can collapse ?"

just out of EJ counter-trend trade, will looking for reversal (long) again wherever they stop-run the bottom. it will probably just keep going without me now, like on the way up, I was pretty pleased with 180 pips off 1.19, until it ran 1100 more the next week lol

 

[stevea]

the Yen devaluation is just easy money so far, as long as you can get in safely.

Which is exactly my point.

Meanwhile the value of stocks is tied to economic growth, and they will go up in periods of economic growth.

IOW these numbers suggest the markets are predicting economic growth.

lomiller fails to recognize that the PRICE (not value) of stocks is tied to the value of the yen vs value of the stock. So lomiller's thesis is that markets are predicting that this complex, new ground, policy will result in econ growth, therefore stock values increase. My thesis is that markets are observing the far more obvious fact that the yen will most certainly decline in value.

The value of Japanese stocks may well increase as they have since 2009 & particularly Q4 2012, but jacking the currency by 2%/yr has a direct impact on price, but not value, of stocks.

against the Euro the question du Jour is

The Euro is a mess, but UDSJPY looks very similar as a longer term trend (weeks).

 

[kevsta]

Which is exactly my point.

lomiller fails to recognize that the PRICE (not value) of stocks is tied to the value of the yen vs value of the stock.

So lomiller's thesis is that markets are predicting that this complex, new ground, policy will result in econ growth, therefore stock values increase. My thesis is that markets are observing the far more obvious fact that the yen will most certainly decline in value.

The value of Japanese stocks may well increase as they have since 2009 & particularly Q4 2012, but jacking the currency by 2%/yr has a direct impact on price, but not value, of stocks.

this is a disease that affects the majority of "investors" IMO - "Nominalerium"

 

[Puppycow]

Which is exactly my point.


lomiller fails to recognize that the PRICE (not value) of stocks is tied to the value of the yen vs value of the stock. So lomiller's thesis is that markets are predicting that this complex, new ground, policy will result in econ growth, therefore stock values increase. My thesis is that markets are observing the far more obvious fact that the yen will most certainly decline in value.

The value of Japanese stocks may well increase as they have since 2009 & particularly Q4 2012, but jacking the currency by 2%/yr has a direct impact on price, but not value, of stocks.



The Euro is a mess, but UDSJPY looks very similar as a longer term trend (weeks).

A weak yen has been correlated with a higher Nikkei average for a long time. And conversely a strong yen tends to be seen as bad news at the Tokyo Stock Exchange. This is because export-oriented companies benefit from a weak yen.

Granted 2% inflation could explain a 2% increase in share prices. And the exchange rate could account for some of it too, although the yen is still stronger vs. the dollar than it was in 2007.
When I think about economic growth I think about real growth, not nominal growth. When newspapers report the latest GDP growth or contraction figures, they report real figures, not nominal. I'm pretty sure that when lomiller says growth he means real growth, not nominal.

 

[lomiller]

No - a loose money policy is not QE, you don't understand basic definitions.

Once again you are arguing by repetition. Quantitative easing is simply a term pasted onto the polity Friedman was describing, that is increasing the money supply until there is measurable inflation in the economy.

Here Friedman is again,

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately

This is what the BoJ is doing now. Not that I needed it but it's also worth noting it fits exactly the wiki link you submitted as evidence

If the nominal interest rate is at or very near zero, the central bank cannot lower it further. Such a situation, called a liquidity trap,[21] can occur, for example, during deflation or when inflation is very low.[22] In such a situation, the central bank may perform quantitative easing by purchasing a pre-determined amount of bonds or other assets from financial institutions without reference to the interest rate.[5][23] The goal of this policy is to increase the money supply rather than to decrease the interest rate, which cannot be decreased further.

Again this was your link...

Then YOU should stop repeating all your silly falsehoods on this forum.

YOUR claim about forseeing growth is not the most reasonable conclusion based on the evidence.

Again argument by repetition. It IS the most reasonable conclusion based on the evidence, as I've already shown.




Regardless of whether the Yen goes up or down Japanese will:
1) sell bonds on fear of inflation, which is a by product of economic growth
2) buy stocks on the prospect of economic growth.

Since this is exactly what's happening we can conclude Japanese investors are predicting economic growth.

lomiller fails to recognize that the PRICE (not value) of stocks is tied to the value of the yen vs value of the stock.

Perhaps for a few multinationals this is true, but the broader market the value of the Yen isn't a big long term factor because it's dominated by domestic investment.


Also you seem to be making a fundamental mistake in treating stocks to something like gold that has little intrinsic value and gains it's price though trade. Stocks on the other hand can be valued based on their earnings. If those earnings are expected to increase the price goes up. This is how investors like Warren Buffet make their money.

 

[lomiller]

A weak yen has been correlated with a higher Nikkei average for a long time. And conversely a strong yen tends to be seen as bad news at the Tokyo Stock Exchange. This is because export-oriented companies benefit from a weak yen.

This holds for the larger multinationals but not the broader market. A better explanation is that overly tight monetary policy has strangled the Japanese economy for nearly 2 decades, and only in periods where that has eased slightly has there been any of the economic growth that underpins the growth in stock prices.


Monetary influences aside you should not expect to see a strong currency and weak growth simultaneously, especially in an export heavy economy. High currency value combined with low economic growth suggests a lack of liquidity in the economy. Go back and look what happened to the USD when the banking crisis hit and liquidity disappeared, it shot up a good 20% against most currencies in a few months and then eased back down as liquidity started to return.