Abenomics: medicine or poison for Japan?

[kevsta]

Nomura's Koo with some thoughts.

Potential benefits and dangers of “quantitative and qualitative”easing

Massive supply of reserve deposits has not sparked inflation

Before Mr. Kuroda was appointed BOJ governor, base money supplied by the Fed under quantitative easing amounted to 16.0x statutory reserves (Figure 1). The corresponding multiples for other central banks were 9.7x for the BOE, 4.8x for the BOJ, and3.8x for the ECB.If the money multiplier were functioning properly, the money supply would therefore be 16 times larger than it currently is in the US, 9.7 times larger in the UK, 4.8 times larger in Japan, and 3.8 times larger in the eurozone.

If such an expansion in money supply actually took place in a short time, it would normally entail a similar increase in prices,leading to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan.

The reason why this has not happened will be discussed in detail below. In short, however, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. And with no one borrowing money and many actually paying down debt, the money multiplier has turned negative at the margin.

however if they manage to pull off the perception shift that they will get inflation..

Inflation expectations and BOJ exit strategy will push interest rates higher

The risk here is that not only borrowers but also lenders will start to believe the lies.

No financial institutions anticipating inflation could ever lend money at current interest rates. A financial institution that suddenly saw inflation on the horizon could not continue holding 10-year government bonds that yield 0.6%.

The resulting rush to sell could trigger a crash in the JGB market, inflicting heavy damage on domestic financial institutions.The question is how the Kuroda BOJ would respond to such a crash. If it began buying more JGBs, the monetary base would expand, stoking inflation concerns at a time when private demand for funds was already recovering and the money multiplier had turned positive at the margin.

But if the BOJ sold its JGB holdings in an attempt to quell inflation concerns, bonds would drop further, blowing a large hole in the balance sheets of financial institutions and the government.

 

[kevsta]

lol, perhaps a little simplistic, but still..

 

[Puppycow]

lol, perhaps a little simplistic, but still..

Confirms something I said earlier:

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.

Didn't realize the correlation was that close though.

 

[Puppycow]

Approval Ratings For Abe Cabinet Between 66 And 76%: Media Polls

These are rather high ratings for a Japanese Prime Minister.

 

[Puppycow]

Yen’s Weakness Means Crowds at Tokyo Disneyland in Golden Week

The weakening yen has turned Japan’s annual Golden Week, a string of springtime holidays, into a boon for domestic tourism.

The uptick in the traditional May holiday week points toward one of the best years on record for Japan’s tourism industry, still recovering from the earthquake and tsunami of March 2011. The yen’s slide, part of Prime Minister Shinzo Abe’s drive to boost economic growth, is luring overseas travelers while tempting Japan’s holidaymakers to stay home. Tokyo Disneyland expects a record number of visitors this year.

 

[Puppycow]

Today is the first day of trading after a 4-day weekend in Tokyo. The Nikkei is up 466 points, or 3.41% atm.

 

[kevsta]

Today is the first day of trading after a 4-day weekend in Tokyo. The Nikkei is up 466 points, or 3.41% atm.

if it wasn't open for trading Friday I expect its just the algos arbing Friday's spike on US & European Indices.

there is of course a perfectly good reason that the DOW, the S&P the UK FTSE, the Spanish Ibex, the German Dax & the Italian 40 indices all look exactly the same at the moment for the last 3 months or so.

it will of course be the complex and independent fundamental picture in each of these very different countries that has produced charts you can barely tell apart from each other.

 

[The Don]

if it wasn't open for trading Friday I expect its just the algos arbing Friday's spike on US & European Indices.

there is of course a perfectly good reason that the DOW, the S&P the UK FTSE, the Spanish Ibex, the German Dax & the Italian 40 indices all look exactly the same at the moment for the last 3 months or so.

it will of course be the complex and independent fundamental picture in each of these very different countries that has produced charts you can barely tell apart from each other.

Really ?

France and Germany look pretty similar but the others are nothing alike over the last 3 months. I think it's easy to tell them apart.

 

[kevsta]

Really ?

France and Germany look pretty similar but the others are nothing alike over the last 3 months. I think it's easy to tell them apart.

yea, you're right, 3 months is an exaggeration, but the last month or so is pretty close on the 1hr chart.

the general liquidity flow is fairly clear over the 3 month period, though, ..can you "name those markets" ?

one might think there was a global "recovery" on or something

 

[The Don]

yea, you're right, 3 months is an exaggeration, but the last month or so is pretty close on the 1hr chart.

I don't think they have the same shape

- Some seem to be rising pretty consistently
- Others are all over the place

In any case, aren't we all just exposed to the global market in any case. One of the reasons given for the performance of the FTSE100 is that 75% of profit from the FTSE100 companies comes from abroad.

 

[Puppycow]

there is of course a perfectly good reason that the DOW, the S&P the UK FTSE, the Spanish Ibex, the German Dax & the Italian 40 indices all look exactly the same at the moment for the last 3 months or so.

Just as an aside, I heard on a podcast that the Dow is actually a pretty lousy index for getting an accurate picture of the stock market as a whole. The S&P 500 is better.

For example, the Dow is basically an average of the share price of 30 large companies. It's not the total market capitalization, and thus movements of companies with larger share prices (but fewer shares) affect the average more than companies with smaller share prices (but more shares).

 

[Puppycow]

The New York Times weighs in:

Pro-Inflation Policies Show Signs of Helping the Japanese Economy

TOKYO — For almost two decades Japan’s economic fortunes have deteriorated, and little seemed to be done about it.

But in the last few months, the nation’s new prime minister, Shinzo Abe, has pushed policy makers and other officials to take bold steps to revive one of the world’s largest economies. Their handiwork was evident on Thursday when the Japanese yen hit 100 to the dollar for the first time in four years.

Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar. But in Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.

The most immediate impact of the weaker yen has been the boost in profits of the major exporters. This week, the Toyota Motor Corporation reported net income in the last 12 months jumped threefold, and Sony produced an annual profit for the first time in five years. Both companies forecast further profit increases largely because of the weaker yen.

Perhaps more important, particularly for the citizens of Japan who have suffered from a long period of falling wages and prices, the yen’s move is expected to kindle inflation in the once moribund economy.

The Nikkei is up another 360 points or 2.56% so far today and appears headed for a big gain on the week. It closed at 13,694 at the end of last week and is at 14,554 right now.

Japan Posts Biggest Current-Account Surplus in Year as Yen Falls

 

[Puppycow]

The Nikkei is up another 360 points or 2.56% so far today and appears headed for a big gain on the week. It closed at 13,694 at the end of last week and is at 14,554 right now.

For a little more long-term (or medium-term) perspective, the Nikkei closed at 8,676 on Nov. 12th last year. That's up over 67% in half a year.

 

[kevsta]

For a little more long-term (or medium-term) perspective, the Nikkei closed at 8,676 on Nov. 12th last year. That's up over 67% in half a year.

there's plenty of precedence for the fact that printing money makes stocks go up.

"You lose sight of what is important if you're focused on nominal prices in equities," said Bass, founder of Dallas-based Hayman Capital Management.

http://www.cnbc.com/id/100427307

"One of the best performing equity markets in the last decade has been Zimbabwe," he added. "But now your entire equity portfolio only buys you three eggs."

edit. re the Nikkei specifically, yes its going well isnt it. if they can keep this trend going for another year the target is 40,000

 

[The Don]

there's plenty of precedence for the fact that printing money makes stocks go up.

The way it was described specifically with respect to the Japanese economy is that QE has caused the value of the yen to drop which has in turn provided a significant boost to both the Japanese economy at large and the profits of Japanese corporations in particular.

As I've mentioned in another thread, there are a number of reasons for the rise in stock prices, not all of which are directly linked to QE (although it QE leads to economic growth I guess everything would be down to QE). Summarising the reasons:

• Big corporations are more dependent on world economic conditions. World growth is at long term averages
• The home markets (in this case Japan) are also picking up
• Corporations are making big profits and are sitting on huge cash reserves....
• .....which they are paying out in dividends
• The money has to go somewhere and bond yields and interest on cash is low right now.

edit. re the Nikkei specifically, yes its going well isnt it. if they can keep this trend going for another year the target is 40,000

The Nikkei has been in the doldrums for a very long time indeed. This may be (yet) another false dawn like all those in the 1990s. I personally think that 40,000 any time soon is cloud cuckoo land but IMO there is a real chance that it may return to trading in the 15,000 - 20,000 range that it was in before the dotcom bubble burst.

That said I have no basis for my prediction and my historic inability to predict movements of stocks and markets means that it'll probably be back below 10,000 by this time next week

 

[Puppycow]

there's plenty of precedence for the fact that printing money makes stocks go up.



edit. re the Nikkei specifically, yes its going well isnt it. if they can keep this trend going for another year the target is 40,000

Even if you convert the price to dollars, the Nikkei is still up significantly from 6 months ago.

Heck, convert it to gold or silver if you prefer. The gold and silver price in yen from 6 months ago vs. now.

 

[Puppycow]

Nikkei closed over 15,000 today. Bad day for gold though. Looks like the gold recovery after the massacre last month was a dead cat bounce.

 

[kevsta]

Nikkei closed over 15,000 today. Bad day for gold though. Looks like the gold recovery after the massacre last month was a dead cat bounce.

heh, in what currency are you measuring my money this time?

re DCB, it will be proven in hindsight, ie if (in $USD) we eventually go and trade lower than 1320, it was a DCB. Otherwise we're just rangebound between $1320 and $1480

edited to say you can actually clearly see the statistically "unusual" state of the Nikkei easily here..

..because, on any timescale you choose, from 5 minutes through to monthly like this, it is quite unusual to see more than 5 (ie six) bars of the same colour follow each other without a break, exponentially more unusual for 7, and the same again for 8.

we are actually showing 8 upbars going vertical at this point, these are far from normal markets

 

[The Don]

Other frightening predictions for Japan courtesy of Charles Biderman:

How will it end this time? My guess is that initially at some point in the next few months the Japanese currency will plunge to 200 to the dollar, much more then the Japanese Central Bank wants. That will create financial panic in the Japanese consensus based society. After that the Euro will be next then followed the US dollar, forcing all three economies into a sort of bankruptcy.

I don't see it happening myself

From this the end of this blog entry - original link provided by kevsta in another thread:

http://charlesbiderman.com/2013/05/01/fourth-quarter-spiked-income-and-boosted-taxes/

 

[kevsta]

Peter Schiff on Japan on Yahoo TV



will he be right all over again?