Abenomics: medicine or poison for Japan?

[kevsta]

Nikkei - very big picture

So I hadn't really ever looked closely at the Nikkei until this thread, but last night spent some time looking at the very big picture, and I'd have to say it doesn't look all that great. (apologies about size of image, but it needed to be this big to go back far enough and still be easily visible)

If one were to subscribe to the technical trader's views that all news, events etc are factored into the technical picture, and that there is any forward-looking insight into the broader picture available from market technicals, then this chart looks to me like it's setting up for an Abenomics fail on a longer-term horizon.

however as I have stated before, I don't actually think equities and economic fundamentals are very much connected any more, and will likely remain in this broken state until the constant supply of fresh liquidity stops. (or threatens to possibly slow down slightly lol)

*somewhere* & *eventually* this will bottom out and reverse, but I don't think it's here yet, and now. the most recent topping formation and that huge (unprecedented in Nikkei history) pin through the highs and 3000 pt reversal into bear again is not disagreeing with me technically.

you can also use this chart to check what I was saying about the latest rally being unnatural with 7 blue bars in a row, can we see another period ever back since 1990 where there have ever been 7 bars of the same color in a row?

and here's another interesting view courtesy of Netdania's "Relative to:" charts which start both products at zero percent bottom left and compare performance "relative to" over time.

Nikkei 225 relative to Gold (in JPY)

- whats Japanese for "Be Right, Sit Tight" again?

 

[kevsta]

Abenomics is doomed to catastrophic failure.

That's why the day after Kuroda's announcement, JGB futures hit a 52 week high and a 52 week low...on the same day!

[qimg]http://i40.tinypic.com/21ju008.gif[/qimg]

how much did the government's expenses vary from low to high in just that one day?

What's more, do you think the other Asian countries are going to sit around while Japan weakens the yen? Seriously? You think South Korea is going to let their export trade take that big a hit?

There is going to be a currency war such as you have never seen before. A race to the bottom.

I think it's safe to say it's well underway now? does anybody seriously think they are ever all going to (be able to) exit and reverse this? I don't.

 

[kevsta]

More like the speculators shorting the yen got burnt when it remained relatively strong and they are now jumping ship and buying yen to cover their positions.

firstly, "the speculators" who "got burnt" with an up-to 3000 pip move in their direction, before just retracing 400 of it again.

so if by "got burnt" you mean "made up to 3000 pips x (as many contracts as they could afford)

and by "the Yen stayed reasonably strong" you mean "the Yen collapsed 25% in six months giving rise to the above potential 3000 pip profits.."

then we agree.

for context here is a little leveraged "speculation" done by me back during all the fun, the trading position was a mere 4 contracts, and the trade ran 45 pips
the large traders are trading in the thousands (and 10's of 000's) contracts, and would queue up round the block to get burnt like this by the strong Yen all day long.

note. the trading is in $USD and at no point here was any buying Yen involved, nor did I have any to sell.

and various people did seem to manage the trades simultaneously too, unless they don't understand what they are talking about?

http://www.businessinsider.com/gundlachs-long-nikkei-short-yen-trade-2012-12

Jeff Gundlach's New Trade Idea Is Killing It
Joe Weisenthal Dec. 26, 2012, 5:28 AM 4,909 5

Jeff Gundlach is primarily known as a bond manager, but he does from time to time offer up some extremely clever trade ideas, such as his call earlier this year to go long natural gas and short Apple, which was basically the most contrarian bet imaginable.

On a recent conference call he tossed out another idea: Go long Japanese stocks (the Nikkei) and short the currency (yen).

We wrote about the trade 10 days ago, and said it was doing well, and since then it's just killing it even more.

so I don't think your theoretical views on this stand up to scrutiny really.

 

[lomiller]

I think what lomiller is saying is that for the Nikkei to be affected, you have to actually put money into it. You may be able to buy an index fund that tracks the Nikkei with dollars or euros or pounds, but the fund manager then has to convert that money into yen and use it to buy shares on the Tokyo Stock Exchange.

Think about it, you cannot actually drive up the price of something without buying it. Thus, I think the recent bull run and subsequent bear run have mostly been driven by domestic Japanese money.

Yup

 

[kevsta]

Yup

the reason we are discussing this was your claim that anybody who wants to

cannot “sell the yen and buy the Nikkei” simultaneously.

which is demonstrably false. hence what follows:

What seems to be happening with the yen is speculators are unwinding their positions. Speculators who bought into the currency crash/hyperinflation fears would have shorted the yen and need to buy yen to cover these positions to close out these deals.

is just uninformed speculation of a different kind.

 

[Puppycow]

here's a chart of funds flows into the Nikkei

Interesting. If I'm reading that correctly, then almost all of the new money was from foreign investors (at least during that time period) and domestic demand was negative? So most of the bull run came from outside money?

 

[kevsta]

Interesting. If I'm reading that correctly, then almost all of the new money was from foreign investors (at least during that time period) and domestic demand was negative? So most of the bull run came from outside money?

that was my understanding as trader-world piled into these trades Nov-Jan

I also read somewhere that less than 7% of Japanese actually own the Nikkei anyway and so benefits to them and the economy from the "wealth effect" would be very limited, but I cant seem to find that article again.

 

[Puppycow]

Here's an article about the effects of Abenomics on natto makers:

Natto Makers to Public Baths Suffer in Abenomics Divide

Almost everything Mikio Matsushita’s factory near Tokyo needs to produce natto is imported, from the soybeans used in the fermented Japanese snack to the polystyrene trays in which they’re packaged.

The reliance on imports, combined with the domestic market focus for the quintessentially Japanese product, puts Matsushita on the losing end of government policies that aid heavy exporters by weakening the country’s currency.

Here's the gist of it:

“The cost of the raw materials and ingredients are rising but we can’t raise the price of our products,” Matsushita, 62, said in his Kawasaki City factory as workers packed cellophane-sealed trays of the slimy fermented soybeans into cardboard boxes. “It’s really hurting our profits.”
. . .
“It’s impossible to raise the price,” said Mikio Matsushita, president of Matsushita Shoten Y.K., whose family has made natto for cafeterias and other food-service customers under the Matsushita Shoten and Sendai Natto brands since 1930. “If we do, our customers will just buy from someplace cheaper.

The deflationary mindset seems to be deeply ingrained here. It is true that natto is a competitive industry here. There are lots of different brands available in any supermarket. However, is it really impossible to raise prices? That's the goal of Abenomics after all. All the other makers are facing the same situation. If one raises their prices others will probably follow suit. This is a perfectly normal situation in most economies. When your cost of production rises, you raise your prices.

I'm a fairly regular buyer of natto (I don't eat it but my wife does). I have not noticed a rise in price at the supermarket yet. It still costs 88 yen for a package of 3, just as it has for a few years now. I admit that I am guilty of buying whichever one is cheapest.

 

[kevsta]

Here's an article about the effects of Abenomics on natto makers:

I always wonder about the reasoning of cheapening the currency to help a percentage of exporters, at the expense of the whole population who have to pay higher import prices on everything, and in Japan, who are low on their own internal resources, as you say many exporters aren't helped that much either.

 

[psionl0]

I always wonder about the reasoning of cheapening the currency to help a percentage of exporters, at the expense of the whole population who have to pay higher import prices on everything, and in Japan, who are low on their own internal resources, as you say many exporters aren't helped that much either.

It's a de-facto form of protection. A cheaper currency makes imports more expensive and therefore shields local industries from international competition.

Of course, other countries respond in kind and this leads to currency wars.

 

[kevsta]

It's a de-facto form of protection. A cheaper currency makes imports more expensive and therefore shields local industries from international competition.

Of course, other countries respond in kind and this leads to currency wars.

local industries that have to import all their raw goods to make things though?

 

[Puppycow]

I always wonder about the reasoning of cheapening the currency to help a percentage of exporters, at the expense of the whole population who have to pay higher import prices on everything, and in Japan, who are low on their own internal resources, as you say many exporters aren't helped that much either.

It's a de-facto form of protection. A cheaper currency makes imports more expensive and therefore shields local industries from international competition.

Of course, other countries respond in kind and this leads to currency wars.

Here's the thing: 5 years ago, the yen was weaker than it is today, and I don't recall natto makers complaining then. Basically it's the export sector that has been taking it on the nose for the last 5 years, while imports have been getting cheaper and cheaper.

Look at a yen/dollar chart that goes back 5 or 10 years. Sony went from a once profitable company to one that could not make a profit. So presumably if a strong yen is good for companies that import raw materials, they've had a very good stretch. I suspect that natto makers may have passed those savings on to customers as it is a competitive industry. If inflation is to take hold, the whole economy has to get used to the idea that prices are now going to rise. This would be natural in most places, but in Japan people got used to prices going down but not up.

 

[kevsta]

Here's the thing: 5 years ago, the yen was weaker than it is today, and I don't recall natto makers complaining then. Basically it's the export sector that has been taking it on the nose for the last 5 years, while imports have been getting cheaper and cheaper.

http://www.testosteronepit.com/home...ns-abenomics-salvation-is-already-a-fail.html

From mid-September to May 23 – the day the whole construct began tottering – the yen dropped 24% against the dollar. Then the Japanese stock market took a nosedive, and the yen retraced some of its decline. But it’s still down 18%. Japan’s attack in the Currency War was supposed to make it more competitive in international trade – but that, it failed to do. In fact, the opposite occurred.

Japan’s trade deficit in May jumped 9.5% from an already awful May last year, to ¥993.9 billion ($10.5 billion), the eleventh month in a row of trade deficits, the longest period of trade deficits since the series of comparable data started in 1979, the largest deficit for any May, and the third largest trade deficit ever.

The weaker yen did drive up exports by 10.1% in May from prior year, but imports, which now have to be paid for with the same weaker yen, rose 10.0%, from a much larger base!

China has become Japan’s largest trading partner, and largest export market. They might hate each other and needle each other and step on each other’s toes while they dance around their various disputes, island issues, and historic massacres, but they do trade. And the trade deficit with China soared 34.8% in May to ¥410 billion.

 

[Puppycow]

http://www.testosteronepit.com/home...ns-abenomics-salvation-is-already-a-fail.html

I think that's a little unfair to Japan because it ignores the effect of the major earthquake 2 years ago. Up until then, Japan relied heavily on (domestic) nuclear power for most of its electricity. Now, all but one or two of its nuclear power plants are offline, and it's filling the gap by importing fossil fuels.

I wonder what the trade balance would look like if Japan's nuclear power plants came back online. There is political resistance to that of course. My Japanese wife, who didn't used to care about it, is now against nuclear power. I personally think that they should upgrade their safety systems and make them more robust in case of a similar disaster, and then restart them once they are recertified under new standards. I think that Abe wants to do this too, but he has to move cautiously. I believe at least some of them will eventually be brought back online. In the meantime, a lot of new solar is being installed.

Before the 2011 meltdowns at the Fukushima Dai-ichi plant, Japan had all but neglected renewable energy, instead emphasising atomic power. But the accident at Fukushima forced the shuttering of the country's 50 operable reactors, only two of which have been restarted. The remaining shutdowns could prove temporary, with Japanese Prime Minister Shinzo Abe pledging restarts of reactors that have been deemed safe. A majority of Japanese, though, remain opposed to atomic energy, and analysts say the solar takeoff highlights Japan's appetite for other options.
. . .
This year, Japan's total solar capacity – 7.4GW at the end of 2012 – is set to roughly double, Bloomberg New Energy Finance said in a recent report. Such growth would make Japan the second-fastest growing solar market behind China and leave it only behind Germany and Italy as measured by total installed capacity. A gigawatt can supply power to an estimated 250,000 homes.

 

[kevsta]

I think that's a little unfair to Japan because it ignores the effect of the major earthquake 2 years ago. Up until then, Japan relied heavily on (domestic) nuclear power for most of its electricity. Now, all but one or two of its nuclear power plants are offline, and it's filling the gap by importing fossil fuels.

I wonder what the trade balance would look like if Japan's nuclear power plants came back online.

this as may be, this is the financial reality now and they're not coming back on imminently for a just-in-time sticksave are they?

 

[lomiller]

Interesting. If I'm reading that correctly, then almost all of the new money was from foreign investors (at least during that time period) and domestic demand was negative? So most of the bull run came from outside money?

One wonders where this outside money came from if people outside Japan were selling their yen instead of buying yen to invest in Japanese markets

 

[lomiller]

I always wonder about the reasoning of cheapening the currency to help a percentage of exporters, at the expense of the whole population who have to pay higher import prices on everything, and in Japan, who are low on their own internal resources, as you say many exporters aren't helped that much either.

The main reason you don't understand is because you have the relationship backwards. Currency gets cheaper because exporters do not productive enough to compete internationally, and it will decline until at least some exporters are competitive. Domestic consumers feel the effects of this lack of productivity in higher prices because exports are not high enough to pay for the goods they want to import.

A weak currency reflects weak economic conditions and you would expect a weak currency whenever you have weak economic conditions. You could keep the currency strong with a tight monetary policy, but this exacerbates the economic weakness.

 

[kevsta]

The main reason you don't understand is because you have the relationship backwards. Currency gets cheaper because exporters do not productive enough to compete internationally, and it will decline until at least some exporters are competitive. Domestic consumers feel the effects of this lack of productivity in higher prices because exports are not high enough to pay for the goods they want to import.

A weak currency reflects weak economic conditions and you would expect a weak currency whenever you have weak economic conditions. You could keep the currency strong with a tight monetary policy, but this exacerbates the economic weakness.

interesting (if outdated / incorrect) theories you have here. what actually happens is somewhat different.

The Keynesian and Monetarist fools in Brazil got what they asked, a weakening currency. Now they don't like the end results. Hot money is fleeing, the Real is sinking, inflation is soaring, and Brazil has no idea how to stem the tide (or the protests).

A similar fate awaits Japan's Abenomics as well as the Shadow Banking System in China

 

[kevsta]

One wonders where this outside money came from if people outside Japan were selling their yen instead of buying yen to invest in Japanese markets

..one clearly has no idea about modern market exchange mechanisms, Forex and /or futures contracts / options then ?

 

[lomiller]

..one clearly has no idea about modern market exchange mechanisms, Forex and /or futures contracts / options then ?

None of which change stock prices without money actually flowing into the stock market. Your own link said money was flowing from outside Japan into the Japanese markets, something that first requires these people to buy yen.