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[weigookin74]

http://www.wallstreetdaily.com/2015/08/31/japan-gross-domestic-product-gdp/


Collapse of Abenomics Threatens Global Stability
Published Mon, Aug 31, 2015 | Martin Hutchinson, Global Markets Analyst

Japan reported this week that gross domestic product (GDP) contracted by 0.4%, or 1.6% on an annualized basis, during the second quarter.

Meanwhile, Japan is carrying out the most aggressive money printing program in the world right now, and its budget deficit is also the largest among the world’s rich countries. Oh, and its public debt is also the world’s highest in terms of GDP.

All of which suggests that something is seriously wrong in the Land of the Rising Sun. Indeed, it’s Japan’s – and not China’s – economic policies that are most likely to collapse in ruin.

When Prime Minister Shinzo Abe took office in 2012, he vowed to get the Japanese economy moving back toward the 2% annual growth rate that was thought to be its natural “speed limit.”

One of his first steps was to appoint a new governor for the Bank of Japan, Haruhiko Kuroda. Kuroda instituted a bond-buying program that, relative to the country’s economy, was about three times larger than Ben Bernanke’s “quantitative easing” at its peak.

Abe also promised a program of reforms, including an overhaul of the labor market. A few reforms have been implemented, and others – such as the partial privatization of the gigantic, government-owned Japan Post – are at least underway.

But the real problem is the third leg of Abe’s program, a series of fiscal “stimulus” spending initiatives that have given Japan the largest budget deficit in the rich world. For 2015, The Economist’s team of forecasters projects a deficit of 6.8% of GDP.

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The United States, by comparison, runs a budget deficit equivalent to 2.6% of GDP. The figure is 4.4% in the United Kingdom and 2.7% in China.

To reduce the deficit, Japan sought to increase its sales tax – but the first increase, from 5% to 8%, caused the economy to relapse into recession. The second hike, to 10%, has been postponed from 2015 to 2017.

Approaching the Tipping Point

Before 1990, Japan had a conventionally cautious fiscal policy with surpluses in some years, spending below 30% of GDP, and debt below 60% of GDP.

However, during the prolonged recession of the 1990s, Japan’s Ministry of Finance was caught in the grip of Keynesian bureaucrats. Wasteful spending spiraled to around 43% of GDP, deficits soared to as much as 8% of GDP, and debt began its long rise to more than 200% of GDP.

Junichiro Koizumi, Japan’s prime minister from 2001 to 2006, partially cut spending and trimmed the deficit, but the recession of 2008-09 saw both spiral out of control.

The current Prime Minister, Shinzo Abe, was originally a disciple of Koizumi – but he hasn’t followed Koizumi’s policies. The result is that Japanese spending consistently exceeds the tax base, with net bond issuance currently 38% of spending and debt around 230% of GDP.

If Abenomics had worked, GDP would have increased and at least slowed the increase in debt. But Abenomics is producing neither real growth nor inflation. The current forecast from The Economist is for growth of 0.9% in 2015 and inflation of 0.7%. Both estimates – each of them probably too high – would still see the debt-to-GDP ratio increasing at a rapid clip.

Now, there are two mitigating factors at work currently.

First, Japanese savers hold the great majority of the debt – though this is of little help, as a government default would merely translate into national insolvency, and that’s not much of an improvement. Second, markets are liquid, confidence in Japan remains strong, and the Bank of Japan is covering the government debt with its bond purchases.

Still, the debt-to-GDP ratio is nearing a tipping point. The highest ratios that have ever been brought down successfully without default were about 250%, by the United Kingdom at the end of world wars in 1815 and 1945.

The first time, it was achieved through economic growth (the Industrial Revolution) and massive government austerity without inflation (the United Kingdom went back on the gold standard in 1819). The second time, it was done by suppressing interest rates and allowing inflation to erode the savings of the holders of government bonds – mostly the British middle class.

If Japanese bureaucrats give up Keynesianism and embark on a massive program of government austerity, without major tax increases, the problem might still be solved. But we’re close to the point at which it will become impossible, not just (to the Japanese political class) unthinkable. At that point, confidence will erode rapidly, and a crisis will ensue.

What form this crisis will take is unclear.

The yen’s value would likely collapse, perhaps halving to JPY250-to-USD1, impoverishing the Japanese people and causing hyperinflation but reducing the debt burden (since almost all the debt is yen-denominated at a low fixed interest rate).

If the Japanese economy has stopped growing, collapse has become not only unavoidable, but also imminent – and its effect on world markets won’t be pretty.

Good investing,

Martin Hutchinson

[Pitarou]

I wish people wouldn't paste in whole newspaper articles like that. It's a waste of time because most people are put off by the length of the post, and it risks attracting the attention of copyright lawyers.

If you really want people to read the article, it would be much better to present a few quotes that summarise it, along with a link for those whose interest you've piqued.

As for Japan's economy, lots of people, including me, have been saying "this can't go on" for many years, and yet it does. But it truly can't go on forever. It's only a matter of time before Japan's last scrap of savings is converted into government bonds, and then there'll be nothing left to do but start paying bills with freshly printed money. (The sheer scale of the Quantitative Easing programme leaves the government perilously close to doing that already.)

My advice to anyone who will listen is: keep a substantial chunk of your savings out of yen, and outside the Japanese financial system.

[RM1983]

[mitsui]

I have heard this for a long time, but it has not happened yet.
If Abe is just going to spend a lot of money, then the debt will go up.
230% of GNP is a lot of money.

Is a 10% rise of the sales tax going to be enough?
The government needs more tax revenues but when taxes go up, people buy less.
Incomes are stagnant. Too many people work for black companies.
Too many people oing dispatch.

I wonder when it will get to 250%.

[Chris21]

Well at least Japan has an increasing number of young taxpayers to foot the bill for the decreasing amount of pension and old-age health benefits it has to pay. Wait. I might have that backwards.

With decreasing revenue and increasing costs, the deficit will likely increase over time until the debt becomes so burdensome that the government decides to monetize the debt. Default is technically impossible for any country that can print its own money, so the debt will just be written off and the yen will plummet. Takeshi Fujimaki thinks the value falls to 400 by 2018.

And I'll be moving to Dubai!

[Maitoshi]

UNTIL they decide to monetize the debt? Where have you been for the past year?

[rxk22]

I dunno. think people are being silly about this. This is not all Abe's fault, and it is silly and almost childish to say so. Under Abe, corp earnings are MASSIVELY up. Which, despite no trickle down, this is still VERY GOOD for Japan. As, the account surplus, despite the trade deficit is still in the 10s of Billions of $ per month.


Japan inc has some systemic problems, that won't easily be cured. As the top here, is not in control. The Meiji era rebels were mostly lower level samurai, and the 30s whackiness was fueled by assassinations carried out by mid level officers. Mid level mng really rules Japan. Despite policies to curb long hours, companies can't implement them, and I blame the middle managers for this.


Anyhow, Japan inc has suffered from globalization. pre 1990s, countries mostly made stuff and exported it. Now, companies only export specialized products, such as heavy machinery. Now, most production is done in the respective country. Look at cars for example. Japan makes lots of cars, but only exports around a million or so. No more exporting 3-5 million, like years ago. Also most of the parts are globalized, so they no longer export tons of parts either.
This is rue for developed nations, not for developing/3rd world.

Alos, the internet never really arrived, which has hurt most companies not named SoftBank.

Anyhow, with massive amounts of overseas income, I don't think the yen can be devalued that much. ie to 400 to the dollar. I just don't see how that is possible.
I would bank in dollars tbh. Then again if you have most of you money in cash ie the bank, you're doing it wrong. You are losing out, massively to inflation. Stocks is where it is. Anything more than a down payment for a house, or 6-8 months of living expenses is highly unnecessary.


Again, Abe has actually gotten some change done, and he is the only PM is 20+ years to actually get anything done.
Plus Japan is close to getting a real military again. Which allows Japan to wear big kid pants in the world.

[Pitarou]

Some more context, for those who are interested. Here's a scathing article from Bloomberg on Abe's latest economic policy announcements:

Abe's New Economic Plan Confounds Analysts

And here's a slightly more technical piece from Zero Hedge which argues that the mess is going to hit the fan by the end of 2018:

The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play.

[rxk22]

Interesting. QE is witchcraft to me. I understand it's intentions but it still doesn't behave how it should I wonder if that is the reason for this low growth era post recession?

Japan wants inflation. Why not simply print money at thispoint? As it would serve to both lower thedebt and stim inflation. Even with QE we are seeing deflation here.

[Pitarou]

[mitsui]

Well, half of my money is in dollars.
I was thinking of buying a mansion in Kobe.

Maybe having property is better than having too much yen, especially if the yen slides.

I am pessimistic about the economy here, and want to move on, but with a Japanese spouse, I will probably be back at some point.

[timothypfox]

Remember the big players (ie big economic countries and international banks etc.) are the ones who decide if a problem is a problem. If they decide it's not a problem, then it's not a problem. Anyways, China is going to be Germany when and if Japan (aka Greece) tanks after the Olympics. Perhaps China will agree to write off debt for Japan, and Japan will allow people to withdraw more than 4000 yen a day from their bank accounts!

[Pitarou]

[rxk22]

Indeed. It is weird. As I see it QE crowds out buyers of bonds and banking derivatives which forces money into securities. Which has closed into NYSE and maybe the emerging markets.
What gets me is, there are the banks of the EU the USA and Japan and engaged in QE. Thestock mmarkets are all down, massively so. The emerging markets are seeing massive out flows and yet the bond markets are still dull. Where is all the money going?


For investing in Japan. Def pick stocks in companies that make most of their money oversees. I think yamahaeis like 90% overseas income while Asahi beer is like 10%. Unless Asahi really invests overseas seriously, it may not do well in the future.


BTW matoshi it's not the players allowing, it's as P says its the free market.

Also the Japanese account t surplus is huge. Which forces the boj to buy billions of foreign ssovereignbonds to keep the yen from inflating

[Inflames]

Fundamentally, absent large increases in productivity or large increases in the population of young people (not yet in their 40s), Abenomics is doomed to failure.

Japan, up until the late 80s, relied on a cheap yen to fuel exports - that model is basically broken, but Japan hasn't even realized this, much less attempt to do anything about it. Some manufacturers do quite well (for example, one company in Kyoto has a 60% share of the worldwide market for automobile exhaust test systems), but, for Panasonic or Sony (large companies with a choice of production areas), they simply don't want to produce here (same for Honda and Toyota).

QE in Japan is simply a way to try and get banks to lend. Japanese banks basically have zero ability to innovate and basically made all their money by taking in deposits (paying basically no interest) and buying government bonds. QE, by buying these bonds (BoJ is prohibited from buying bonds directly), is trying to force the banks to lend more money (except the banks basically don't know who to lend it to.