Pork-Barrel Spending Expert Becomes Finance Minister
It appears it is not enough for Shinzo Abe to attempt to wrest control over the nominally independent Bank of Japan from its board with the aim of getting it to “inflate Japan to prosperity”. The erroneous belief that one can get something for nothing by cranking up the printing presses is of course deeply ingrained all over the world, but as policy options go, it is an especially bad one for Japan with its graying and society and declining population. As we have mentioned before, inflation is about as useful to Japan's citizens as a hole in the head.
Now Abe also wants to add to the debtberg of his government, already the by far biggest in the industrialized world relative to the size of the economy, but more importantly, the most costly relative to the size of the government's tax revenues, even while interest rates are at generational lows.
To this end he has now appointed the 6th Japanese finance minister in three years, a former prime minister, and , 72 year old Taro Aso.
Aso is the scion of a cement manufacturer, i.e., he has ties to an industry that has always been one of the main beneficiaries of Japan's “artificial life support for malinvested capital” policies over the years. One might as well call him the new minister of bridges to nowhere.
According to Bloomberg:
“Taro Aso, son of a cement magnate and a champion of pork-barrel spending when prime minister, became Japan’s sixth finance chief in three years, auguring expanded fiscal stimulus in the world’s third-largest economy.
Aso, 72, will also serve as deputy prime minister and financial services minister in Prime Minister Shinzo Abe’s administration, Chief Cabinet Secretary Yoshihide Suga said in Tokyo yesterday. Fumio Kishida is foreign minister, while Akira Amari was named economy minister.
The finance minister’s first task will be to deliver on his party’s pledge of a “large-scale” supplementary budget to stimulate the economy, which is forecast to shrink for a third straight quarter. At issue will be averting any sell-off in the bond market as the nation grapples with debt in excess of twice the size of gross domestic product and as Aso calls for a new plan to restore fiscal health.
“Aso’s challenge will be to pursue an expansionary fiscal policy without triggering a rise in bond yields,” said Mari Iwashita, Tokyo-based bond strategist at SMBC Nikko Securities Inc. “It seems the LDP isn’t paying much attention to the bond markets. It’s possible that ratings companies may signal a downgrade as a warning.”
The Liberal Democratic Party must establish its own “framework” to curb spending and debt expansion, Aso told reporters early this morning after the Cabinet was sworn in by Emperor Akihito. Aso said he won’t adhere to limits made by the previous government to cap new bond issuance for the fiscal year ending March 31 to 44 trillion yen ($514 billion).
“We can see that Japan has completely failed to overcome deflation during the past three years,” Aso said. “Our priority is to ensure Japanese people can perceive that the economy is improving.”
Japan’s sovereign bond risk increased in the run-up to the assumption of power by the LDP, which won elections for the lower house of Parliament Dec. 16. The cost to insure the debt from non-payment for five years rose 14.5 basis points to 86 basis points as of 3:04 p.m. in Tokyo yesterday, from 71.5 basis points Nov. 13, according to data provider CMA. That’s on course for its highest close since Sept. 26, the data show.”
We have said it many times, but it should be said again: there is no 'deflation' in Japan and there never has been any. The Japanese true money supply has grown every single year since the bubble has burst, albeit at a far slower rate than during the bubble years. This has led to a barely noticeable, mild decline in prices in those years when productivity growth outran the increase in the money supply. We hasten to add that this is merely a 'rule of thumb' type of statement, as the connection between all these moving parts is of course not mechanical at all. There are leads and lags involved and the effects are both non-linear and influenced by numerous other factors that will differ from time period to time period. However, as a rule of thumb, this is certainly how inflation, productivity growth and prices hang together in principle.
So there is nothing that needs “curing” by the printing press. It is however still more astonishing that Aso and Abe seem to think that they has nigh endless room to maneuver with regard to issuing even more debt. Not only will the spending this debt issuance finances end up just as wasted as all previous stimulus budgets, but there is altogether too much debt extant and the priority should be to lower it, not add to it. By increasing the debtberg further at this juncture, Japan may well lose its last chance to alter the dynamics of what increasingly appears to be an inescapable endgame.
To be sure, the markets are so far not overly concerned. As can be seen below, while 5 year CDS on Japanese sovereign debt have indeed increased somewhat lately, spreads are so far still near the low end of their recent range. However, apprehension is likely to grow in view of the aggressive verbiage emanating from the new government.
Specifically, Shinzo Abe has also begun to refer to an ongoing “currency war” recently, indicating that he thinks it should now be Japan's turn to add kindling to the global fiat currency bonfire. Actually, pouring gasoline on it may be the more appropriate imagery (more on this further below).
There are strongly varying degrees of suspension of disbelief detectable in the markets. Not only are CDS spreads still tame, the Japanese government bond market continues to cruise serenely along near its recent highs, with all uptrend lines perfectly intact. The JGB market is basically greeting Abe's pro-inflation declarations a big yawn – it evidently does not really believe that he will get very far with these ideas.
It is quite different with the yen and the Nikkei, but these markets look by now rather stretched in the short term.
5 year CDS on Ireland, Belgium, France and Japan (the white line). At 81.09 basis points, CDS spreads on Japanese debt are the lowest of the four and remain about 65 basis points below their high of the past year – click for better resolution.
A weekly chart of the continuous JGB futures contract over the past five years. The bond market has lost all of a single point so far as a result of Abe's policy pronouncements, displaying a remarkable lack of concern – click for better resolution.
So far it would not be wrong to state that the markets seem to think it's all good and there can be no adverse consequences whatsoever as a result of the policies Abe proposes. So either the bond market is wrong, or Abe is more bark than bite. At least the Japanese government is mostly borrowing from its own citizens. As Steven Wright once remarked, it is always a good idea to borrow money from pessimists, as they usually don't expect to get it back.
In what has to be the laugh of the week in view of his proposals (award of the laugh of the month must remain reserved for now due to the ongoing 'fiscal cliff' antics in the US), Shinzo Abe complained over the holidays about other central banks printing too much money. Even more risible is that Mervyn King of all people (proud owner of 25% of all outstanding UK gilts) opined on the same topic concurrently, expressing his “concerns”:
“Japan's incoming prime minister fired a volley into increasingly tense global currency markets, saying the country must defend itself against attempts by other governments to devalue their currencies by ensuring the yen weakens as well.
Shinzo Abe's call comes as others including Bank of England Gov. Mervyn King warn that the world's economic-policy makers risk becoming embroiled in currency spats that could heighten tensions among countries.
Mr. Abe on Sunday called on Japan's central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies and noted that a yen level of around ¥90 to the dollar—it was at ¥84.38 in early Asian trading Monday, down from ¥84.26 late Friday—would support the profit of Japanese exporters. Tokyo markets were closed on Monday for a holiday.
"Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example," said Mr. Abe, referring to the Federal Reserve's policy of flooding the market with dollars by purchasing massive amounts of Treasury bonds and other assets.
"If it goes on like this, the yen will inevitably strengthen. It's vital to resist this," said Mr. Abe, who will become prime minister on Wednesday.
Mr. King, in an interview this month, said, "I do think 2013 could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns."
You couldn't make this up if you tried. Abe is yet another stand-up comedian manqué, and so is evidently King. They are on stage even so, only it's the wrong one. Abe is not even attempting to demand that the other central banks stop printing so much money – instead he wants the BoJ to simply out-print them, in a variation of the “two wrongs make a right” theme.
People trading the yen evidently believe Abe will be successful – although this is not yet backed up by hard data (while Japan's true money supply grew at a relatively brisk – for Japan – 4.3% year-on-year, it actually shrank by 1,6% annualized over the past quarter). As noted previously, speculators are now betting so heavily on a continuation of the yen's recent downtrend that it actually seems increasingly unlikely to continue for much longer, purely based on sentiment and market structure grounds.
Dollar-yen, cash, over the past year: the recent sharp decline of the yen has seen speculators amass a near record net short position in yen futures in the aggregate – click for better resolution.
The Nikkei index has meanwhile become short term overbought, although it would be incorrect to call it “overvalued” after the recent rally. It remains one of the cheapest markets in the world, as the recent rise is mostly a reflection of the weaker yen. Admittedly though both the longer term yen and Nikkei charts suggest that the recent moves may have further to go after a pullback.
The continuous Nikkei futures contract chart over the past five years. The recent rally was quite strong, but it is still just a blip in the longer term picture – click for better resolution.
As our readers know, we have waxed positively about Japan's stock market just before its recent rise, but that was mainly based on three factors:
Valuation, sentiment and the enormous decline in volatility. The first is what argues in favor of Japanese stocks in the long term, the latter two argued for a rally to begin in the near term.
So far so good, but we don't really like it that the rally was apparently driven by a weakening yen – that's just not a very good reason for the market to rally and makes the recent move increasingly vulnerable to disappointment.
Or in other words – to quote one of our favorite actual stand-up comedians for a second time (the master of the pithy one-liner, Steven Wright):
“If everything seems to be going well, you have obviously overlooked something.”
Charts by: Barcharts, Bloomberg
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “Arsonists Grab Matchbox in Japan”
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...