Corrigan: The Many Inconsistencies of Abe's Policy

Readers of this blog are well aware of a number of key points we have made for a good while now, among others the one (which you'd think should be fairly obvious, but you'd be surprised…) that the BoJ cannot have '2% inflation' and expect that to happen with JGB yields remaining below 1% concurrently – unless it is prepared to become the sole owner of the entire JGB market.

Sean Corrigan was recently interviewed at CNBC Europe and has pointed out that Shinzo Abe's economic policies are riddled with many such inconsistencies. It really makes one wonder what the point of it all is.

Here is the link to a video of the interview with Corrigan. We highly recommend investing the few minutes. As Corrigan notes, one doesn't have to necessarily predict a catastrophic outcome, and such an outcome seems unlikely in the near term anyway. However, that does not alter the fact that the policy evidently attempts to achieve things that are inherently contradictory.  As Corrigan says at one point: 'How any of this helps, nobody knows'.

Indeed, nobody knows, but Krugman likes the policy reportedly. Also, the assorted magic wand wavers at the G-7, G-20, the IMF and other political/bureaucratic outposts widely regarded as significant and/or important all have given their placet and endorsed this inflationist nonsense sotto voce.


Japan's GDP Data – or How to Become Richer by Becoming Poorer

As an addendum to the above, in a recent Diapason report, Corrigan inter alia tackles the 'good news' of 3.5% GDP growth that was recently reported by Japan and widely hailed as 'proof' that Abenomics is 'working' already.

As he points out, a significant worsening in Japan's terms of trade due to the declining yen (import prices went up by 6.9% or 30.8% annualized, while export prices increased only by 4.3% or 18.2% annualized in the quarter), led to a significant statistical improvement in 'real' GDP, as the larger deflator for import prices left a greater residual to be added to real GDP.

As a consequence, Japan's statistics minions concluded that real net exports were better by 31.7% on the quarter, or a stunning 238.7% annualized, instead of worse, as they were in nominal terms, thanks to the gain in 'real' exports of 3.8% or 16.1% annualized and the lesser increase in 'real' imports of 1%/4.06%. (note: annualized numbers are not simply multiplied by 4, but show the compounded gain if the quarter-on-quarter increases were to continue at the same percentage rates). Incidentally, as Corrigan points out, this exercise also pushed down the overall deflator, which is tantamount to a signal to Kuroda-san to inflate even more! Regarding the  ultimate effect on the GDP report Corrigan remarks:


“To sum up, despite an appreciably worse monetary balance tinkling through the nation's cash registers, real net exports gave an overall boost to Q1's increment of real GDP of that of Q4 of no less than 50.4%!

This, then, was not so much the magic of easy money at work for good, but for ill. It was a classic screw-up in the calculation process which served to render an anyway highly schematic and invariably distorted GDP datum into even more of a fairground hall-of-mirrors freak than usual. Because the so-called 'terms of trade' – i.e., the volume of imports able to be gained in exchange for a given volume of exports – moved to Japan's disadvantage, its people were just shown to have become richer by dint of becoming poorer.”


As we have discussed previously, this is precisely how one could sum up the mercantilist fallacy underlying the so-called 'currency wars'. One does not become magically richer if the exchange value of one's currency declines. The opposite is the case; one needs to produce and export more goods than before to obtain an amount of goods from abroad that is equivalent to the previously imported amount. Whatever monetary gain the export industries can point to in domestic currency terms is but fleeting – it exists only for as long as it takes for domestic prices and wages to adjust to the new situation.

In short, the end result of a decline in the currency's exchange value is not that one becomes richer, but that one becomes poorer. It is a case of 'what you see is what you get', i.e., it couldn't be more obvious. Only those who believe that a nation's welfare depends on its trade balance would argue otherwise, but to this it must be repeated that national borders have no economic significance. 'Nations' don't trade with each other, individuals do. Every single trade is to the mutual advantage of the parties engaging in it, otherwise it would not take place. Whether such trading individuals reside in different nations is utterly irrelevant.

The only thing that can possibly be said to be 'bad' about e.g. the trade deficit of the US with Japan is the fact that it has been egged on by credit expansion causing overconsumption in the US and Japan's mercantilist currency policy impelling its central bank to monetize oodles of US debt in a kind of gigantic vendor financing scheme (the same can be said about China). It is a good bet that if everybody were using sound money and eschewing credit expansion via fractional reserve banking, international trade imbalances would be far smaller and correcting more frequently. However, this should not detract from the basic fact that all voluntary trade is beneficial as such. It is merely a comment on the current monetary system, not a belaboring of the alleged evils of trade deficits. Those are merely a figment of mercantilist imaginations.


Kuroda Calls on Banks to Lend

Obviously there has been a dearth of private sector credit demand in Japan in recent years/decades. At first, corporations as well as individuals were forced to deleverage after the bubble had burst. Banks had to deal with a mass of unsound credit on their books and likewise needed to slowly nurse their balance sheets back to something resembling health (of course it is debatable whether holding JGBs worth 900% of their tier 1 capital is really a sign of balance sheet health).

BoJ chief Kuroda has now come up with an idea how the banks may be better able to withstand the coming rise in interest rates. His advice: lend more.


“Bank of Japan Gov. Haruhiko Kuroda is calling on commercial banks with solid capital positions to be more aggressive in lending, something the central bank sees as crucial to getting the economy out of deflation.

"The process to overcome deflation is also the process for the financial system to recover its vigor," Mr. Kuroda said Sunday at a gathering of academics in Tokyo.

The BOJ regards a shift in funds by financial institutions from safe government bonds to riskier assets, such as stocks and foreign assets, as one of the mechanisms it wanted to put in motion with its unprecedented monetary easing undertaken in April. The strategy also includes getting banks to initiate more lending. Such a shift, called a "portfolio rebalancing effect," is one of the three things the BOJ hopes to bring about, the others being putting broad downward pressure on bond yields and achieving a rise in inflation expectations toward a 2% rate of inflation in two years.

Mr. Kuroda said that unlike in the late 1990s, when Japanese banks were saddled with mountains of nonperforming loans, banks now have the capital to expand lending and are resilient to external shocks, such as a rise in interest rates. Referring to a question of whether banks have been fulfilling their role in the economy, he said that low profit margins in lending have kept them from being "full of vigor and dynamism."

Mr. Kuroda acknowledged that recent reports showed that banks have increased lending for activities related to mergers and acquisitions, real-estate and natural-resources transactions, but he said loans to smaller companies have remained "sluggish."


(emphasis added)

Okay, but lend to whom? In Japan's case there is certainly not a shortage of wealth that could be lent by banking intermediaries to eager borrowers, if only there actually were enough eager borrowers. The problem is that Japan's demographic trend means there are fewer and fewer potential borrowers around year after year. It is not a matter of the banks not being able to lend (although the ZIRP policy has certainly sapped their interest rate margins), it is a matter of credit demand undergoing a natural shift in a downward direction. This is independent of the post bubble effects on private sector balance sheets, which have been largely worked out by now.

An essential point that seems to have escaped the members of the Abe administration and their appointees at the BoJ is that Japanese administrations have largely been tasked with what could be termed 'decline management' in recent years. Due to the country's culturally ingrained resistance to immigration, Japan's population decline is accelerating.

It may well be erroneous to extrapolate that decline indefinitely into the future (we cannot know whether some future Japanese generation decides to bear more children), but if the current trend persists over the next few decades, the population will decline by roughly 20 million people to 107 million from the current 127 million by 2040. The demographic profile of society suggest as much, with a quarter now aged 65 or older, while only 13% are children aged 14 or younger. Last year two ominous records were set: the biggest population decline in a single year in Japan's history, while at the same time the lowest number of babies was born since births have been systematically recorded.



Meanwhile, 10 year JGBs have been falling again overnight (May 28), but continue to  cling to the previously mentioned important shelf of longer term lateral support that extends from about 139 to 141 points.



JGB-15 minute

The JGB contract stair-steps lower again. While these moves appear to be small, they refer to the second biggest outstanding public debt pile in the world, so the absolute amounts lost by holders in the aggregate are fairly sizable – via – click to enlarge.



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3 Responses to “‘Abenomics’ a Race to Nowhere”

  • JasonEmery:

    I doubt the situation in Japan is significantly different from the USA. Our federal deficit is mostly masked in the form of unfunded liabilities. For almost three decades the American people have been overtaxed under the guise of ‘contributing’ to social security,lol. In reality, the plan is ‘pay as you go’, or as the American people are about to find out, ‘pay as you WENT’.

    Kyle Bass makes some good points, but I have never heard him compare apples to apples. Our annual deficit, using GAAP accounting is $7 trillion, or about 40% of GDP. I’d be curious to know what Japan’s is on that same basis. It wouldn’t surprise me if Japan’s GAAP deficit is also in the 40% neighborhood.

  • ab initio:

    There’s some $14 trillion of JGBs outstanding. And several hundred billion in new JGBs being issued every year. If there is sufficient selling of JGBs then all the banks, pension funds and insurance companies loaded up with JGBs will need to further reduce exposure. The money question is can the BoJ print enough to keep the selling pressure muted and yields capped while at the same time not shredding the Yen exchange rate? The other question is will Japanese banks and pension funds consider it their “patriotic” duty to accept losses on their portfolio as “inflation expectations” ratchet up?

    Seems like a high-wire act to me.

    On another note it looks the short Yen trade while crowded for some time and sentiment rather bearish again for sometime – will there be a reversal or will the Yen drop down the chute?

  • The stories go on. I couldn’t comprehend how they showed a 3.5% growth, but it was pretty clear it was made up. There was boasting about the consumer confidence numbers in the US. The number is still at what has been for the past 40 years, a recessionary number. You would think it was over 100.

    There are too many large numbers that can go haywire in Japan. There are 2 ways you manage debt to where you can get out of deflation. Totally destroy the collateral basis of the currency or more debt. I believe I have read the total debt in Japan is over 500% of GDP. The government is raising in taxes half of what it spends. What would happen if they had to tax to get money to keep spending? The next thinning of population might be the political class.

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