Abenomics - What You Should Know
Hi all – I've always had a big interest in Japan – with the recent news and Abenomics in full swing, thought it'd be great to give everyone a primer on Abenomics and what's happened so far.
Abenomics boils down, in essence, to three different "bazookas", as Finance Minister Taro Aso puts it :
1. Monetary Easing
This is essentially akin to the U.S. Fed QE, but on a larger scale – remember that Japan is smaller than the US; the purchases will amount to ~twice the relative size of the Fed's QE3. This is accomplished through assets purchased by the BoJ (Bank of Japan)
2. Fiscal Stimulus (Temporary)
This will be used to close any discrepancy in output (negative of course). The BoJ has stated that if the inflation targets are not met, they will utilize and even increase the size of the stimulus.
3. Structural Reform
Perhaps the most important factor in sustaining long-term growth, this refers to the larger goal of de-regulating labor markets and increasing efficiency/productivity.
What's Happened So Far
Since the first wave of Abenomics took effect, the Nikkei has risen over 60-70%. The yen has weakened significantly since December 2013, from ~80/dollar to a little over 100/dollar today. However, growth has slowed in 3Q, and the government is still working to boost wages. In addition, many foresee that the BoJ will implement additional easing in '14.
Common Misperceptions
Japan's absolute decrease in labor numbers is not as pronounced as many state – projections of 30-40% decrease in the labor force by a certain year may look good on paper, but remember that extrapolation can sometimes lead to numbers that are unfeasible with a little thought.
The gross debt for Japan is also a common misperception – while still a multiple of GDP, it is important to note that this is a gross number and doesn't account for monetary base value, debt held by the BoJ, and other reserves/balances. Net debt is actually a fraction of the commonly stated numbers.
Putting Things in Perspective
There's obviously a lot left to do – while QE and increasing the monetary base is easily done, long-term structural reform is much more difficult. Japan has historically been very averse to internal change, and even if this were to happen, will be extremely slow. Furthermore, there is a mismatch between Abe's conservative stance and the necessary liberal reforms needed to enact such unprecedented reforms.
However, this time around may be different – with the growing pressure from China and emerging markets and Japan's need to address its public debt and potential default problems, we may very well see such structural reforms enacted.
Final Thoughts
Personally, I'm cautiously optimistic about prospects in Japan. I believe that you're not really buying policies, but rather the PM. Abe has done a great job of selling his product, but needs to follow up with proven long-term results. Hopefully both the need for change and the upcoming Olympics will help change the way Japan thinks, but only time can tell.
Feel free to discuss! Tried to keep this as short as possible :)
By the time fiscal stimulus/QE etc begin to taper off in Japan, what do you think will emerge as primary drivers of growth in the country? And how do you think the China-Japan economic relationship will develop, given their current political impasse but huge trade interdependency? And how many more seasons of Pokemon do you think are feasible?
IMO, primary drivers will be related to markets and other countries. If other countries raise their inflation targets relative to Japan, inflation in Japan will be stymied - if other countries don't change their targets, then the weaker yen will persist.
Foreign investment is crucial as well - while private investments have increased, they're mainly domestic - same thing with residential construction (and the real estate game is entirely different in Japan compared to the US). They'll need the structural reforms and long-lasting impacts such as foreign interest, but that is all up to how Abe performs now.
Domestically long-term, women and a better labor system would help immensely. That is pretty much undisputed.
China-Japan: obviously the interdependency won't (hopefully) destroy anything material. There's a rivalry and face game going on, if you remember before when China replaced Japan as the #2 economy. I think Japan will have to pursue alternative alliances, etc., which will cause them to step out of their comfort zone.
BUT HERE'S THE MAIN REASON YOU CAME HERE Bro pokemon is like a flagship enterprise – the seasons won't stop as long as pokemon keeps existing. Probably another decade imo, but you never know; all I can say is…fck Lance no one catches ice pokemon their first time around to deal w/ the dragons. Plus Venusaur sucks.
Cheap money(QE) is a terrible fix. They'll have a bubble here shortly, just like the one we will experience in the US thanks to Bernake and Yellen.
Thanks for the nice summary - interesting experiment to say the least. I'm also interested to see how it turns out, but I'm a bit less optimistic. Currency Wars not good...
@glm1510 QE may be bad in the context of the US, but for Japan, it's probably a good thing as a jump-start. That's because it's relatively new, plus a possible catalyst for other change. Remember that the QE is essentially doubling the monetary base of Japan.
@WallStreetOasis.com Currency wars are awesome – all I care about are cheaper flights to Asia hehehehehe
Assuming it works, Abenomics would be a temporary solution since it doesn't solve their long term demographic problem.
@danin650
Which is why I mentioned that women and deregulation of the labor markets are necessary - the government reforms definitely come more easily than the cultural change, though. Plus, people tend to only see immediate rewards, not long-term benefits, so it'll be tough to see if these policies, if enacted, will last.
I don't do much currency trading anymore, but my 2 cents for macro economic trends with FX would be short the yen using the kiwi. I wrote a paper before Abe became PM about currency manipulation in Japan and it was interesting to see the value of the yen continue to be devalued. Against the dollar it has gone down almost 25% in a little over a year. There is still room for additional devaluation, especially as QE3 begins to wind down.
Why wouldn't you short it directly?
In currency trading, you have the ability to choose which currency you use to short it. So I could use the euro, the dollar, the franc, basically anything I choose. While the dollar is a strong bet, especially as QE3 winds down, it will strengthen the dollar in value, but at the same time, the correleation between the yen and the dollar are higher than the yen and the new zealand kiwi. Both the yen and dollar are considered "safe haven" currencys and in terms of risk, I would rather use an alternative currency to short the yen so there is less correlation in my trade.
As China's middle class continues to grow and the change with their 1 child policy, this trend is going to influence the New Zealand currency significantly because many of the things China needs (dairy product for example) come from New Zealand.
That is the picture I see playing out right now.
Also if I shorted the yen using the dollar, if I was wrong, I would be extra screwed as opposed to only screwed.
@Magneton QE isn't real money. It is never good. Saying it is bad for the US but good for Japan is a farce. Economic principles are absolute and will respond the same under all conditions. If you're in favor of Keynesian economics, then yes, QE or BOJ intervention is a good thing. But, I see no way that you can fundamentally argue in favor of any type of monetary stimulus triggered by BOJ. That money is being created by borrowing from future debtors(the japanese public); it is not "real" money. Furthermore, BOJ is artificially lowering rates and just as is the case with QE and the american economy, that money is going to their market, the Nikkei, not production. You heal an economy by letting the market rid itself of malinvestments and weak businesses naturally, not by the fed or BOJ throwing free money at a problem.
All of these Japanese corporations, as in the US, are able to issue debt at extremely low rates because BOJ has driven rates down and put it towards malinvestments such as stock buybacks and other financial assets; again, not production. So yes, in the short term, the Nikkei, and the Dow, will rise because there is essentially free money being given out to put into nothing but equities. And why is money only being put into equities? Because rates are driven SO low by BOJ/FED that equities are the only option. In the short term- 3-5yrs- you will have a bounce, but all you are doing is delaying the inevitable and making things worse by never letting any real cleansing or healing take place. Cheap money is never the answer.
Japan's problem is an aging demographic, which translates into less production. While that looks bad on paper, it is not actually bad. They don't need to continue to produce more than is necessary just for the sake of having an expanding GDP. If allowed to operate organically, their economy and markets will work itself out.
Thanks for your input - would say that QE in Japan has, so far, succeeded in its goal to increase borrowing. Don't agree with your statement on Japanese companies not using the cash - buybacks and financial asset purchases invest in both short-term and long-term growth of the company and are positive indicators.
Would also say that investor sentiment, at least domestically, is still a bit wary, though better in the private sector.
You're incorrect in your logic in equities allocation: the correct reasoning is that Japan has historically had a high savings rate and an aversion to equities; most of the savings are in JGBs and cash. Equities will become a bigger part of the portfolio because inflation erodes bond value AND because investor sentiment is optimistic - any negative news will typically send people back to bonds.
In fact, the biggest buyers of Japanese equities are foreign investors. They're doing this because of the positive foreign currency translation effects and increased corporate margins due to a depreciating yen and the fact that the Japanese companies are heavy on exports.
Production in Japan is largely based off of productivity, which can be improved greatly - but that's another issue. Keep in mind the effects of Fed tapering and additional BoJ stimulus.
Finally, please try and understand that Japan is different from the US - while your logic may somewhat work for the US, it is different in Japan where markets and sentiment are inherently different from the US's.
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