Showing posts with label lost decade. Show all posts
Showing posts with label lost decade. Show all posts

Tuesday, 19 February 2013

Abenomics

Abenomics Is Back: Shinzo Abe Returns As Japanese PM Following Crushing LDP Victory

Tyler Durden's picture
Submitted by Tyler Durden on 12/16/2012 11:15 -0400    Zero Hedge



To little surprise, and confirming the pre-election polls, Shinzo Abe, who previously was Prime Minister of Japan from September 2006 to September 2007, has just won a second chance in today's Japanese election, following a crushing defeat by the LDP and the concession moments ago of challenger Yoshihiko Noda (who will no longer be watchim\ng, watching, watching). As BBC reports "The LDP, which enjoyed almost 50 years of unbroken rule until 2009, is projected to have an overall majority in the new parliament. Mr Abe has already served a Japan's Prime Minister between 2006 and 2007. He campaigned on a pledge to end 20 years of economic stagnation and to direct a more assertive foreign policy at a time of tensions with China. He is seen as a hawkish, right-of-centre leader whose previous term in office ended ignominiously amid falling popularity and a resignation on grounds of ill health. But Japanese media project big gains for his LDP who they say are on course to win between 275 to 310 seats in the 480-member house." In other words, with Japan's sharp turn to the right, this time will be different, and Abe will succeed where previously he failed miserably, or so the people, who have long abandoned any hope of an economic recovery, dare to hope.
What happens next? One word: Abenomics:
By contrast, Mr Abe has promised more public spending, looser monetary policy, and to allow nuclear energy a role to play in resource-poor Japan's future despite last year's nuclear disaster at Fukushima.

But economists say there is little new in Mr Abe's policies, or 'Abenomics' as they have been called. They have been adopted by previous LDP governments without successfully renewing the Japanese economy.

Mr Abe has also called for a tough stance on a territorial row with China over islands in the East China Sea that both countries claim.

But neither of the main parties fully convinced voters. Several new parties contested the poll and the right-leaning Japan Restoration Party founded by the mayor of Osaka, Toru Hashimoto. could win as many as 50 seats.

And the nationalist former governor of Tokyo governor, Shintaro Ishihara, whose bid to buy disputed islands provoked a fierce diplomatic showdown with China, may also have won a seat in parliament according to Japanese media.
One thing appears certain: Japan, which is the grand Keynesian experiment in keeping bond yields in check even as sovereign debt/GDP is approaching 250%, may have some trouble with the coolness and calmness of bond investors now that Abe has even threatened with making the BOJ a branch of the government, setting 3% inflation targets, and outright monetizing the debt (without even the courtesy of semantical coverage).
In fact, as Bloomberg summarizes, Abe is the worst premier for JGBs since 1994:
Shinzo Abe, the front-runner to replace Yoshihiko Noda in elections this weekend, oversaw a 1.2 percent gain when he was in office for a year through September 2007, the least since a loss in the two months that Tsutomu Hata was in power in 1994. In the 15 months under Noda’s watch, JGBs returned 3.2 percent, the most among the six successors to Junichiro Koizumi, who stepped down in 2006, data compiled by the European Federation of Financial Analyst Societies and Bloomberg show.

“Noda has been friendly to the bond market, and he literally risked his political career for Japan’s fiscal consolidation,” Shunsuke Doi, a market analyst in Tokyo at SMBC Nikko Securities Inc., one of the 25 primary dealers obliged to bid at government debt sales, said on Dec. 12. “An Abe administration would be an unfriendly environment for bonds, and super-long term yields are more likely to remain high in years ahead.”

Longer-term bonds are signaling concern about Japan’s fiscal health. The yield premium on 20-year JGBs over 10-year securities climbed to 99 basis points on Dec. 5, the highest since 1999. That compares with a gap of 68 basis points for similar maturity U.S. Treasuries.

Abe’s September 2007 statement for resignation from Japan’s top office made no mention of his economic record except for a growth strategy “centered on innovation and openness.” It listed the upgrade of Japan’s defense agency to a ministry-level position among his achievements.

Japan’s debt has climbed to 237 percent of its annual economic output, the most in the world, compared with 183 percent in 2007 during Abe’s previous tenure as prime minister, according to data estimates by the International Monetary Fund.
The fact that something is rapidly changing in Japan can be confirmed by the following comparison of Japan vs US 10s30s, where suddenly Japan is getting far more concerned about the long end even compared to the country run by Blackhawk Ben:


and stand alone... JGB 10s30s at record steeps...

"Not so honest" Abe's return deserved a special mention in the latest Privateer letter by Bill Buckler:
The man of the hour in Japan right now is Shinzo Abe, the leader of the Liberal Democratic Party (LDP) and the man almost universally expected to become the new Japanese Prime Minister on December 16. Mr Abe has been the Prime Minister before - as recently as 2006. His resignation in 2007 ushered in the modern era of “annual governments”. If Mr Abe gains the top spot this time, he will become the sixth Japanese Prime Minister since he last held the job in 2007.

The policies Mr Abe is selling, the ones which are expected to lead to his electoral victory, have been dubbed “Abenomics” by the Japanese media. Mr Abe wants to further increase what is so politely called “monetary easing”. He also wants to embark on yet more infrastructure projects while at the same time pushing the exchange value of the Yen down to foster the “competitiveness” of struggling Japanese companies. Finally, Mr Abe is expected to put pressure on the Bank of Japan to start DIRECTLY monetising Japanese sovereign debt. He has gone so far as to suggest that the 1998 law which ostensibly granted the BoJ independence from government be rewritten or simply scrapped.

If there is any political prescription which can finally push Japan over the brink and bring on a dreaded spike in Japanese interest rates, it is the one being pushed by Mr Abe. Any increase at all in the borrowing rates being paid by the Japanese government would be instantly catastrophic. When, not if, that happens in Japan, it will be the end of the line for all those advocating stimulus via the printing press all over the world. If Mr Abe follows through on his policies after December 16, it’s only a matter of time.
Buckler is spot on, however the Japanese people are hardly aware of these nuances, and hardly aware that any ongoing blow out in bond spreads as Abe's targeted inflation goal of 3% is hit, will achieve two things before any vaunted "recovery" in the economy comes:
i) all Japanese banks and insurance companies will go promptly bust and require a massive bailout, but by Japanese citizens (most likely to be footed once again by the Chairman in exchange for the recent Japanese favor in buying US TSYs, in a time when China has decided to boycott any such purchases), and
ii) all Japanese tax revenues will go merely toward covering the cash interest on the government debt, as the following two charts summarize quite well:
Sovereign debt/government revenue. Japan is at, oh..... 2000%. Can you say living on the edge?

Total Japanese debt, which at last check was breathing on JPY 1 quadrillion:

And once the Japanese domino falls, and Kyle Bass is finally vindicated, the entire house of Keynesian cards will promptly follow.
Congratulations Japan: you may have just been the first to push the grand reset button.
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The Lost Decade (Japan)

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The Lost Decade or the Lost 10 Years (失われた10年 Ushinawareta Jūnen?) is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years 1991 to 2000,[1] but recently the decade from 2001 to 2010 is also sometimes included,[2] so that the whole period of the 1990s and 2000s is referred to as the Lost Two Decades or the Lost 20 Years (失われた20年, Ushinawareta Nijūnen).

Contents

 [hide] 

[edit] History

The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a speculative asset price bubble of massive scale by Japanese companies, banks and securities companies. The combination of exceptionally high land values and low interest rates briefly resulted in heightened liquidity in the market. It led to massive borrowing and heavy investment mostly in domestic and foreign stocks and securities.
Recognizing that this bubble was unsustainable, the Finance Ministry sharply raised interest rates in late 1989. This sharp policy caused the bursting of the bubble, and the stock market crashed. A debt crisis followed and the Japanese banks and insurances were now loaded with bad debts. The financial institutions were bailed out through capital infusions from the government, loans from the central bank and the ability to postpone the recognition of losses, ultimately turning them into zombie banks. Yalman Onaranof of Salon stated that the zombie banks were one of the reasons for the following stagnation.[3] Additionally Michael Schuman of Time magazine noted that these banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on bail-out funds. Schuman believed that Japan's economy did not begin to recover until this practice had ended.[4]
Eventually, many of these failing firms became unsustainable, and a wave of consolidation took place, resulting in four national banks in Japan. Many Japanese firms were burdened with heavy debts, and it became very difficult to obtain credit. Many borrowers turned to sarakin (loan sharks) for loans. (Even now in 2012, the official interest rate is 0.1%;[5] it has been similarly low for several years.)
The 1990s therefore was the "lost decade" when the economy contracted or grew at a paltry rate. The impact on everyday life was muted, however. Unemployment rates were high, but not at a crisis level. With the traditional Japanese emphasis on frugality and saving, an impact on an average Japanese family was quite limited, whose standard of living did not deteriorate significantly from what it was in the 1980s.[citation needed]
Despite the economic recovery in the 2000s, conspicuous consumption of the 1980s such as lavish spending on whiskey and cars did not return for the most part.[6] Difficult times in the 1990s made people frown on ostentatious display of wealth, while Japanese firms such as Toyota and Sony which had dominated the industry in the 1980s had to fend off strong competition from rival firms based in South Korea, Taiwan, and other countries. Many Japanese companies replaced a large part of their workforce with temporary workers, who had little job security and fewer benefits. As of 2009, these non-traditional employees made up more than a third of the labor force.[7] As of August 2012, the nation's economy has not fully recovered from the 1991 crash.[2]

[edit] Interpretations

Economist Paul Krugman has argued that Japan's lost decade is an example of a liquidity trap (a situation where consumers and firms saved too much overall, thereby causing the economy to slow). He explained how truly massive the asset bubble was in Japan by 1990, with a tripling of land and stock market prices during the prosperous 1980s. Japan's high personal savings rates, driven in part by the demographics of an aging population, enabled Japanese firms to rely heavily on traditional bank loans from supporting banking networks, as opposed to issuing stock or bonds via the capital markets to acquire funds. The cozy relationship of corporations to banks and the implicit guarantee of a taxpayer bailout of bank deposits created a significant moral hazard problem, leading to an atmosphere of crony capitalism and reduced lending standards. He wrote: "Japan's banks lent more, with less regard for quality of the borrower, than anyone else's. In so doing they helped inflate the bubble economy to grotesque proportions." The Bank of Japan began increasing interest rates in 1990 due in part to concerns over the bubble and in 1991 land and stock prices began a steep decline, within a few years reaching 60% below their peak.[8]
In response to the recession, Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing. The central bank also attempted to increase inflation (which devalues savings over time but can also make debts easier to pay off), to encourage consumer spending. Krugman wrote that by 2003, the Japanese economy began to recover, helped by imports from the U.S. and China that helped Japan achieve a real growth rate of 2%. He wrote the recovery was "provisional" and there was significant risk of a return to a liquidity trap.[8]
Economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession". It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.[9][10]
Economist Scott Sumner has argued that Japan's monetary policy was too tight during the Lost Decade.[11][12][13][14]

[edit] Legacy

On February 9, 2009, in warning of the dire consequences facing the United States economy after its housing bubble, U.S. President Barack Obama cited the "lost decade" as a prospect the American economy faced.[15] In 2010, Federal Reserve Bank of St. Louis President James Bullard warned that the United States was in danger of becoming "enmeshed in a Japanese-style deflationary outcome within the next several years."[16]

[edit] See also

[edit] References

  1. ^ http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf
  2. ^ a b Leika Kihara (August 17, 2012). "Japan eyes end to decades long deflation". Reuters. http://www.reuters.com/article/2012/08/17/japan-economy-estimate-idUSL4E8JH1TC20120817. Retrieved September 7, 2012.
  3. ^ Onaranof, Yalman (2011-11-25). "Kill the zombie banks!". Salon Media Groupn. http://www.salon.com/2011/11/25/kill_the_zombie_banks/. Retrieved 2013-01-16.
  4. ^ Schuman, Michael (2008-12-19). "Why Detroit Is Not Too Big to Fail". Time Inc.. http://www.time.com/time/business/article/0,8599,1867847,00.html. Retrieved 2008-12-23.
  5. ^ Ohno, Kenichi. "Economic Development of Japan". National Graduate Institute for Policy Studies. http://www.grips.ac.jp/teacher/oono/hp/lecture_J/lec13.htm. Retrieved 3 April 2011.
  6. ^ New York Times
  7. ^ Tabuchi, Hiroko (2009-02-22). "When Consumers Cut Back: An Object Lesson From Japan". The New York Times. http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?fta=y. Retrieved 2010-05-11.
  8. ^ a b Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited. ISBN 978-0-393-07101-6.
  9. ^ Koo, Richard (2009). The Holy Grail of Macroeconomics-Lessons from Japan's Great Recession. John Wiley & Sons (Asia) Pte. Ltd.. ISBN 978-0-470-82494-8.
  10. ^ Presentation by Richard Koo-The Age of Balance Sheet Recessions-April 2010
  11. ^ Sumner, Scott. "Why Japan's QE didn't "work"". The Money Illusion. http://www.themoneyillusion.com/?p=9404. Retrieved 6/3/2011.
  12. ^ Sumner, Scott. "More evidence that the BOJ is not trying to create inflation". The Money Illusion. http://www.themoneyillusion.com/?p=8091. Retrieved 6/3/2011.
  13. ^ Sumner, Scott. "Rooseveltian Resolve". The Money Illusion. http://www.themoneyillusion.com/?p=3587.
  14. ^ Sumner, Scott. "The other money illusion". The Money Illusion. http://www.themoneyillusion.com/?p=6937. Retrieved 6/3/2011.
  15. ^ Meckler, Laura; Weisman, Jonathan (2009-02-10). "Obama Warns of 'Lost Decade'". The Wall Street Journal. http://online.wsj.com/article/SB123419281562063867.html?mod=djemalertNEWS.
  16. ^ The Seven Faces of 'The Peril'"
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