What I Learned At The Economist’s Conference

Yesterday I had the privilege (and indeed it was a privilege) to attend the Economist Group's Bellweather 2013 Japan conference.

My key takeaways from the panels:

Don't Call It Structural Reform

Whatever the contents of the Third Arrow of Abenomics, due for release next week, it will not be a package of structural reforms for various problematic sectors of the economy.

Instead, if the vision laid out yesterday by Parliamentary Vice Minister of Economy Trade and Industry Sato Yukari is accurate, the third arrow is an economic growth plan, light to the point of insult on deregulation and liberalization and heavy on the picking and choosing of winners and losers among industries. The centrality of dirigisme in the presentation almost had me singing La Marsellaise in response.

[Come to think of it, "Allons enfants de la Patrie/Le jour de gloire est arrivé!" pretty much encapsulates the Abe Shinzo message to his people and the world this year.]

This made me wonder:

1) do Abe, the members of his Cabinet and his advisers understand that the rise in the equities markets and the willingness of bondholders to sit tight as the Bank of Japan rampages through the bond market require a faith that structural reform is in the offing, meaning that there will be a real payoff for investing in Japan?

2) Senator Sato started out her political career as an assassin for free markets enthusiast Koizumi Jun'ichiro. Prior to that she was an economist with JP Morgan and Credit Suisse First Boston, presumably in favor of deregulation and the end of protectionism.

Now she does P.R. for industrial policy.

Hmmm...

"Ending deflation" does not mean what you think it means

Until yesterday, I had thought that the Abe Cabinet's and the Bank of Japan's goal of "leaving behind deflation" meant fiscal and monetary policy and maybe structural reform leading to a 2% rate of CPI inflation by 2014.

I was (some would add in an "of course" here) mistaken.

"Leaving behind deflation" is not inflation. It is Inflation+ ™ .

Literally.

As explained yesterday by Bank of Japan Governor Nakaso Hiroshi, simply having 2% inflation in 2015 will not suffice. There has to be

2% CPI inflation + increased corporate profits + increased wages and bonuses

before the standard of what constitutes "leaving behind deflation" will be met.

Again the urge to rise from my seat gripped me, this time in order to shout, "But that's cheating. You're moving the goal posts!"

The core argument of the "Whip deflation now" crowd has always been that deflation was a primary cause of economic malaise. Whip deflation and the country could get on its feet again. (Link)

Now the BOJ activist wing, as represented by Nakaso, seems to saying that no, reigniting inflation does not do the magic trick. One needs more. Indeed you need the items – higher incomes and corporate profits -- that the deflation voodoo skeptics kept saying were the real targets worth the shooting for.

The activists, now that they are in control of the levers of the economy, are admitting that they were being disingenuous. Deflation was not in and of itself a cause of economic malaise. At least part of deflation, perhaps even most of it, was a symptom of decay.

Supporters of the new Inflation+ ™ formula might counter, "It was never a simple end deflation/you will have economic growth" situation. Inflation, were it to return, would always had to had "demand-pull" in addition to "cost push." (Link)

Yes, but that is not how the deflation fighting mantra went, at least not until the deflation fighters seized the reins this past winter.

That Mountain In My Eye

Below is the graph of the support levels for the various major parties over the last six months, according to the monthly NHK public opinion survey:


Click on image to enlarge.

The House of Councillors election is less than two months away.

Somebody please tell me what the opposition parties could possibly hope to accomplish...and what the strategy would be to achieve that end...and please do not tell me it is "winning over the undecided voters."

Source: NHK Broadcasting Culture Research Institute

More Toys For The Boys

J. Michael Cole's contributions to The Diplomat usually drive me up the wall. However, his report on the People's Liberation Army Navy's latest piece of aquatic hardware fails to infuriate.

Just think of what one can do with a few of these vessels.

There are those who will ask, "Why shouldn't China have a slew of the world's largest Landing Craft Air Cushion vehicles"? More often than I care to contemplate, these are the same folks who ask, "Why shouldn't Japan revise Article 9 of its Constitution"?

The answer "Because the Right to Might is not a right but an excuse" sits poorly with these people.

Later - For those who think I am prejudiced against toys, a photo image from one of the spots I visited this past weekend, the GSDF Public Information Center adjacent to the GSDF Asaka military base.


Click on image for larger view.

The tank sitting behind the "protective" (yes, I am being sarcastic here) fence is a new Type 10, the same tank the Prime Minister mounted last month.

The Information Center's 3-D GSDF promotional movie (no, I do not know why the theater is built into a simulated rock outcrop) is a must-see -- and should be required viewing for all PLA colonels and Chinese government officials.

Nobody does propaganda like this blessed land's filmmakers.

Come On Down. Really.

Is there an economics paper that could explain the pricing strategies described here?

Midweek frozen food sales (personal note: I steer clear of the frozen foods section) make sense as a strategy for drawing in mid-week shoppers, reducing crowding on the weekends. However, Uniqlo's holding of sales on weekends, when the stores would be most crowded anyway, flies in the face of logic, unless drawing in even more folks somehow maximizes the employment of contractual, part time sales staff who are around only on the weekends.

Of course, if the goal is to clear off shelf space occupied by unsuccessful items...no that does not seem to work out either.

As for bureaucrats trying to save us from being taken in by sales prices off of what are imaginary suggested retail prices, one would think that our civil servants had better ways of deploying their talents and authority.

One would think that, yes.

Please Stop It, You're Creepin' Me Out

Here's an image to stop the heart of anyone skeptical of the Liberal Democratic Party's commitment to liberalism and democracy.



The members of the LDP's Education Revitalization Committee presenting their ideas for education reform to Prime Minister Abe Shinzo on May 23. (Link)

Just one look at the smile of satisfaction on the the face of ecstatic revisionist Yamatani Eriko and you know this is going to turn out badly.

Oh, the proposals likely include some deceptively reformist-sounding provisions like serious study of the possibility of changing the start of the tertiary school year to September, this in order to bring the scholastic calendar of this blessed land in line with Euro-American norms. Until now such internalization provisions have been window-dressing, however; distractions to occupy the time and minds of domestic critics and foreign observers, leaving the real, ideological and institutional subventions under-examined.

Not that there is much anyone can do in response save withdraw into a life of contemplation and the cultivation of radishes. Come August, after the LDP wins the majority of seats in the House of Councillors, there will be no way, constitutional or otherwise, to stop the revisionists from transforming their fantastic desires into law.

Image courtesy: Prime Minister's Residence

The Hyperactive Mr. Abe

I was asked to provide comment on the Prime Minister’s visit to Myanmar. In the course of looking at articles and background reports, I found myself feeling a bit annoyed at the PM. "What are you doing in Myanmar? Didn't you just get off the plane in Russia and Saudi Arabia?"

This set me to thinking that it is not just Abe's foreign travel that is excessive – it is his EVERYTHING that is excessive. Half of the 30 minute-long 7 p.m. NHK news broadcasts seems composed of "Prime Minister Abe did this...and Prime Minister Abe did that...and the Prime Minister also did this...and in a surprise, Prime Minister Abe did something yet again..."

I accepted that the most likely explanation for my feelings of being beset by news of Abe's activities came from being "one of the fiercest critics of the reborn Abe regime" (Michael Penn's characterization, not my own - Link).

However, I suspected there was substance to my annoyance – that Abe's near omnipresence was more than just a notion buzzing around in my head.

So I decided to do a little bit of counting.

The data set is the accounts of the PM's activities posted on the Prime Minister's Residence website under Sori no ichi nichi (literally "The Prime Minister's Day" but translated into on the website as "The Prime Minister in Action" ).

What gets reported through Sori no ichi nichi is not everything the PM did during the day. Instead only the activities the prime minister's support staff and the ministries think we should hear about receive write-ups. As such, Sori no ichi nichi is a picture of the prime minister's day not as it is but as his subordinates want us to see it – which is, in a media-drenched modern post-industrial democracy, probably more important. Rather than actual achievement what is important is presence, at least as far as the molding of perceptions of the prime minister's interest in his work.

So what happens when you look at the prime minister's calendar as his people want us to see it? And how does Abe in this second term compare to his predecessors in terms of doing visible business?

Taking as a comparison the reports filed in Sori no ichi nichi for Abe's predecessor Noda Yoshihiko, and looking at the same span of time (Jan 1 – May 24) in 2012 and 2013, we get:



Looking at the graph, it sure looks as though there is more red than blue. The number of Noda postings only clearly exceeds those for Abe once in late May – the time when Noda was hosting a summit of Pacific island nations.

Looking at the monthly totals, we see that indeed for at least the two months, Abe's posts outnumber Noda's, with Noda's numbers in May getting goosed by the slew of posts showing Noda holding the hands of heads of state from countries that are dots in the middle of the ocean.



As for making sure that the public has the PM is on the job, the Abe crowd can be said to be twice as assiduous as the previous administration. Here are the graphs comparing the number of days during the period when nothing was posted to Sori no ichi nichi:



There might be only one posting on some days – but that one post goes a long way to maintaining an illusion of diligence.

However, it is in state visits and foreign travel the differences in between Abe's and Noda's administrations seems most stark.

Here is the list of overseas trips Prime Minister Noda took in between January 1, 2012 and May 24, 2012:

Jan 2012 – none

Feb 2012 – none

March – Security Summit (South Korea)

April – none

May – China/Japan/South Korea Trilateral Summit (Beijing)
G8 Summit (U.S.A.)

------
Total countries visited = 3
Total bilateral visits = 0

Here, by contrast, is the overseas travel of Prime Minister Abe during the same span( January 1 to May 24) this year.

Jan 2013 – Vietnam
Thailand
Indonesia

February 2013 – U.S.A

March 2013 – Mongolia

April 2013 – Russia

May – Saudi Arabia
U.A.E.
Turkey
Myanmar

------
Total countries visited = 10
Total bilateral visits = 10

OK to be fair, the time spans are perhaps not commensurate in terms of their situation within each PM's term in office.

So here is a second listing, of Prime Minister Noda's overseas travels during his first five months in office:

Sep 2011 – none

Oct 2011 – South Korea

Nov 2011 – APEC summit (U.S.A.)
East Asian Summit (Indonesia)

Dec 2011 – China
India

Jan 2012 – none

------------------------------
Total countries visited = 5
Total bilateral visits = 2

A better record than Jan-May 2012 but still not comparable to Abe's record of gregariousness.

Looking at both lists for Noda, we find his use foreign travel was rote. After his first five months in office, his only travels were second visits to South Korea, China and the U.S.A. -- and these only to attend multilateral forums.

Noda did not use foreign travel, as Abe is doing, to as a means of resetting both the political and media agendas.

Was Noda a prisoner of political gridlock and the ongoing recovery from 3/11? Or was his lack of overseas travel a signal that his perception of the office of prime minister was consuming him?

Afloat Upon A Raft Of Unusual Stability

Just how aberrant are the levels of support for for this Abe Cabinet, compared to the support ratings for the cabinets of previous prime ministers?

Here is the graph of the cabinet support ratings of the first year (in Hatoyama Yukio's case, the seven months) in office of every prime minister since Keizo Obuchi (1998-2000).



[Click on the image to see a larger version in a new window.]

Freakish? You bet. Not even the cabinet of fabled outlier Koizumi Jun'chiro (green dotted line) enjoyed the stability of support that Abe 2 (thick red line with nodes) has enjoyed over its first five months in existence.

The real sad sack tale? Kan Naoto (dotted yellow line). Starts out with 61% support in May; has 65% support in September.

What happens in between, in July and August? A collapse of support to 39% and 41% respectively -- just in time for the July 2010 House of Councillors election. The ruling coalition loses control of the House and thus control of the legislative agenda. Short circuited is the Democratic Party of Japan's plan to rule the country based upon a new set of priorities and principles. Kan and his successor Noda Yoshihiko must go hat in hand to the Liberal Democratic Party, begging the LDP to please, please, please vote for bills drawn from the LDP's policy program.

None of that kind of nonsense going on now, is there?

Data source: NHK Broadcasting Culture Research Institute

The Hashist In The Lion's Den

What should be the hottest ticket in the TMD, if it is not already? Osaka City mayor and Nippon Ishin no Kai co-leader Hashimoto Toru's appearance at the Foreign Correspondents' Club of Japan on Monday. (Link)

Hashimoto intends to confront or put up a huge show of confronting foreign prejudice. He will try to deflect outward his comments earlier this month excusing the Japanese Imperial Army's sanctioned brothel system (the ianfu seido, a.k.a., the "comfort women system") and decrying the lack of U.S. military personnel patronage at Okinawa's sexual services establishments. He will try to paint everyone as black, then ask why Japanese citizens -- and by extension Hashimoto Toru -- have been singled out for criticism.

It is likely that Hashimoto will see a measure of success in his quixotic quest. He is a lawyer, which means his capacity for spewing reasonable-sounding nonsense is near infinite. He also a veteran of the pressure cooker world of "wide-show" infotainment programs, as well as of years standing before the microphones in hot pursuit of public office. He has honed a supercilious, in-your-face, bullying style that crushes most questioners, even the experienced journalists.

If I were present at Monday's session, and was given the grace of a moment at the microphone, what would I ask him?

I guess I would question the assumption that war makes men beasts in heat:

"Hashimoto-sensei, let me read to you what you said on the 13th of this month:

'Amidst a storm of flying of bullets, when you are trying arrange rest and relaxation for groups whose members are all wound up psychologically, the sanctioned brothel system is a necessity. Anyone can understand this.'

Are you not making the situation sound a lot more out-of-control and sexier than reality? Were not the patrons of comfort stations mostly assigned to boring garrison duty? Was not the 'Recreation and Amusement Association' created after Japan's surrender in order to procure women not for troops psychologically wound up by a storm of bullets but instead Occupation forces doing desk work and guard duty in a pacified and flying-bullet-free Japan? How did you come to accept occupying forces taking advantage of country's military and economic domination by using its women as sex toys to be instead a kind of sexual psychotherapy treating potential sociopaths? And what is the basis for your belief, seeing as how you have no personal experience of military life?"

Too long. Too complex. I know.

Still I would love to hear his response.

Original image courtesy: Sankei Shimbun

One Thousand One Hundred Points Down For The Day

All rapidly rising markets suffer reversals -- or corrections, if you believe in "days of reckoning" and other manifestations of an unholy alliance in between finance and morality.



The performance of the Nikkei since the election has been portrayed as proof that Abenomics -- the PM's mix of big budgets, wild expansions of the Bank of Japan's balance sheet and still murky promises of structural reform -- has won over hearts and minds of the world's investors, prophesying better days ahead for this blessed land.

Today's stumble has therefore got to be causing migraines in Liberal Democratic Party headquarters.

I wonder whether the PM, when briefed about the Nikkei's soaring and then crashing today, felt the first, faint fluttering of butterflies in his stomach.

Later - Reasons for success: obvious. Reasons for setbacks: not what you think. (Link)

Graph courtesy: Yahoo! Finance

The Courts Try Reason

In most industrialized democracies, the above title is something of a non sequitur. However, in this blessed land, where the courts have long shown deference to the executive and legislative branches, the sudden irruption of reasonable and reasoned decisions against the government is a surprise -- and a cause for celebration.

Last year Philip Brasor and Masako Tsukubu posted on their Yen for Living blog about the case of a former Osaka salaryman and father of two small children. The man had found a way to beat the odds, putting together a program that, when applied in a brute force manner, could net a tiny profit out of betting on horse races. Relying on databases of race results, the man placed massive, repetitive, automated bets on multiple horses, resulting with each iteration in a tiny, but compounding, return.

After letting his computer run these bets for three years, the man learned, to his horror, that under existing interpretations of tax law, his tax bill would be calculated not based upon his net winnings but upon the blunt, arithmetic total of his gross winnings, minus the cost of the winning tickets. This meant that when the dust cleared the man owed the National Tax Bureau 570 million yen in back taxes on transactions that had netted him only 140 million yen in income. (Link)

The man filed suit for relief from the Osaka District Court, arguing that the tax office's method of calculating income was insane.

Incredibly, at least for those of us who have been around these parts for a while, Osaka District Court Justice Nishida Masaki this morning handed down a judment in the man's favor (Link - J). He released the man from the immense tax penalty he had incurred, ordering him to pay taxes only upon the amount he had actually earned from his successful, fractional trading betting strategy.

Justice Nishida is of the 34th graduating class of lawyers, so he is near, if not exactly on the cusp of, retirement.

So?

So for those looking for the story of Japan being saved despite itself, perhaps talking with hot young entrepreneurial types or reformist politicians and bureaucrats is a misleading waste of time. Perhaps the real vanguard of change for the better is a posse of old guys and gals in long black robes.