The Grand Illusion

Dr. Noah Smith has been one of the great defenders of Abenomics, that amorphous mass of Keynesian stimulus, Friedmanesque monetary policy and Nice Words About Structural Reform, particularly changes in work-life balance allowing women greater access to executive and management positions.

Dr. Smith, however, seems to have undergone a change of heart about the economics of the prime minister. Either that or he has a particular onus against one particular recent seemingly huge announcement: a 28 trillion yen stimulus package, the details of which will be examined in the Diet this Fall (the overal plan received Cabinet approval this week).

Japan's New Stimulus Is Just the Same Old Thing
Bloomberg

Japanese growth is still sluggish. Consumers aren't consuming much, and businesses aren't investing. The government doesn't have many options to remedy this, and the Bank of Japan, which has sent both long-term and short-term interest rates into negative territory, has basically no more room to maneuver.

The dreaded Zero Lower Bound is starting to bite. The BOJ is buying more stocks, but this too has its limits -- eventually companies become de facto nationalized, as the government becomes the majority shareholder. That's scary both because it would affect corporate governance, and because it would be politically unpopular. It's also unclear how much of an economic boost the stock-purchasing program has given the country anyway. The BOJ could resort to policies like a higher inflation target or the much-discussed "helicopter money" approach, but so far it has been afraid to take these steps.

With the BOJ seemingly out of the game, demand-side macroeconomic policy is up to the parliament. So this week the government of Prime Minister Shinzo Abe proposed a new fiscal stimulus package. It is moderately sized: about $45 billion in U.S. dollars this year, and about $60 billion in low-interest loans, to be followed by slightly less next year.

That move might win a few halfhearted cheers from Japan's battered consumers, but it's unlikely to have much of an effect...

(Click here to read more)

Later today (inshallah) Langley Esquire will be posting to YouTube a conversation Timothy Langley and I had yesterday on exactly the same subject.

(For the Langley Esquire YouTube channel, click here)

What should be setting everyone's teeth on edge about both the stimulus package and Abe's recent Cabinet picks, aside from the knowledge that both are in-your-face I-got-mine-suckers giveaways to cronies, is that with majorities in both houses of the Diet, a prostrate opposition, an emasculated bureaucracy, a totally compromised bond market, increasingly compromised equities markets and no rival power centers within the ruling Liberal Democratic Party, the Abe government has failed to pass a single fundamental structural reform of consequence. No other G7 or OECD leader enjoys the freedom and dominance of Abe Shinzo and his LDP. Abe & Friends nevertheless remain timid and/or clueless.

Amaterasu Omikami, save this blessed land from these poseurs and legacy turkeys.

As Heresies Go, Mine's Not Going To Make Me Too Popular

Let me just toss this out, as it has been annoying me for a while.

"Womenomics" -- the precise term invented by Goldman Sachs analyst Kathy Matsui (Link) and the Abe Government's fluffier set of programs intent on improving the status and numbers of women in corporations and government -- promise(s) to increase the size of Japan's GDP per capita and in total. By injecting the talents of women into the established sectors of the economy, corporations will have greater sales and government will become more responsive, bettering people's lives.

Really?

When since the beginning of the Meiji Period has Japan's problem been a lack of talent? Put another way, when since those very few decades after the Restoration has there been a massive need to import skilled labor?

Has not the problem in Japan been, and acutely so since the collapse in the Bubble, corporations and government sitting on talent, misapplying it or allowing it to wither?

If so, how will luring more women into the corporate and career government paths improve the performance of these entities? Without a fundamental reform in the way labor is used -- with workers allowed to flow toward more profitable and efficient enterprise -- having more women in the corporate management and government might mean only women will be gaining an equal chance at having their talents go to waste.

As for society at large, the triumph of "Womenomics" could significantly decrease public welfare. A consequences of the poor uptake of women into career path Japanese corporate and government positions has been a surplus of talented women seeking to become professionals (doctors and lawyers), working for non-Japanese corporations and establishing their own businesses and NGOs. By increasing the percentage of the women gaining access to higher level positions in The Establishment one would be shrinking the pool of talent available for these often much more socially constructive courses.

Already improving opportunities for women in corporations and government could be one of the factors behind the trend identified in a hard-to-read but still fascinating recent graph from plotted//grundriss. Entrepreneurship, rather than equalizing in between the sexes, has become an increasingly male activity. (Link)

While other factors may be in play -- the large lump of mostly male Baby Boom retirees looking for something to do with the last two decades of their active lives, for example -- the decreasing percentage of women entrepreneurs corresponds with the expected outcome from greater opportunities opening up for women in government and established corporations.

In a broader and less fair sense, should we not be more skeptical about ideas hatched in the Goldman Sachs fun factory? Kathy Matsui may be a fine human being (I cannot say, having only chatted with her that one time at that bizarre conference) but any analysis finding "the world would be a better place if more persons were able to become like us" has to be seen as at least potentially unsound -- especially if the definition of "better" is "that which allows us to sell more of our precisely targeted investment instruments."

I get it that in the aggregate having more women working increases the number of wage earners and thus the size of the economy. However, that "Womenomics" has never been shy about being a nakedly regressive nationalist social policy, pushing Japanese women into the workforce to take up mostly the sorts of jobs other societies have immigrants do -- receiving thunderous applause from international circles in the process -- that I do not get.

Live Blogging The Robert Shiller Press Conference

Are We Headed for Another Financial Crisis?
Robert J. Shiller
Economist and Nobel Laureate
Foreign Correspondents' Club of Japan
11:00~12:00
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11:06 Shiller presentation: Of course there is going to be a crisis, the history of the last 800 years is a cascade of crises.

11:08 My view is that financial crisis is a crisis of human emotions, the loss of confidence, a psychological effect.

11:09 In 2005, the new edition of Irrational Exhuberrence focused on the housing market, rather than the stock market (first edition focus)

11:10 The weakness/source of concern now is bond markets, where prices of bonds seem way out of line.

11:11 So talk today is about stock markets, housing markets and then some observations of  world bond markets, where the yields are startingly low.

11:15 Cyclically adjusted price earnings (CAPE) in U.S. markets are at their third highest marks in history, second only to the 2000 millenium boom and the 1929 Roaring Twenties.

11:16 Japanese CAPE ratios were astronomical in the EARLY 1980s but now shrunk to global norms.

11:18 Japanese confidence in rising share prices remains aberrantly positive.

11:20 U.S. economy is now in deflation.

11:21 Trend in yields in U.S. bonds in relentless downward, and downward at an almost constant rate for the last 30 years.

11:24 Psychologically, loss of confidence, less of a sense of security, from 1) capitalist ideology (everyone for himself/herself)

11:22 Trends in bond yield declines are a global phenomenon, somewhat irrespective of the particular actions of central banks.

11:24 2) computer technology,

11:25 The result is excess savings and the bidding up of the prices of existing businesses and governments.  The lack of security is thus leading people to cut back spending and/or starting their own businesses.

11:27 Entrepreneurial and development successes are receding, leading to weakness in confidence that is often called secular stagnation.

11:29 Q: How much can politics can change economic psychology? (Abe reference)

11:31 The "Three Arrows" are actually concrete proposals, not an attempt to talk up the economy. That is what makes the proposals worthwhile, as just cheerleading has a poor record of success.

11:33 Shiller - NASDAQ high yesterday, adjusted by CPI inflation, is not at historic highs. So not so significant.

11:34 Japanese confidence bled into world markets, distorting international flows toward Japan, in the same way that overconfidence in tech magic led to NASDAQ historic highs.

11:37 Shiller - I had a conversation with Prime Minister Abe a year ago - unfortunately I (Shiller) did most of the talking so I have little so say about Mr. Abe's thinking about Abenomics.

11:38 (Says an interesting thing about labor force security - MTC here). Shiller sees the easier firing of Japanese workers as a good thing for efficiency. Intriguing...really?

11:42 In the U.S., there is a socialist economy in the housing markets.

11:44 Schiller - Decision to create the euro was politically an act of genius and not an act of genius economically. Euro is important as a symbolic act, but one with too many economic consequences. Symbolism is good.

11:47 Income inequality - Piketty, capital accummulation; Shiller, technological inequality.

11:48 Shiller quotes Norbert Wiener on whether the nuclear weapon or the computer is more dangerous. Worries about robots replacing human labor.

11:50 Abe advisor and fellow Yale economics professor Hamada Koichi is offering commentary on the presentation.


Hamada Koichi
FCCJ press conference of Robert Shiller on 3 March 2015

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11:51 Hamada: "There is a rosy future for the Japanese economy."

11:52 Hamada: "Mr. Abe is holding back, allowing the figures to speak."

"Oil prices are a positive. A million workers have entered the labor force. Wage are increasing. But Abe must do reforms, overcoming obstacles."

11:54 Hamada+Shiller  - Womenomics is important. Shiller: it is inspiring. Hamada: numbers are returning (???) to the job market.

[Nota bene: the % of women in the Japanese workforce is higher than the participation rate for U.S. women - MTC)

11:57 Q: with true declines in populations and aging of populations, is not there no exit out of slowing or contracting economies?

Shiller: government policy to combine career and family is an important step to reversing or slowing decay in confidence.

11:59 If you want to end inequality, you should have career insurance -- takes care of the insecurity of life planning. Governments must have a plan to tax the wealthy and subsidize work, do it now for the future rather than try to deal with inequality (worsening?) in 20 year's time.

Labor = Capital *

Looking at Japan's perennially and perniciously weak consumer spending, the marriage rates of those not in permanent employment versus those who are, the decades-long reign of "public servant" at the top of "What I want my child to be when he/she grows up" rankings (for example, Bandai - J or Kuraray - J) the speed at the checkout stands at Ozeki supermarkets (I was wrong, Ozeki does employ part-timers -- but only high school students it seems) I am beginning to think that the fundamental divisions of economic factors of production into Land + Labor + Capital are unhelpful and possibly harmful. Indeed, in light of the rise of the glaring social downsides of the increasing fraction of non-permanent workers in the workforce, it may not be hyperbolic to say that looking to the economists of Anglo-Saxon economies for advice on reforms of the Japanese labor market is much like asking anarchists for advice on reform of the banking system.

Yes, I will elaborate.


* Offer geographically restricted. Not available in some countries and territories.

What I Am Clicking On - Re The Economy On Monday, November 17

- Paul Krugman on the apparent decision to delay the October 2015 imposition of a 10% consumption tax rate ((Link). He clarifies that in a deflationary world, an independent monetary authority can be a curse.

- The Diplomat 's interview with Dr. Martin Schulz -- because one should see what the other side is arguing. (Link)

Yes, I too find off-putting Dr. Schulz's characterizations of those who are not with the program as being narrow-minded, short-term fixated and demanding of a large-scale story the media can mediate.

- Tobias Harris on the reality Abe Shinzo does not want to face -- that the greatest menaces to the success of Abenomics are the executives of Japan's corporations (a.k.a. his New Best Friends Forever) and their deflation-honed parsimonious ways (Link). Key here is the understanding that these are not evil individuals (well, some of them are, but for reasons other than parsimony). It is just that their accumulated virtues of thrift become the black hole into which the nation's generate surplus disappears, never to be seen again. The government of Japan has an obligation to yank some of the 300 trillion yen in inert savings back into the economy in the same way the government has an obligation to step in with increased spending when private consumption falters.


The all-important-until-last-week-when-the-Diet-dissolution-story-stomped-over-everything-else preliminary third quarter GDP figures are today. Prime Minister Abe Shinzo is rushing back from the G20 in Brisbane, Australia to meet them.

Even If This Is The Only Halfway Intelligent Thing I Say Today It Will Still Be A Good Day

Advocates for changes in the status quo in Japan tend to presume a personal knowledge of what is real and normal.

Not all of them. But most of them.


Later - In The Japan Times, Colin P. A. Jones of Doshisha University explains how twisted "normal" can be. (Link)


Image: Poppy field in Showa Kinen Park. Tachikawa City, Tokyo Metropolitan District on June 14, 2014.
Image courtesy: MTC

Takahashi Kosuke On Abe Shinzo's Nationalist Plan

Rare it is that I find myself reading an essay where I am in total concord with the views expressed.

That is why I am a bit taken aback by Takahashi Kosuke's essay for The Diplomat entitled "Shinzo Abe’s Nationalist Strategy" (Link). The opening sentence is shaky but the rest of the piece is solid.

It is clear that what underlies Abe Shinzo's attempt to escape from the postwar regime is the faith that the United States will sign off on on pretty much any plan changing Japan's position in the world order as long as interoperability of Japanese Self Defense Forces and U.S. military arms is increased. What is unclear is whether the Abe team is aware that keeping the Pentagon happy is only one facet of a program of increased national resilience -- that the ideological self-indulgences of the escape from the postwar regime can interfere with the hard work of restructuring the economy for growth.

Tip of the hat for the link to Neojaponisme.

Damn You Science!

Abenomics is getting the stuffing kicked out of it this week. The Nikkei plunged 500 points yesterday, finishing the day down 376 points (-2.43%), adding to the losses since January 9. The yen has been on a mild strengthening trend, threatening earnings reporting of the big exporters. U.S. Senate Majority leader Harry Reid's rejection of a request for fast-track trade authority has put the Trans Pacific Partnership on hold.

Yesterday, Prime Minister Abe Shinzo's plans for reviving Japan's economy received another blow, this time from a bubbly 30-year old girl geek in pearl earrings.

Stem cell 'major discovery' claimed
BBC News

Scientists in Japan showed stem cells can now be made quickly just by dipping blood cells into acid.

Stem cells can transform into any tissue and are already being trialled for healing the eye, heart and brain.

The latest development, published in the journal Nature, could make the technology cheaper, faster and safer.

The human body is built of cells with a specific role - nerve cells, liver cells, muscle cells - and that role is fixed.

However, stem cells can become any other type of cell, and they have become a major field of research in medicine for their potential to regenerate the body.

Embryos are one, ethically charged, source of stem cells. Nobel prize winning research also showed that skin cells could be "genetically reprogrammed" to become stem cells (termed induced pluripotent stem cells).

Acid bath

Now a study shows that shocking blood cells with acid could also trigger the transformation into stem cells - this time termed STAP (stimulus-triggered acquisition of pluripotency) cells.

Dr Haruko Obokata, from the Riken Centre for Developmental Biology in Japan, said she was "really surprised" that cells could respond to their environment in this way.

She added: "It's exciting to think about the new possibilities these findings offer us, not only in regenerative medicine, but cancer as well."

(Link)

Dr. Obokata's paper was published in Nature, whose account of the discovery (Link) fails to mention that it rejected her original paper. According to last night's NHK report, the reviewer told her that her results, if true, would contradict 100 years of research into cellular biology.

The coverage of Dr. Obokata's new pathway to stem cells has been lavish and fawning (Link - J video) -- which is rather inconvenient for Prime Minister Abe. He already has his stem cell hero, Nobel laureate Yamanaka Shinya. They have a mutually beneficial relationship, Mr. Abe plying Dr. Yamanaka with honors (Link) and cash (Link). Dr. Yamanaka's patented induced pluripotent pathway to stem cells was supposed to be the nucleus of a bio-engineering revolution, a showcase of Japanese prowess in technological and business development -- and Mr. Abe was going to be its munificent and enthusiastic patron.

Now here comes this lacrosse-playing, turtle-keeping, media darling young lab rat with a method of creating stem cells that is cheaper, more efficient, faster and with fewer potential complications than Dr. Yamanaka's.

It must all seem so unfair.

Original image courtesy: BBC

Niseko Bound And Unbound

My New York style maven pseudo-cousin (I hail from Northern California, where family trees are...complicated) A.K. arrives in Tokyo today, years after she promised to drop by. As is the wont of one living on the bleeding edge of fashion and design, she will be trolling Tokyo for a couple of days, meeting with folks too far out even for Harajuku or Shibuya.

After only the briefest of stints in the capital, however, A.K. will be striking out for her real destination: Niseko. (Link)

That A.K., who goes everywhere in search of that which is most rarefied and daring, should leave New York to document the Christmas-into-New Years scene in Niseko means that the Hokkaido ski resort town has arrived. Not that this is any news to the ten thousands of Australians, Hong Kong residents and Singaporeans who have been traveling there each year to pound away at the mountain with their skis and snowboards -- and the tens of thousands of more folks from all over who visit the township in the summer. (Link - J)

The success of Niseko, and the way it has achieved its success through attracting not only foreign visitors but small-scale foreign investment (Link) should make the village the central focus of every national and local government effort to promote tourism and economic growth in rural communities.

However, nowhere will one find anyone in government flogging a "Learn From Niseko!" slogan. That national government bureaucrats would not want to do so is not surprising. But why not the politicians, when it is economic development of any kind that makes people's livelihoods better and Japan's government coffers fuller?

The Abe administration's glaring lack of interest in Niseko's market- and foreign-private-investor sector supported rise (I have never heard any of the economics-linked Cabinet members talk about the place) seems a strong indicator that the administration's free markets and private enterprise rhetoric is just that: rhetoric. Indeed from the way Abe and his folks maneuver, uncharitable eyes would see an administration interested only in economic transformation it can control. Whether it is rewarding multinationals with balance sheet inflating attacks on the value of the yen, coopting new industries though regulatory change and subsidies (the drafting Mikitani Hiroshi of Rakuten and the coddling of Nobel Prize winner Yamanaka Shinya and his pluripotent stem stells) or the promises of regulation-lite enclaves, all whilst dumping longtime partners on the down slope of economic history such as Japan Agriculture and the Post Office, the goal of Abe and the Liberal Democratic Party does not seem to be an internationally open economic environment -- despite the reality that this approach to economic transformation seems to work .Instead, the goal seems the formation of new, dependable and dependent voting blocs.

Which is just about the worst goal for an economics policy imaginable.

Abe Shinzo's Friends Indeed

"It is called the Unbegun Symphony. It used to be called the Pathetic Symphony. Now these names as you may know, like the Jupiter Symphony and the Eroica Symphony...now these names as you may know, they are usually not given by the composer. They are given by friends or the musicians and stuff. This name, the Pathetic Symphony, was given to the piece by some of my old friends.

(Pause)

Well, I have a new set of friends now...and we're calling it the Unbegun Symphony."

- Peter Schickele, "The Unbegun Symphony" (1966) *

Well, he has a new set of friends now...

When I hear Abe Shinzo arguing for a stimulus package (taking cash out of the national treasury and distributing it to politically important constituencies) in order to offset the likely downturn in individual and corporate spending after the consumption tax rise (raised in order to pay for the higher health and pension costs associated with a larger population of retirees) so as to not derail the economic growth associated with Abenomics monetary policy (which, by targeting inflation, will eat away at the spending power of those on fixed incomes and/or living off their savings, i.e., retirees) and fiscal policy (which by accelerating the rate of increase of the national debt, threatens jumps in interest rates demanded by borrowers, which will increase the percentage of the national budget consecrated to debt service, decreasing the amount of money available for everything else, most importantly pensions and healthcare for the elderly) all against the advice of economists Honda Etsuro and Hamada Ko'ichi, the two identified "fathers of Abenomics," whilst simultaneously trying to drum up support globally for an as yet unknown set of structural reforms to be decided on...soon...because the set of reforms his brain trust of supposedly market savvy and creative CEOs produced for the big June announcement were either trivial (Link) or so nakedly self-serving (Rakuten CEO Mikitani Hiroshi going so far as to threaten to quit Abe's industrial competitiveness council if the sales of drugs and medical equipment over the Internet were not in included in the June announcement) as to embarrass the PM -- I blackly remember Professor Schickele's sardonic, "Well, I have a new set of friends now..."

In his return to power a year ago, Abe Shinzo seems to have secretly made a deal with himself and his eminence grise Suga Yoshihide. Abe would nod in the direction of old coterie of supporters and allies, the so-called "Friends of Abe" like Taka'ichi Sanae, Furuya Keiji and Inada Tomomi -- and yes, even the duplicitous and too glib Aso Taro -- relying upon them as the backbone for his challenge to the status quo within the Liberal Democratic Party. The muscle and momentum for the takeover of the party and the government, however, would come from the zaikai, with new style but still establishment business moguls like Mikitani, Takeda Phamaceuticals CEO and Keizai Doyukai head Hasegawa Yasuchika, JR Central Chairman Kasai Yasuyuki, Fuji Film CEO Komori Shigetaka as a set of "New Friends of Shinzo" -- persons whom when you talked to them seemed full of ideas on how to transform Japan into an economic powerhouse, a state capable of paying for the kind of raw politico-military power Abe had seemingly previously thought could only come through the imposition from above of a hair-trigger patriotic, paranoid obedience to authority -- you know, like the mindset the Chinese seem to be fostering.

The New Friends seemed full of the promise of a revived fukukoku kyohei, but a fukoku kyohei for the Facebook Age -- with the New Friends of Shinzo providing the ideas and capital for the fukoku and the Old Friends providing the applause for the Abe/Suga duarchy's tentative tiptoeing toward the kyohei.

As I watch Abe's epic, manic, economic speedballing -- meeting everyone, asking everyone's advice, with resulting announcements of new economic policies off-setting the effects of previous economic policies offsetting the effects of yet earlier policies engaged to counter the consequences of even older policies, with frenetic searches for new statistics demonstrating earlier that the latest policies are indeed working (Link) or that the current policies need yet newer policies to offset them -- I find myself worrying, "Won't the pressures of finding a path through the bewilderingly numerous, numbingly complex and often mutually contradictory plans of the New Friends of Abe cause the man to break down -- just like the unseemly power-grabbing and intransigence of the Old Friends did?"

A disconcerting thought for a sunny day.


Later - It is not a sign of the Apocalypse, but when the Yomiuri Shimbun, which is as a rule sycophantic in its coverage of the policies of the LDP prime ministers, is like me in shaking its head at the PM's mutually negating proposals (Link) then the sum of the parts of the current administration's ideas is clearly less than a whole.

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* The album An Hysteric Return: P.D.Q. Bach at Carnegie Hall is available here.

Cut And Pastiche

According to the conventional wisdom, Prime Minister Abe Shinzo has been blessed with a new set of more adept and aware English-language speechwriters, making Abe II a much easier international sell than Abe I was.

For those who have had the pleasure (?) of reading his book, though, in either of its versions, New Abe retains many of the defects of Old Abe. He is still offering the regurgitation of rote memorized bullet points, without bridges in between the points themselves. What is new about New Abe is the presentation of a broader topic list -- the offering of a greater variety of monochomatic sketches of potentially attractive subjects. New Abe also delivers his points and anecdotes with vim and vigor, rather than the hangdog look of haughty contempt of six years ago.

An honest desire to appear interested in what listeners might be interested in, however, cannot compete with the Prime Minister's unwillingness or inability to satisfy the human need for a defensible architecture of thought. Further crippling is the lack, even at this late date, of Mr. Abe having a sense of the kind of country he intends to craft via the Third Arrow of Abenomics.

The result, as can be judged from the text of his speech to the New York Stock Exchange (Link) is earnest, trivial, bewildering, winding and embarrassing rhetorical chaos. The smart money will applaud (because it is the smart money) but will note in the aide-mémoire only "Structural reform/YES, TPP/YES, More women/YES. Substance? NOTHING -- jury still out."


Later - The Mainichi Shimbun checks in with a report that a cool reception awaits the PM from within the Liberal Democratic Party in response his eager beaver rhetorical flourishes in New York. (Link)

Later still - Over at The Diplomat, Jonathan DeHart derides the speech as "a barrage of pop cultural references" and highlights the blowback from at least one of the PM's metaphors. (Link)

Not Even With Free Money May This Land Be Healed

Where macroeconomic policy making meets psychology, unhappily: Kathleen Chu's and Katsuko Kuwako's look at Japan's brain bursting housing and land markets. (Link)

Hint to world: after a housing bubble bursts, destroying the equity and/or the virtual savings of everyday folk, be not surprised if weird, interest-rate and market-clearing-mechanism-defying resistance should move in...and never leave. Even in the most densely populated environs on the planet.

Hoarding is what Chu & Kuwako describe...but the hoarding of a vacuum, the lost value of land and buildings owners never had a chance to hold in their hands.

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Image: Conjunction of Venus, Jupiter and the Moon above the Kanda River on 30 November 2008.
Image courtesy: MTC

Parallel Problems Among The Princelings

Japan has no bumiputera policy of ethnic favoritism. Otherwise, the East Asia Forum essay "Domestic interest groups haunt Najib’s TPP campaign" on the political barriers looming in front of Prime Minister Najib Razak as regards Malaysia's participation in the Trans Pacific Partnership is a word-for-word description of the barriers before Abe Shinzo as regards Japan's participation. (Link)

My own sense is that Abe's and the Liberal Democratic Party's big tent policies transform Japan's  participation in TPP negotiations into a stopgap measure, a way of keeping Japan's options open as the world's trade negotiators rush around from conclave to conclave, each fruitlessly trying to win a "best of a bad lot" deal for his or her country from out of a jumble of acronyms. (Link)

I look forward to Abe & Co. proving me wrong.

What Could Really Kill Abenomics

My admiration for Yale University professor Hamada Ko'ichi, the acknowledged intellectual father of the first two arrows of Abenomics (Link), has been, for the most part, non-existent.

Until today. (Link)

And yes, my newfound appreciation is based in his seeing the data the same way I do, as unsupportive of a declaration of victory.

By contrast, thanks to reporting by the same financial news service, my faith in the economic reasoning at major financial institutions has plummeted. In a survey of 32 economists at financial giants like JPMorgan Chase & Co and Nomura Securities, 22 thought that Japanese stock markets would suffer a significant fall if Prime Minister Abe Shinzo decides next month to delay or cancel the April 2014 rise in the consumption tax from 5% to 8%. (Link)

Because...

1) It would diminish the capacity of the Bank of Japan to buy government bonds (What???)

2) Because it would reduce the credibility of the reforms in Abenomics growth package (What???)

Unless the 22 economists with a negative view can offer a mechanism that would cause the relative value of owning shares to fall vis-a-vis other investment opportunities -- which would have to be opportunities outside of Japan as the value of the main domestic alternative, Japan government bonds, will likely be crushed by any hint the government will not even attempt to keep its promises on finding a way of repaying the debt -- then those economists should not answer the phone the next time Bloomberg calls.

As for the so-called Abenomics growth strategy (which is not a strategy since strategy involves choice and sacrifice), its vacuity, not a failure to raise taxes, seems the most imminent and likely cause of a crushing of investor sentiment. In response to a massive letdown after the official Third Arrow announcement in June (Link), the government and its advisors seemingly have chosen the paths of least, or possibly no, effort:

a) Canvassing the public for ideas as to what policy changes should be in the growth strategy (Link) -- as if a grab bag of a hundred little ideas, all of which would require regulatory or legal changes, could even be implemented, much less coalesce into coherent programs, and

b) Doubling down on the announced plans, assigning to the Abe government brain trust the task of making the June proposals seem more than what they are (Link - J) -- the infamous recommendation of the "Plan B is to make Plan A work" school of management.

Oh, fabulous...

Where The Opponents Of The LDP Lose Me

In intellectual sparfests these past few days I have faced not a few persons asserting that the citizens of Japan deserve (and, according to Ozawa Ichiro, want) an organized, progressive umbrella party as an electoral alternative to the Liberal Democratic Party.

To which I reply, "And what would this alternative party's policy axis be?"

Let us look at the posters of the current five strongly anti-LDP opposition parties, i.e.

- The Democratic Party of Japan

- The People's Life Party

- The Social Democratic Party

- The Japan Communist Party and

- Green Breeze (Midori no kaze)


DPJ - "We Will be the Power to Protect People's Ways of Life"


People's Life Party - "We Will Protect Livelihoods!"


DSP - "Rather Than A Strong Country, A Kind Society"


JCP - "Stop TPP: Agriculture, Employment, Medical Care and Food Safety
The Party That Loves This Country"

Green Breeze - no official poster (that I know of) but a lot of the same kind of messages

Give the JCP credit for its opportunistic seizure of a national emblem at a time when Mt. Fuji is very much in the news, and for its unabashed expression of a love of country. Way to go, JCP (whose name is, by the way, the NIPPON Kyosanto) -- this is how a progressive party should muscle in on right wing nationalist territory!

Nevertheless, the similarity of the messages, rather than being a source of hope (hey look, all these different parties are saying about the same thing -- we have the ingredients for a united front here!) is instead incredibly depressing*. Each party is asserting that globalization and its effects can be resisted, that competition and market forces can be stopped at the border, and that even as the world changes, Japan can stay as it was.

I am sorry. If a crabbed, timid and backward-looking vision is what you have on offer, then you have lost me.

For all its many faults, the policies of the ruling LDP-New Komeito coalition, which are in every area risky as hell, at least acknowledge the premise that the important work of government is the management of change, not desperate, lunging attempts to keep change out.

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* That the DPJ, People's Life and Green Breeze should have near identical policy platforms is hardly surprising, as all are led by either Ozawa Ichiro or one of his proteges.

The July 21, 2013 Election - Where Are The Opposition's Economists?

The heads or co-heads of the parties had their pre-election warm-up debate at the National Press Club yesterday. (Link)

From the snippets broadcast on television or transcripted to be read on paper or on a screen, the impression is that opposition parties, despite having a raft of issues to run upon -- a crash national program favoring renewable energy sources and steering away from nuclear power, constitutionalism, a real discussion of the pros and cons of the Trans Pacific Partnership, the plan to lower the corporate income tax rate while raising the consumption tax -- issues where the majority of the populace agrees with the positions taken by opposition parties -- are either not serious about or not capable of running against the Liberal Democratic Party.

Prior to the election, commentators will review the positions the parties hold. I cannot...and not just because I am lazy.

The opposition parties do not have positions; they have poses. Whether it is the Your Party with its insistence on reform of the bureaucracy; the Japan Renewal Party (Nippon Ishin no Kai) with its love of decentralization and regionalism; the Democratic Party and the Life Party and their purported defense of people's livelihoods; the Communists and the Socialists with their "Article 9 Now and Forever, No TPP And More Daycare Centers Too" -- all are too easily dismissible with a "Yes, but what are the projected results of doing things your way?"

What marks the opposition parties as lightweights? The inability of their leaders to either quote or be seen in the company of economists.

If once, just once, Kaieda Banri or Shii Kazuo or Watanabe Yoshimi -- who purportedly runs on an economic liberalization program -- could say, "Professor So-and-so of the Department of Economics of Wossamatta U. says..." the voters would have the chance to say, "Hey, this party has considered the reality of there being trade offs. They've tried to think this all through."

Instead the voters are treated to brain-freezing tautologies of the sort, "The inflationary policies of Abenomics are going to lead to price rises, which is going to affect people's livelihoods."

Then again, a lack of serious engagement with economics seems may be the identification badge for those seeking to be seen as ready to clip the LDP's wings. Take the editorial (Please!) The Japan Times published on July 2:

...the right-leaning political forces inclined toward market fundamentalism — as represented by the Liberal Democratic Party, the Japan Restoration Party and Your Party — have already become powerful. If they become lopsidedly strong, voters will be deprived of meaningful political choices. The DPJ must clearly explain to voters the problems that market fundamentalism brings about, namely the expansion of the gap between the rich and the poor, and the shrinking of welfare and other public services provided by the government sector. Such an outcome will only serve further destabilize Japan’s economy and society.

(Link)

The LDP leaders believe in many things...but "market fundamentalism"? OK, Takenaka Heizo is back...but only as an advisor on the economic growth council, sitting alongside a bunch of CEOs who themselves are on the council in order to suggest sweetheart deals for their own industries (Yeah, I said it). Nakagawa Hidenao, the big man when it came to the Koizumi Revolution, bugged out long ago and took the spirit of free markets with him.

Who could the editors of The Japan Times be talking about? And if not individuals or factions, about which policies of the current government? And how would the editors propose to remedy the problems of inequality and loss of the ability to fund welfare?

If the thinking were any woollier, it would be a sweater.

That Rising And Sinking Feeling Of Abenomics

Today may be the day when the shock comes.

No, not from the first opening of the climbing season on Mt. Fuji since the mountain and its environs were proclaimed UNESCO World Heritage sites, though the likely result is more crowding on what is an already overcrowded mountain.

[I am of two minds regarding the listing. The listing does grant the communities at the foot of the mountain the ability to start charging climbing fees eventually (Link). Such fees will be a source funding for facilities and environmental clean up on the mountain. However, the government's successful last second lobbying efforts to have Miho no Matsubara included in the listing, after the UNESCO panel recommended its exclusion (Link - J) smells of graft and/or vote trading.

So both the good and the bad on the big ledger.]

No, today is when we find out whether or not the heretofore restrained rise in consumer prices will stop being restrained, smacking shoppers in the face with a sudden, across-the-board jump in prices for household goods, electricity, transportation and just about everything else.

Consumers have been largely shielded from the effects of the Abe administration's destruction of the international standing of the yen. As of today, the start of the new quarter, the gloves will likely come off. Producers of flour, bread and meats have already announced significant jumps in prices for today (Link - J). All producers and service providers will be under pressure to follow suit, either openly or through stealth (Link - J). Even the luxury goods with their absurd pricing that gives them the leeway to swallow the effects of currency fluctuations, are set to rise today. (Link - J)

[Hint: to those who have been using the recent increases in the sales of high-end imported luxury goods and luxury cars as barometers of a hotter Japanese economy, think it possible that even the buyers of these items have been looking ahead and buying now, before the sticker shock comes, rather than loosening their purse strings.

Oh, and you might have wanted to mention that increased purchases of imported luxury goods are a net negative for GDP.]

In the anecdotal everyday, retailers have been acting peculiar. When I tried to buy a new bag (my old one being a tattered embarrassment) at a fast retail outlet, I was told there were no bags. When I asked whether this meant the chain no longer sells bags, the clerk told me peremptorily that no, they still sold bags. Only they did not have any left in the stock room.

A state of affairs which anyone can tell you never occurs unintentionally.

As for my favorite discount foreign food and coffee bean seller, it has until now not raised any of its prices -- an impossible state of affairs given that all of its products are imported. Ominously, it had a special sales offer through June 30, encouraging consumers to buy five flavors of beans in return for a reduction in price on a future purchase -- an offer looking suspiciously like the kind of warehouse cleaning a company would undertake before releasing a completely revamped line of products at a higher base price level.

The price rises for consumer goods will be large but not unreasonable, despite soaring raw materials and energy prices. Deeply enracinated deflationary expectations will force producers and retailers to moderate their increases, for now. They will, of course, have to swallow a part of the rise in the cost of inputs, meaning they will forgo regular profits.

Or so we hope.

On the level of local government services, the price for an hour's swim today at the local public swimming center costs 20% more than it did yesterday. Or it would, if the pool were not closed today in order for employees to reset the automated ticket dispensers and takers and replace all the signage. Considering that the water in the pool is heated by the incineration of the area's garbage, the jump in price, percentage-wise, seems uncalled for -- unless, of course, it is inordinately expensive to make a price change and making the jump in prices a big one is one way to recoup the cost of the transformation.

I do not have to elaborate how much the double punch -- a sudden jump in the prices of everyday goods and producers having to accept lower or no profits -- will likely affect personal consumption, remuneration and investment over the summer and into the fall.

But then, as any credible statistical evidence of declining consumption, income and/or investment will not appear until after the Liberal Democratic Party crushes all of its enemies in the July 21 House of Councillors election, no worries, eh, Mr. Abe?

Abenomics -- A Tragi-comedy In A Series Of Desperate Acts

Jesper Koll will be at the Foreign Correspondents Club in Tokyo on Monday. Koll is an engaging and effusive speaker, his main fault being a Teutonic tendency to shout.

Unfortunately, he will be on a panel speaking on the topics of "Abenomics: A Story of Success or Failure?" (Link)

[Odd...when I was typing that phrase just now, the fingers went astray, typing out: "Abenomics: A Story of the Success of Failure"]

I would go to witness the latest iteration of the Koll spiel (We all remember his TED talk from last year, bullish back even before Abenomics started slapping us around, yes? -- Link- YouTube ) but "Dogpile on Koll" is tired even as a silly party game.

I hope the attendees leave him alone. He's a narrator, not a playright, after all.

There have been a lot of debates on Abenomics. There will be a lot more. The one I want to hear will explain how a government and a central bank of an advanced industrialized democracy with a shrinking population creates inflation in the real economy (the capacity to create asset inflation is proven) without going through the actual physical procedure of printing currency and leaving it out on the street for folks to pick up.

The enthusiasts have never explained that one.

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.

Martin Wolf Drops The Other Shoe...

...and it lands on Paul Krugman's head.

This is one of my posts on Abenomics.

If your daily bowl of rice depends on your organization's convincing trusting savers to invest their money in shabby assets, you might want to click off.

Two months ago I expressed relief that Dr. Krugman took a moment to explain his support for Abenomics -- or at least the deliberately irresponsible monetary and fiscal policies that are all we are likely see of the three arrows of Abenomics, welcome party speeches notwithstanding.　(Link)

The explanation that Krugman provided in February was that the Japanese economy, even at zero nominal interest rates, fails to generate a demand for investment capable of consuming all available savings (Link). By creating inflation and inflationary expectations, the government and the central bank drive real interest rates into negative territory, bringing savings and investment into line.

There was always a bit of legerdemain in the Krugman treatment, failing as it does to provide the bridge in between interest rates and investment. "Invest in what?" is the question that always came to ignorant, non-arithmetic minds minds like mine. "What is this investing by Japan's consumers and corporations that current real interest rates have been preventing?" *

Martin Wolf, in his column for the Financial Times last week, provided what should have been a sobering answer: no such investment exists. According to Wolf's argument, stagnation in the Japanese economy is not the result of failure to reach an equilibrium in between investment and savings. Instead, it is the product of the double whammy of high rates of retained earnings and idiotically low returns on existing investment. In Wolf's view, unless there are reforms creating huge disincentives for corporate savings – an extremely unlikely event, in light of the multi-year effort of the Japan Business Federation (Nippon Keidanren) to justify a lowering of corporate income tax rates – the boost from the debasing of the currency will be temporary, at best. (Link)

Wolf and Krugman are not in opposing ideological camps. They are both interventionists, seeing actions by governments and central banks as crucial to altering the contours of economic events.

However, as regards Abenomics, either Wolf or Krugman is right. Of the two columnists, Wolf presents the more convincing story.

The problem is that the success of the Abe government's program is predicated on Martin Wolf being wrong. Abenomics works only if Krugman's right...or if inflation's soaking up of excess savings is not the engine, then some other inflation-induced growth mechanism kicks in increasing consumer spending and lowering the dependence on government debt-fueled economic activity.

The keys to sparking economic growth (and here I am exposed to the slings and arrows of those who truly do know better, like Alexander Kinmont and Peter Tasker**) have always been structural reforms -- and not the ones the Trans Pacific Partnership is promising. What are necessary -- for both in terms of political viability and fairness -- are counterbalanced reforms, one example of which would be the removal of restrictions on the firing of workers (a recommendation of members of the Industrial Competitiveness Council - Link) paired with a ferocious enforcement of limits on working hours.

Unfortunately, given the almost purely political and not-just-seemingly-but-actually irresponsible nature of the changes being instigated under the banner of Abenomics, the outlook for real reform and thus durable increased economic return is poor.

As for Professor Krugman, he is in the United States, which is the actual subject of his Japan postings. His recent virtual victory lap (Link) is a bit unseemly, given the uncertainty (check out the number of times Wolf uses "might" and "could" in his article) of a positive outcome from the Abe government's policies.


Later - For a worthwhile defense of Abenomics, read Okumura Jun's posted crib sheet for a panel discussion on Chinese state radio.

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* I have a similar problem with the "part of what Japan's economy needs is greater participation of women in the workforce" statements. My impertinent response is, "Doing what, exactly? What safe, rewarding, decently remunerated jobs are left begging for workers?"

** My suspicion is that Chris White is the smartest of this incredibly smart group -- for the very simple reason that he has to my knowledge never written about investment.