Grim Exposition Of Fundamental Flaws in Abe's Abenomics

Loose monetary policy goes a long way toward liberating a country from economic torpor. However, monetary policy alone is insufficient for the whole journey. I have for a long while been railing that the Abe Cabinet has to get down to brass tacks and figure out ways to punish companies for hoarding their profits rather redistributing them to shareholders, converting them into higher pay for employees or deploying them in investments. (Link)

In a video that everyone should watch, Charles Dumas, the chief economist for Lombard Street Research, agrees. (Link - video)

That exports continued to underperform last month despite the effective devaluation of the yen (Link) only makes the Dumas presentation all the more damning.

Given that Abe 2.0: The Return of the Princeling was orchestrated by a select group of (often China hating) empire builders of the zaikai who crowd around Abe on the weekends, not letting others with their pesky opinions near their superannuated golden boy, the chances that the PM will be made aware of the changes necessary to save Abenomics, much less implement those changes, are very, very low.


Image: Council on Economic and Fiscal Policy meeting of 22 July 2014
Image courtesy: The Prime Minister's Residence

Size Matters

Finally, an article in the vernacular press explaining, at least partially, how Japan's vehicle markets can be so resistant to imports.

Are Japan's Minicars a Trade Barrier?
Nation's Preference for Ultrasmall Autos Poses Hurdle for Foreign Auto Makers

TOKYO—Japan's auto market, once a global trend setter, has become one of the most disconnected from markets elsewhere, putting it at risk of becoming irrelevant, say executives here.

More than 90% of cars sold in Japan are Japanese brands. A third of them—ultralight minicars—are sold nowhere else. Originally developed to fill Japan's need for cheap cars after World War II, they are too small or too expensive for other markets.

The country's singularly strong appetite for fuel-efficient cars means car makers have developed a series of advanced technologies, such as hybrid cars, that don't necessary translate easily elsewhere.

Japan has no tariffs on auto imports. Japanese auto executives say the country's unique tastes are a big reason for global auto makers' failure to thrive in the world's third largest auto-buying country, after China and the U.S. Foreign auto executives say the country's preferential tax treatment for minicars and its unique safety and environmental regulations are nontariff barriers that protect the country from foreign competition...

(Link)

Had the author added brand loyalty based on regional and keiretsu ties to his reasons why Japanese consumers and business customers buy what they buy, he would have covered all the bases.

The ruling coalition is set to try leveling the playing field in terms of the tax advantages of minicars. The Liberal Democratic Party's tax committee has recommended lowering the acquisition tax for full-size vehicles and raising the annual taxes minicar owners pay by 50%. (Link). Minicar manufacturers and their suppliers screamed in protest when the proposals came before the committee.

Minicar makers, particularly minicar-motorcycle manufacturers like Suzuki and Yamaha, seem to have little traction or connection with Abe Shinzo and his allies, however. Daihatsu in theory might have been able to bend the ear of the LDP tax committee, corporate parent Toyota Motors being seen as a vital member of Team Abe thanks to President Toyoda Akio's obsequious praise of Abenomics.

Daihatsu, is, however, the outcast problem child of the Toyota family. Toyota Motors would really want to have Daihatsu customers buying the group's more profitable full-sized cars. That Daihatsu did not take a lead in fighting the tax changes, leveraging the Abe-Toyoda relationship into influence upon the committee's deliberations, is not surprising.

Raising the taxes on minicars goes partway into answering the charges of U.S. automakers that regulations plays a role in closing Japan's auto markets to foreign manufacturers. The tax changes can therefore be seen as one facet of the political show Japan has to put on in order to consolidate its position inside Trans Pacific Partnership negotiations on vehicle tariffs -- where the white whale of Japanese trade policy, the U.S. 25% tariff on light trucks (a.k.a., minivans), lurks.

The still far off tax rise (the tax changes would only affect vehicles purchased after March 2015) on minicars does carry a political price. Minicars are seen as "people's cars" (Ja, ist Japonishes Volkswagen!) and everyday life vehicles (seikatsu no ashi - literally, "livelihood legs"). They are particularly important for rural households, which generally have lower than national average incomes yet which need a vehicle for each adult family member for both personal transportation and ferrying goods. Raising the costs of owning a minicar, or two or three or four as is often the case, is a rude slap in the face to rural voters. Coupled with the recently announced plan to phase out the gentan rice subsidy program over the next five years (Link), it looks as though the LDP is double-crossing the rural voters who remained loyal to the LDP even during the party's years of decline and banishment to the political wilderness.

Thinking that the demographic trends in agriculture and the rural areas make the minicar tax rise a safe bet for the LDP -- a "So long and thanks for the votes, you losers" -- ignores the reality that younger consumers are also big fans of minicars. Ticking off youth, folks who will voting for a long time to come, seems dumb, strategically. The young, however, are s numerically small proportion of the current electorate who do themselves no favors by furthermore not showing up at the polls on election day. (Link - J)

So minicars go to it, despite their extreme popularity.

Come Fly With Me

I normally rail against the citation of articles quoting anonymous sources, particularly from the major domestic news organizations. In this blessed land, anonymous sources are usually being either coy, abusive or mendacious. Coy in the sense that every informed reader of the news article knows who the source is. Abusive in that the source is a policy entrepreneur using the journalist's supposed autonomy as a shield for floating as a fact what is indeed only a proposition. Mendacious in that what is being said is flatly untrue, but having been published and incepted as a part of the detritus of discourse cannot be traced to any particular liar in government, the parties or industry.

Anonymous sourcing makes antennae up in the "stay alert, you are being manipulated" mode my default news reading and viewing position -- which is unfortunate.

However, there are times that the only way a tale can get told is when anonymous, protected persons spill the beans. The Reuters story on the politics behind JAL's decision to buy Airbus aircraft "Insight: Japan politics looms over ANA's choice between Airbus, Boeing" is one such tale. Nobody with a career or even just a job can offer details or comment upon the way passenger aircraft purchase decisions really get made. For that, one needs someone talking from behind a mask.

The July Trade Deficit And The Green Movement

While in June, Japan's trade surplus, despite a 24.5% year-on-year increase in the imports of liquified natural gas for power generation, was 60 billion yen -- a minor decline from June 2011, when it was 64 billion yen (J). In the year to June, however, Japan's trade deficit was 2.9 trillion yen, up 103% from the previous 6 month span and greater than the trade deficit for all of 2011. Fuel imports were up 21% in the first 6 months of this year, with LNG imports up a hefty 49.4%. (J)

The trade deficit in July, however, is likely to be even more stunning. With utilities and independent power producers possibly trying to stock up before the worst days of summer, the deficit for just the first half of July was a colossal 368 billion yen. Given unceasing heat waves this blessed land has experience over the second half of this month, it would not surprise if the deficit in July is greater than one quarter of the deficit over the first half of the year. (J)

Headlines regarding a massive importation and burning of fossil fuels for electric power generation will certain provide grist for the mills of those who wish to disparage the anti-nuclear movement. It will be hard to argue for a cessation of the use of nuclear power generation, as the Green Party, established on Saturday, has demanded (J) in this atmosphere. In light of Japan's burgeoning LNG addiction, absolutism about nuclear power is likely to garner the mockery of the news media, the Noda government and the industrial establishment.

The Green Party (Midori no to -- not to be confused with Midori no kaze, the four woman, anti-nuclear, anti-TPP caucus in the House of Councillors) hopes to run district and party list candidates in next summer's House of Councillors election. As for the next House of Representatives election, whenever it is held, the Greens hope to present a list of candidates for the proportional election, while possibly lending support to the candidates of existing and like-thinking parties in the districts.

The existence of a third anti-nuclear party in the proportional voting is bad, bad news for both the SDP and LF. The SDP could conceivably fall beneath the five Diet-member limit for a party eligible for public elections funds. With Green support, however, some of the SDP members fighting for district seats might gain an edge.

Unlike the SDP, the LF has enough viable candidates in the district seats that the Green Party's participation in a House of Representatives election does not pose an existential threat. Nevertheless the LF, with its opportunistic rather than ideological stance against nuclear power, has to worry about a Green Party's whittling votes in the proportional race. The LF's sizable proportional seat contingent in the House of Representatives could face annihilation.

The Greens set out with significant barriers to their affecting policies in the way the party wishes. They will have a hard time fighting an image of anti-nuclear fanaticism. They will also splinter the anti-nuclear movement, paradoxically serving the interests of the moderately-pro-nuclear ruling Democratic Party and the strongly pro-nuclear Liberal Democratic Party.

By the time Hashimoto Toru's Osaka Ishin no kai enters the ring, assuming Hashimoto Toru emerges from his current funk (J) and assuming Hashimoto still wishes to take on national politics after the parties in the Diet went on their knees yesterday, promising to transform Osaka Prefecture into a Metropolitan District by the end of August (J) -- and given Hashimoto's pragmatic "opposed but oh well we need it right now" approach to nuclear power --the importance of the Greens to national politics will become somewhat clearer.

In Sunday's Yamaguchi Prefecture gubernatorial election, Hashimoto's anti-nuclear advisor Iida Tetsuya Tetsunari, campaigning against the completion of the Kaminoseki nuclear power station, finished a respectable second in a field of four, garnering an impressive 35% of the vote to 48% for the LDP-New Komeito backed winning candidate.

Iida's second-place finish and receipt of over a third of the vote was particularly impressive given he had only been in the race for a month; had no formal organization when he started; was practically a carpet bagger (he has not lived in the prefecture for 35 years); Yamaguchi is absolutely dominated by the LDP; and a former DPJ member was one of the other three candidates running.

Now interpreting the results as indicative of a strong anti-nuclear allergy, even the most conservative and public works-dependent of prefectures, might be premature. Nearly 50% of the public nationwide allies itself with no particular political party, meaning that a powerful anti-all established parties feeling already exists in the electorate. Both the LDP-New Komeito-back candidate and the former DPJ member candidates could have also been victims of an anti-MV-22 Osprey backlash, the controversial aircraft having been deployed last week to the U.S. Marine Corps base in Iwakuni.

The high percentage of the total vote Iida received may have also been aided by the low overall voter turnout. Gubernatorial elections have of late had notoriously low turnouts. Sunday's contest was no exception, attracting only attracted 45.32% of the electorate -- the second lowest percentage ever for the normally politically charged prefecture. (J)

Just what percentage of votes a protest candidate like Iida would win in a national contest, when participation numbers are much higher, is at best unclear.

However, it can be argued that Iida's participation likely sparked interest in what was going to be a lackluster contest, increasing voter participation. If slates of outsider candidates can lure to the polls those who would otherwise toss away their ballots, the LDP and the DPJ, but particulary the DPJ, will be in serious straits. The Noda government's rollout of the Oi reactor restarts was a fiasco, energizing as if with a lightning strike the previously somnolent anti-nuclear movement. All the DPJ, even those favoring a nuclear phase-out, are tarred with the brush of the Noda government's impossibly quick determination of the safety of the Oi reactors.

So what will be the color of the revolution, or at least this iteration of it?


Later - Here is the Nihon Keizai Shimbun report on the preliminary July first half trade figures making the same guess I did above. (J - WARNING - link rot sets in fast)

Much later - Many thanks to reader MP for his alert reading of this post.

The Philosopher King

Let us say you are reading an op-ed from Toronto's The Globe and Mail on Japan's immense national debt by a Mr. Daryl G. Jones, director of research at Hedgeye Risk Management in New Haven, Connecticut. You read that:

The Asian nation has been adding debt at an accelerating pace over the past decade. In 2001, Japan’s debt-to-GDP ratio stood at 144 per cent. A decade later, it was 212 per cent – meaning that Japan is now far more indebted than Greece was at the worst point of the recent crisis, when Athens’ debt topped out at 165 per cent.

And you sort of shrug, as you know half of the gross debt is actually owed by the government to itself, and that 90% of the remainder is in the hands of passive domestic investors -- who have an incentive, as they are Japanese, to not push Japan into foreclosure.

So you trundle along:

Japan’s debt burden is still expanding rapidly. We project the country will run a budget deficit of more than 9 per cent of GDP this year. This is a huge gap and will require even more borrowing. The Japanese government says that revenue from bond issues will account for 49 per cent of all government revenue in 2012 – a situation comparable to a family having to borrow half of the money it expects to spend over the next year.

Turning the situation around is difficult. Social security spending and debt repayments are projected to make up 53 per cent of Japan’s 2012 federal budget. Both areas are hard to cut, especially with an aging population.

Government is also tough to trim because Japan’s government spending is only 40 per cent of GDP, lower than in most industrialized nations. Thus, it is unlikely that Japan can, or will, implement austerity to reduce its deficit.

This makes you a bit more worried, as it reflects some of your own concerns. Laying aside the country-as-household metaphor, which never works, any more than the country-as-corporation metaphor, the inability of the Democratic Party of Japan, despite its best efforts, to find "wasteful government spending" in amounts that would make sensible Hatoyama Yukio's and Ozawa Ichiro's complaints about the sequencing of the imposition of a rise in the consumption tax ("First find all the waste; cut it; then make the necessary tax adjustment") is a point the Noda government is failing to hammer home.

The op-ed then takes a turn, as they always do, through Japan's demographic conundrum. You skip over the part about investors losing confidence as they did in Greece, Portugal and Spain, which managed to have debt crises prior to demographic crises.

Then you read another interesting passage:

There are a number of reasons that Japanese sovereign debt may be re-priced sooner rather than later. The first is that Japan will have to refinance 24 per cent of its outstanding debt this year, an enormous amount that will test the limits of the market’s hunger for Japanese bonds. Second, Japan is shifting from a current account surplus to a current account deficit, which naturally reduces the appetite for Japanese bonds.

If the current account were going into the red zone, that would be really worrisome. It must be noted that yesterday the Finance Ministry announced an unexpected trade surplus for February (E) -- so perhaps, for at least today, we can ignore our fears of the inevitable switch to a current account deficit.

So everything is going pretty well. There are some dire predictions and uncomfortable facts, but nothing you cannot handle.

Then, in the second-to-last paragraph, you hit this:

Japanese philosopher Daisaku Ikeda once said, "A person, who no matter how desperate the situation, gives others hope, is a true leader."

...and then your day is shot, as your mind is filled with increasingly elaborate and borderline paranoid theories ("Hedgeye...You know if you say it really fast, you know what it sort of rhymes with?").

"Philosopher"? That is a new one for me.

For the full op-ed, click here