Always consider hidden risks
The Abenomics Mirage: The Politics Mandate of Selling Hope ?
( From OECD, Rational Pessimist, Forbes, Japn2E, FreeNewsPoos, EIA, FRED )
If you would like to receive our free daily markets updates, please Sign-up
Abenomics describes the plans of Japanese Prime Minister Shinzo Abe to revive growth in the world’s third largest economy, which is struggling to find traction under the impact of a strong yen and stubborn deflation.
Abenomics’ “three arrows” , first by a massive monetary stimulus to “beat
deflation” and weaken the yen; secondly by greatly augmented fiscal stimulus through
increased deficit-financed public works spending; and thirdly, by a “growth strategy” to
increase Japan’s economic competitiveness.
Japanese are trying it in despair after more than two decades of unsatisfied reforms...
We will show you that Abenomics is a short term relief but is not addressing the major problems that Japanese still face after more than two decades of slow growth and deflation. Can achieve it s three arrows goals? I doubt that on a longer time frame, it s gonna fail tremendously.
We will show you why...
Massive Monetary Stimulus
One of the main goal of the new Quantitative Easing by the Bank of Japan have been to devalue the Yen ( see chart below ) to gain in terms of competitiveness and then increase their exports.
Even more worrisome is the fact that the very violent weakening of the Yen have unintended consequences. In fact, Japan is far than being self sufficicient in term of energy; they just produce 16% of their energy consumption. So a weakening Yen is creating a huge cost increase in terms of energy to Japanese producers compare to their competiton.
So the huge yen shift has crucial implication for a Japanese producer, because the oil is trading mainly in US Dollar but its costs are Yen based driven. So the US Dollar Yen exchange rate has risen from ¥80 to ¥95 ( a 19% move ) since november 2012 as Japan seems intent on creating inflation for itself by depreciating its currency. ( See graph below )
It is too soon to see if Abenomics can revive tremendously the export sector ( export sector contribution to total Japan s GDP is around 15% ), but there is still negative growth ( on a year-over-basis ) as shwon by the cahrt below...
BRENT OIL PRICE IN YEN ( Blue / Left Scale )
BRENT OIL PRICE IN US$ ( Red / Right Scale )
The “second arrow” of “Abenomics” was focused on pump-priming fiscal measures.The scale of infrastructure projects through public-private partnerships and private finance initiatives will be expanded to ¥12 trillion within 10 years.
We don t realize that to achieve those massive investments, Japan Government will have to borrow even more in an already very precarious budget.
The first full-year draft budget compiled under Prime Minister Shinzo Abe, who led his Liberal Democratic Party back with promises of economic revival, marks symbolic improvement after years of deterioration.
With the 92.6 trillion yen in spending, the government effectively trimmed the size of its draft budget from the previous year for the first time in seven years, taking into account government funding for basic pension payouts, but still relies on borrowing to cover 46.3 percent of its spending.
Read also: The Japanese Abenomics Experiment : A Fukushima Kind of Result !
Abenomics “Growth Strategy”
The “third arrow” of “Abenomics” was focused mainly from new investments, deregulation ( reforms ) exports and tourism.
A Growth Strategy to Boost Private Investment. The scale of infrastructure projects through public-private partnerships and private finance initiatives will be expanded to ¥12 trillion within 10 years. Electricity-related investment will be raised to ¥30 trillion within 10 years.
Japan’s corporations should take the lead, increasing investment to
increase labor productivity and to increase profits. Government will do its
part by implementing an investment friendly growth strategy.
Deregulation ( reforms )
Japan to Lead in Applying Innovations by supporting businesses introducing cutting-edge innovations through regulatory
University major reform by bringing in some 1500
elite researchers and double the number of foreign instructors for the next three years.
Reform governance and relax restrictions on investing in businesses. To promote investment domestically, implement comprehensive measures in tax, budget, financial, regulatory reform, and regulatory system adjustment
Through an “infrastructure export strategy,” triple overseas sales from JPY 10 trillion in 2010 to JPY 30 trillion in 2020 in the fields of medical services, culinary culture, space, disaster prevention, eco-cities and agricultural industry.
From today s 8 million visitors come to Japan annually, increase to 10 million, then to 20 million. As a “tourist destination” model
country, relax visa issuance requirements, especially to ASEAN country
Concerns over Japan: Why Abenomics will Fail
Energy Costs and Supply
Electricity after Fukushima
In 2011 after the Tohoku earthquake and related tsunami that led to the destruction of Tokyo Electric Power Company's (TEPCO) Fukushima Daiichi nuclear power plant and subsequent outages at other plants, the supply of electricty have been reduced substantially
The suspension of nuclear plants operations was partially offsett by higher imports of fossil fuels to increase generation at thermal plants.
Electricity consumption remaining close to the level of 2011 - about 13% below the 2010 level.
And as we may observe clearly on the chart below, is that the gap between total expenditures and revenue for the central government is widening ( as %of GDP ). That demonstrate how stretched already Japan s financioal situation is...
Japan’s sharp drop in nuclear energy generation, since nucleat plants have been progressively shut down through the year with no restarts being allowed until very recently. Nuclear share has been basically replaced by more fossil fuels.With a fossil fuel generation rate approaching 90%, by the end of FY12 Japan electricity generation has become one of the dirtiest among developed countries. And the dependency over oil prices are making them vulnerable.
So a shift from nuclear to fossils fuels imports has led to a hike in electricity prices. TEPCO, which supplies about one-third of the energy consumed in Japan, raised its electricty prices by 15% for firms in April 2012 and by 8.5% for households in September 2012, further pushing up the already high energy prices.
Between 60% and 80% of manufacturers in a survey replied that their production, investment and revenue would be adversely affected if the tight supply-demand situation were to continue for two to three years.
And already in 2011 ( as shown by the chart below ), Japan had one of the highest electricty prices in the OECD; add 20% devaluation of the Yen plus the 15% increase of TEPCO in 2012....
Fiscal and monetary measures could not provide a rapid cure for massive balance-sheet recession, and long-term economic stagnation has been complicated by structural problems, primarily by aging, and soon also shrinking, population, growing income disparities and disappearing local economies.
As shown by the chart below, the total population have already started to shrink and the portion of the population aged 15 to 64 will shrink even faster...
An obvious sector of the economy where the workforce is already composed of elderly is the agriculture ( rice farmers ) where 56% of farmers have over 70 years old as shown by the graph below. How can you increase productivity then?
The real long term impact have been the secular downtrend in the Japanese labor force participation rate...
One of the crucial aspect for Japan s Abenomics to regain competitiveness is the growth in productivity. Short term productivity since 2010 in Japan have been declining...
.The major trend for Japan in terms of productivity and the number of workers have been already declining. That process will accelerate going forward because of the aging population...
And on the chart below, it is obvious to see that the trend between Real GDP per Capita in Japan an the trend in total working-age population in Japan is the same...
Exports and Japan
Japan s dependency on exports is nothing new... to me! In fact, the average share of exports from Japan in terms of GDP
( from 1995 till 2009 ) have been 12.5% but brang 26.6% of total GDP growth!. Those numbers must surprise you. Already Japanese growth was more the 25% based on export !
We must realize that the main problem of Japan is in its shrinking population and workforce combined to a lack of productivity. By trying to reflate a whole economy through exports is a risky bet especially when exports are only 15% of total GDP. So to bring a real growth of 2% with 15% of your economy is quite of a challenge.
Even more worrisome is the fact that the very violent weakening of the Yen have unintended consequences. In fact, Japan is far than being self sufficicient in term of energy; they just produce 16% of their energy consumption. So a weakening Yen is creating a huge cost increase in terms of energy to Japanese producers.
And finally, the gargantuan debt must be fund and their strategy doens t have any exit plan for that: the assumptions of the Abenomics are really scary ; just because they think that this reflation process can be done in an orderly manner without creating any financial tsunami !
So, in summary, how can a country with a shrinking labor force, lack of producitivity, energy dependency and under the biggest debt burden on the planet be competitive ?
For me, Abenomics is just a nice, a big firework in the process with unintended consequences...
Isn t the mandate of politicians to create a Mirage, the mandate of Selling Hope !
Mr Abe, be aware of what happened at Fukusima !
Natural Gas Prices
And for those who wonder about the natural gas prices, Japanese cost are 3.5 times the cost of a US procducer !