The Japan Story Continues To Evolve

 |  Includes: EWJ
by: Tim Duy

Evolving economic policy in Japan is an excellent distraction from the fiscal cliff story. From my perspective, the most interesting idea Abe floated was forcing the Bank of Japan to buy government debt to support additional fiscal stimulus. Noah Smith countered that Abe is unlikely to experiment with monetary policy and will simply fall back on a mercantilist policy. While I think it is too early to ignore the fiscal policy aspect, it is increasingly clear that Abe thinks the future of Japan is in its past. From Ambrose Evans-Pritchard:

Premier Shenzo Abe is to spend up to one trillion yen (£7.1bn) buying plant in the electronics, equipment, and carbon fiber industries to force the pace of investment, according to Nikkei news.

This on the back of:

The disclosure came just a day after Mr. Abe vowed to revive Japan's nuclear industry with a fresh generation of reactors, insisting that they would be "completely different" from the Fukushima Daiichi technology.

I imagine that should advanced civilizations ever travel to the Earth, they would be amazed that we allow fission reactors on the surface of the planet. I am amazed after by this after the lessons of Chernobyl and Fukushima.

I have trouble with this characterization:

The industrial shake-up shows the ferment of fresh thinking in the third-largest economy after years of paralysis.

I am not sure this is fresh thinking at all. It sounds as if Japan is trying to go backwards in time to the 1980's. Especially when combined with an obvious intent to devalue the Yen for mercantilist reasons:

He has set an implicit exchange range target of 90 yen to the dollar, instructing the Bank of Japan to drive down the yen with mass purchases of foreign bonds along lines pioneered by the Swiss.

Finance minister Taro Aso brushed aside warnings that naked intervention would anger trade partners and damage Japan's strategic alliance with the U.S. "Foreign countries have no right to lecture us," he said, accusing the West of failing to abide by a G20 pledge in 2009 to forgo competitive devaluations.

As I have said in the past, I think that a yen/dollar target of 90 will yield only minor economic benefits at the price undermining Japan's international relationships. The U.S. and Europe will reply that their quantitative easing programs are primarily aimed at boosting domestic demand, whereas Japan appears to be pursuing an obvious beggar-thy-neighbor strategy. Of course, Abe isn't too worried about offending the international community. From Reuters:

Japanese Prime Minister Shinzo Abe wants to replace a landmark 1995 apology for suffering caused in Asia during World War Two with an unspecified "forward-looking statement," a newspaper reported on Monday...

...Any hint that Japan is back-tracking from the 1995 apology, issued by then Prime Minister Tomic Murayama, is likely to outrage neighbors, particularly China and North and South Korea, which endured years of brutal Japanese rule.

This is shaping up as a year in which Japan moves to center-stage in the international arena.

Bottom Line: Explicit cooperation between fiscal and monetary authorities to dramatically support domestic demand in Japan would be a step forward, but everything else that seems to be coming from Abe is a step backwards.