After the election on July 21 that gave PM Abe a majority in both houses, the yen bears had to be disappointed. The market failed to give them a windfall profit. The political victory, it seems, had been anticipated, and therefore was already priced in the market.
For a number of years the Japanese yen had been regarded as a safe haven and consequently was much overpriced. With the high value-added manufacturing of cars and electronic no longer competitive, the economy and those companies and industries contracted. No longer were there lifetime jobs at these companies abundantly available. It has been so difficult to find a tenured job that there are estimated to be 3 million men age 35 to 44 living at home with their parents. They are known as "parasite singles."
Economic atrophy in Japan had continued for two decades. During this period, the government made efforts to use monetary policy to stimulate the economy, but Prime Ministers came and went. Efforts to revive the moribund economy were intermittent and unsuccessful, and they were not cheap. In 2012, for example, Japanese tax receipts covered less than half of government expenditures. Deficit spending covered the rest.
Nothing was working. The Japanese were ready for a change. Mr. Abe and the Liberal Democratic Party offered a vision of something new. After his victory in November, the yen started to weaken. This continued with the announcement the new Governor of the Bank of Japan would be Haruhiko Kuroda. Kuroda's experience as the top Japanese currency official and his pledge further expand the yen supply continued to weaken the yen.
The yen, which weakened from 79 to the USD to over 103 versus the USD since last November, has helped their economy and efforts by Abe to consolidate his power. Early critics of Abe's plan claimed it was merely more deficit spending. It had been tried and it did not work. Japanese government debt was climbing above 230% of the GDP, which was barely holding unchanged. These criticisms took their toll as the yen continued to drop.
But the cure for lower prices is lower prices. As the yen weakened, optimism among auto and electronics manufacturers rose, as did some of the company profits. The Nikkei 225 average responded, moving from under 9,000 to almost 16,000. The stock rally fed on itself as index funds, under-weighted in the Nikkei, had to buy more as the stock market rose. Today it was reported overseas investors were net buyers of Japanese stocks for the seventh straight week.
While optimism soared, not all the Japanese news was positive. The lower yen resulted in higher import costs in June 2013 and a trade deficit of $1.82B. Japan imports 90% of her energy requirements, which are priced in USD. Liquid natural gas was up 13.2% and oil costs were up 6%. Japanese exports were up 11.5% to the US, but down 0.6% to China and down 3.3% to Europe because of their recession.
The Abe economics plan, in addition to yen printing and public works projects, calls for an effort to modernize business practices. Some of these were described in the Telegraph today:
"Mr Abe has created a tailwind before he launches his blast of Thatcherite reforms, or 'Third Arrow,' intended to drag Japan's pre-modern service sector kicking and screaming into the 21st century, to open the rice paddies to commercial farming, to open the country to the world and, in theory, to demolish the edifice of vested interests, using the Trans Pacific Partnership as a sledgehammer. ...
There are, of course, horror stories of inefficiency in Japan. Companies have 'banishment rooms' where unwanted workers are shunted in the hope that they will resign, since solvent firms are not allowed to fire staff.
Yet the real crisis is demographic, and harder to solve.
Prof Masahiro Yamada, from Chuo University, says the economic depression itself has been a key reason why fertility has collapsed and why the population has been shrinking since 2005, with awful implications for ageing costs."
These issues, and the worry about the cost of financing the sovereign debt, currently .80 for 10-year paper, should inflation in Japan currently perk up to 2% make for a lot of super bears. But these are longer-term worries. Currently, there are abundant yen shorts (FXY) and the bear news is in the market. Perhaps if the equities and specifically the Nikkei 225 head south, this could target yen selling, but for the short and intermediate term, the bears may be out of ammo.
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