Japan's LDP: Let Them Eat Cake

The solutions being offered by Japan's ruling Liberal Democratic Party [LDP] for Japan's anemic growth and struggling stock market are about as useful as Marie Antoinette's famous quote, "If the people have no bread, let them eat cake".

Japan's economy is still technically in its longest economic recovery in post-war history, but you wouldn't know it from Japan's notoriously volatile quarterly GDP numbers, which have gone, by quarter, from -0.2%, +5.5%, +2.6%, -1.6% and +2.6% since Q3 2006. But the real trend is in the annual change rates since 2002, i.e., +1.1%, +2.1%, +2.0%, +2.4% and +2.0%--i.e., not exactly robust growth coming out of a financial sector fragility-induced decade long "Heisei Malaise".

In the six years of recovery, there have been three episodes of growth "pauses", and it still doesn't feel like an economic recovery to the man/woman on the street, even though corporate profitability has recovered to historically high levels and companies are awash in cash from extremely accommodative monetary policy.

Both the BOJ and the LDP are doing everything in their power to exacerbate monetary and fiscal tightening. The BOJ wants to "normalize" monetary policy while the government (egged on by the MOF) would dearly like to double the VAT and slash social welfare expenditures?as their solution for spiraling public sector debt that is 158% of GDP.

This big picture contrasts with the upbeat scenario painted by a recent article on a Japan recovery in Barron's, which suggested Japan is now the contrarian's call. While all it would take for the Barron's prognosis to become self-fulfilling is for the pendulum of foreign investor sentiment to swing back toward raising their relative positions in Japan, this is not likely until a) the MOF/BOJ seriously attempt to prevent the yen moving above JPY100/US$, and/or b) stock dividend yields move above JGB yields, which historically have been a clear signal for a sustainable rally in Japanese stocks.

For the time being, however, we see the Japanese market continuing to test downside resistance.

Disclosure: none

Comments

[huangjin]

I don't think you can properly understand Japanese GDP numbers without considering demographics and the declining population.

[ikkyu]

Mr Huangjin,
Mr. Whitten is not not oblivious to these trends, i can assure you.

Nice piece once again. i am sure no one would welcome a bull more than you, so you words ring true in contrast to Barron's.

When the bull does come, I wonder if we could have a repeat of 2005 with a strengthening nikkei and a weakening yen?

itsudemo benkyou ni natte imasu!

Thanks from Osaka.

john

[Darrel Whitten]

Dear Huangjin;

Yes, demographics is having a major impact on Japan in many ways. Most prefectures (of which there are 47) are experiencing declining populations, a weakening economic base and related lackluster demand for banking services, shrinking property values, and structural local government deficits.

That said, the government actually exacerbated the situation by "stealth" tax hikes, trimmed public services (i.e., no buses for grandma) and a rush-job tightening of regulations on building codes that has essentially stopped the housing market in its tracks. And oh by the way, they would ram through a doubling of VAT hikes in a minute if they thought it would be politically feasible.

They are also clueless as to how to restore Japan's role as an international financial center, even though they desperately would like to. How about tax breaks, easier administrative proceedures, free economic zones, etc., etc.?