Abenomics: Awesome Or Apocalyptic?

Includes: EWJ, FXY
by: Han Jun Low


It seems Abe has finally forced CPI upwards in Japan, but has he saved Japan's economy or doomed us all?

Why is the world so happy about rising prices in an aging nation filled with pensioners dependent on fixed income?

Why is it good that the average Japanese person works longer, retires later and has savings that are now also less than ever before?

Abenomics. It's strange how this colloquial term has come to such prominence, despite the fact that Abenomics in practice is hardly new or revolutionary even in Japan itself; Japan, of all countries, is no stranger to debt and stimulus. It has had a well-documented flirtation, no, full-blown affair with debt, to the chagrin of the naively loyal working man. Oblivious is he to the seductress that is so keen on stripping him of his savings and pension.

To understand why history is repeating itself, we must first understand history. It was 1989 when the so-called Lost Decade (which may be better classified as the Lost Two Decades at this point) began, thanks to the ease with which Japanese corporations could obtain loans for even poor-quality investments. As they borrowed more and their investments provided fewer returns, a bubble was inflated. Then, interest rates rose, and it soon became clear that the poor investments would not be able to return enough to keep over-leveraged firms above water.

We see that the beginning of the bubble is the same as it had been in 2008, and indeed, most bubbles are inflated and popped by this same exact formula; easy credit leads to increased speculation and increased indebtedness, and a sudden rise in interest causes it to all come falling down. Banks faced with bankruptcy are bailed out, just as they had been in the US, and are further funded by cheap government loans. The zombie banks were born, and as they fed cheap liquidity to firms that should have gone bankrupt too, zombie firms were soon shambling about. All funded by the working Japanese tax-payers' money and the working Japanese citizens' savings. Basically, EVERYTHING the working Japanese did not consume. Eventually, even these zombie firms would cease their shuffle. It would take 12 years for Japan to recover to 1995 levels, hindered by the support given to these zombie entities, many of which would not survive anyway.

That was in the early 1990s, before any talk of stimulus. The effect of stimulus itself, however, has transformed Japan... from a nation of savers, into a nation of debtors.

With below-1% interest rates since 1994 (certain "economists" continue to argue that high interest had caused the long recovery, rather than admit the sheer fact that interest rates were as low as they would go), Abe's monetary arrow seems hardly revolutionary. With rising debt and a fiscal deficit (government spending more than they earn) since 1991, Abe's fiscal arrow is also nothing new. It seems that the only "revolutionary" aspect of Abe's policy is the sheer scale of his policies. Perhaps finally Keynesians will admit that there is no "liquidity trap" when Abe's ballistae fracture the Japanese economy. Most likely not, seeing as Abe still has a third arrow to fire, real structural reform, and any blame can be laid at the feet of that policy. Also, they might argue that his policies simply were not extreme enough and that he really should have helped debt reach, say, 400% of GDP.

The real irony is that the first two arrows basically lay the groundwork for zombie companies to continue their dance, as had happened back in the 1990s; instead of structural reform, the first two arrows continue to enforce the status quo, at the expense of everyone. Arrow three seems doomed to failure at that rate, seeing as the first two arrows seem diametrically opposed to it.

Inflation is taking hold in Japan, a real achievement considering how little the Japanese saver has left to spend. Seeing as wages are still stagnant, part-time employment is rising and consumption is down, the Japanese saver has even less.

No matter, inflation on the back of rising costs rather than on the back of increasing wealth are seen as the same thing in Abe's eyes. Until real wages improve and consumption and savings rise again, I am doubtful of Abenomics being any more than a means of wealth redistribution, from the poor to the rich ironically. As asset prices rise even further into bubble territory, stocks will have to be unloaded onto the last refuge for Japanese savers: pensions. Although pensions are invested in Japanese government bonds, which have been low-yielding and rendered near worthless by the prospect of inflation, I wonder at the timing...

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.