Japan's LDP: Let Them Eat Cake

Includes: EWJ, FXY
by: Darrel Whitten

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