EVERYBODY LOVES A Christmas general election, and I’m sure Japanese premier Shinzo Abe would love nothing more than a rollicking victory in the snap election lined up for this coming Sunday.
The official puff from his office is that the election has been called as a quasi-referendum on the opinions of the Japanese electorate towards his economic reform policies, and specifically with regard to his decision in November to postpone a planned rise in Japan’s sales tax from 8% to 10%.
Delaying a planned rise in sales tax? I should hope so. The first increase, which was imposed in April, kicked Abenomics where it hurt and plunged Japan back into recession.
After that neat demonstration of economic cause and effect (which seldom goes the way economists say it should), there’s no way that anyone other than the most reckless of gamblers would vote for another hike at this point.
It seems that Mr Abe is up for a landslide victory on Sunday. He himself appears to be hyper-confident about his chances, given that in his own constituency he didn’t bother to fill out the proportional representation form which allows you to slip into the house if the result is marginal.
If the landslide occurs, therefore, the result of the referendum on Abenomics will be a resounding “yes”. That does seem odd, since the prime minister’s radical economic programme hasn’t worked in the way he intended.
Yes, there have been some direct, showboating effects – such as a yen that is weaker versus the dollar and other major crosses than at any time since 2007, a rallying Nikkei and microscopic JGB yields: the 10-year is yielding around 50 basis points, the lowest return available in the global government bond sector.
And the massive monetary boost provided by the Bank of Japan really did get the inflation rate moving, in line with Mr Abe’s and BOJ Governor Kuroda’s aim to drag Japan out of the deflationary doldrums that have prevailed for decades.
But after hitting 3.7% inflation, as measured year-on-year in May, Japan’s consumer price index gained 2.9% in October and preliminary data for November suggest the rate has pulled back to just a tenth over 2%. Not quite according to plan. And there are those dreadful GDP numbers for the third quarter. Japan’s economy shrank 1.6% over that period. Again, not part of the plan.
If the landslide occurs, therefore, the result of the referendum on Abenomics will be a resounding “yes”
I’VE HAMMERED ABENOMICS in this column since the programme was first instituted, and little has happened that would alter my stance towards the whole shebang. Quite a few debt bankers in Asia share my views and the one who always brings a smile is the head of DCM at a bulge-bracket bank in Singapore who suggests that the biggest knock-on effect of Abenomics has been the quest for offshore assets by Japanese loan bankers.
This was confirmed to me yesterday when I spoke to a project finance banker who agreed that participation by Japanese banks in infrastructure finance, in both debt and equity, had risen substantially since the Bank of Japan introduced QE in 2012.
You really can’t blame them. After all, nothing makes your consolidated balance sheet look prettier than a bunch of foreign currency assets when your domestic currency is hitting the skids.
It’s becoming more and more common to see infrastructure projects in Asia Pacific funded with a 50/50 debt to equity mix, rather than the usual 70/30 in favour of debt.
Are the Japanese banks responsible for this shift? The answer may not be that simple, but there’s no doubt that the Japanese hunger for assets in the face of a plunging yen and minuscule local debt market returns have helped push that dynamic.
I THINK BACK to the 1980s and Britain’s economy when it was managed (eventually to the fury of Prime Minister Margaret Thatcher) by Chancellor of the Exchequer Nigel Lawson. He was known among traders in the City of London as “Lucky Lawson” because whenever he took a policy gamble, markets somehow moved in his favour.
I wonder if Mr Abe is “Unlucky Abe” since he’s just had the most unfortunate bit of bad luck as the slide in the oil price works in exactly the opposite way to what his reflationary policy intends to achieve. It will help Japan’s balance of payments, but the inflationary psychology Abenomics hopes to inculcate into the collective Japanese psyche is not likely to take hold while energy prices are plummeting.
Maybe Mr Abe knows a thing or two about how the final quarter of 2014 is shaping up for Japan’s economy. Already numerous economists are reckoning that the worst is over – that the latest round of monetary stimulus will kick in and that Japan will push out of recession. That would indeed make a rather happy belated Christmas present for Mr Abe, on the assumption that he does indeed achieve a landslide in the December 14 election.
The biggest worry, as far as I can tell, is that the Bank of Japan’s continued easing turns the spotlight onto Japan’s pile of debt, one of the most onerous of all the world’s biggest economies.
How the BoJ would respond to a homegrown debt crisis after having thrown the kitchen sink at Japan’s economy doesn’t bear thinking about. For now, however, I will simply wish Mr Abe “Ganbatte Kudasai!” and enjoy the fact that I shall still have Abenomics to write about for a considerable time yet.
