Even in the Short Term, Abenomics Fumbles

Cheerleaders of Japan’s PM Shinzo Abe’s aggressive economic policies known as “Abenomics” say that devaluing the yen would produce the “solution” required to revive her economy. I say that this represent no more than wishful thinking that relies on tooth fairy.

After the yen’s 7% loss against the US dollar since the end of 2012 (as of Friday’s close), “Abenomics” hardly seems to have delivered on its vaunted promises of increasing “competitiveness”.

From Bloomberg,

Exports climbed 6.4 percent in January from a year earlier, the first rise in eight months, exceeding the median 5.6 percent estimate in a Bloomberg News survey of 24 economists. Imports increased 7.3 percent, the Finance Ministry said in Tokyo today.

Weakness in the yen that aids exporters such as Sharp Corp. and Sony Corp. also means the country pays more to import fossil fuels needed as nuclear reactors stand idle after the Fukushima crisis in 2011. That burden may encourage the government to limit the currency’s slide, with Deputy Economy Minister Yasutoshi Nishimura signaling in a Jan. 24 interview that the government may prefer a yen stronger than 110 per dollar.

"Abenomics" has, so far, only worsened the trade and current account balance of Japan (charts from tradingeconomics.com) which amplifies the risks of her overleveraged government. To cover such deficits, Japan's economy would now require more foreign capital. Japan seems on path to a banana republic.

More from Dr. Ed Yardeni at his blog,

The immediate consequence of his browbeating the central bank was a 16.9% plunge in the yen since September 27. The catch is that 18% of Japan’s exports go to China, where components made in Japan are assembled into final products. That could lower the input costs to Chinese manufacturers and increase their competitiveness. Higher import prices in Japan could depress consumers' spending by lowering their purchasing power. By far the biggest catch is that Japan’s numerous governments have tried massively stimulative fiscal and monetary policies for over two decades that all obviously failed to work. 

While the benefits of inflationism are usually on felt on the short term, in Japan’s case, it hasn’t.

Yet, whatever supposed boon accrued from the loss of the yen’s purchasing power has largely been offset or neutralized by other factors such as higher import costs and reduced capacity by consumers to spend.

As the great Ludwig von Mises warned,

The much-talked-about advantages which devaluation secures in foreign trade and tourism are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.

So far what the crumbling yen has generated has been an artificial money inflation fueled boom in her stock markets. 

The Nikkei has been up 9.53% as of Friday’s close. However a foreign investor invested in Japan would see his returns at only 2.53%, net of the losses from the yen, while taking on greater risks from the potential setbacks from the political desire to combust price inflation.

The Economist Buttonwood columnist Philipp Coogan rightly noted of the growing risks from Abenomics…

Abenomics is targeting higher inflation. But does the government really know what will happen if inflation hits 3-4%? Hard to believe that the Japanese public will want to own 20-year government bonds yielding 1.75%. At current interest rates, Japan spends 25-30% of its tax revenues on debt payments; what would happen if yields double or treble? The effect would dwarf any improvement in tax revenues that would flow from a revived economy.

Again in politics, common sense has hardly been common.

At the end of the day, the real intent of the yen’s devaluation has been to provide subsidies or transfers of wealth to the banking, insurance and finance industry that will come at a great cost to Japan’s citizenry via a credit event or a currency run.