Abenomics: Government Economic Downgrade Sends the Nikkei Flying

Bad news IS good news. That’s a symptom of how price discovery in financial markets has been shattered from repeated monetary interventions. 

Like Pavlov’s dogs (or even zombies from World War Z) financial markets have been conditioned to see negative developments as paving way for more monetary heroin, thus goosing up risk assets. 

So if bad news is good news and good news is also good news for stocks then this means stocks can only go up forever.

Anyway the bad news from Nasdaq:

Japan downgraded its overall assessment of the economy in September for the first time in five months, as poor summer weather weighed on consumption, raising further questions over the viability of pushing ahead with a second sales-tax increase after the first one in April hurt demand and stalled growth.

In its monthly economic report released Friday, the government cut its assessment of private consumption, saying it appeared "to be pausing recently" as typhoons and record downpours pummeled Japan this summer. While it said the economy was still on the path to a "moderate recovery, " attention should be paid to the lingering impact of the April 1 tax increase to 8% from 5%.

The announcement set fire the major equity bellwether the Nikkei 225 as seen from the intra-day chart from Zero Hedge

The Nikkei 225 closed with an astounding 1.58% advance. Today's close marks a milestone, the Nikkei technically tops the December 30, 2013 high of 16,291 and is on path towards the 2007 levels.

Yet Sovereign Man’s Simon Black has the updated numbers on Japan fiscal conditions:

In the recently proposed budget for fiscal year 2015, the Japanese government earmarked 31.7 trillion yen for social security, welfare and health spending.

This is the largest item in the budget, consuming 31.2% of all planned government spending.

And it’s only getting larger.

It doesn’t help that Japan is essentially already bankrupt.

The second largest item in Japanese government’s budget is interest.

While social security, welfare and health spending has increased by 3% from the current budget, debt servicing is up by 11% and now amounts to 25.8 trillion yen, or an incredible 25% of Japan’s budget.

So just between pensions and interest, they’re spending 57.5 trillion yen. Last year they only collected 50 trillion in tax revenue.

So before they spend a single yen on anything else in government… anything at all… they’re already 7 trillion yen (about $70 billion) in the hole. They have to borrow the rest.

Bear in mind, this is coming at a time when interest rates for 10-year Japanese bonds are 0.5%, and even closer to zero on shorter notes.

If interest rates rise to just 1%, which is historically still very low, Japan will spend almost all of its tax revenue just to service the debt!

You can’t make this stuff up. It’s a screaming indicator that this system can’t possibly last.

Europe, the US and Japan, three of the biggest economies in the world, are all on a similar inevitable trend—they’re in debt up to their eyeballs, with absolutely no arithmetic possibility of ever getting out of the hole unscathed.

Japan is just worst of them all.

The above simply implies that Japan’s government have now become totally dependent on Debt IN Debt OUT or monetizing her deficits to survive…temporarily. Even at zerobound, the incessant growth of her debt levels will eventually reach a critical tipping point

Japan’s deteriorating fiscal conditions alone have been on route to a crisis. The ramifications of the above extrapolates to either an eventual default or a complete destruction of the yen in a not so distant future. 

Yet rising stocks benefit little of Japan’s society where stocks account for ONLY 9.1% of the financial assets of the Japanese household as of the 1Q 2014 according to the Bank of Japan.

So the HOPE has been to inflate a stock market bubble enough to jumpstart the “animal spirits” in the real economy which is presently being battered both from price distortions from monetary interventions and by tax hikes. Also the HOPE implies of a spillover of the “animal spirits” to the real economy which would translate to higher tax revenues (from G-R-O-W-T-H) that would help sustain unceasing growth in Japan’s welfare economy. Add to this the warfare economy

As been repeated here, stock markets have become propaganda tools by the government.

The problem is hope has never been a good strategy especially if it runs in contrary to economic reality.