The Magic of Abenomics: Triple Dip Recession!

A few hours back I cited one of the possible reasons that could bring Japanese markets (as well as global markets) into a risk off mode: 

In short, history suggests that Japan’s financial markets will experience another (mini) boom bust cycle. As for how this will be triggered is beyond me. Will this be due to domestic politics?… Or will it be a meltdown from extremely overbought conditions premised on the excuse of poor economic data—say a recession?

Well, Abenomics has apparently ran the Japanese economy aground. 3Q GDP now manifests of a “triple dip recession”

First the Bloomberg:

Japan unexpectedly sank into a recession last quarter as the world’s third-largest economy struggled to shake off the impact of an April sales-tax boost, raising the odds of a delay in a second bump in the levy.

Gross domestic product shrank an annualized 1.6 percent in the three months through September, a second straight drop -- matching the textbook definition of a recession. Unadjusted for price changes, the economy contracted an annualized 3 percent, the Cabinet Office said. Japanese stocks slumped.

While exports and consumer spending returned to gains last quarter, they weren’t strong enough to offset the impact of a slump in the stocks of unsold goods -- a sign that companies were unwilling to boost production. Residential investment was another soft spot, while government spending had a positive impact on GDP.

Because mainstream reports are usually sterilized, we'd get a better picture from statistical charts (provided by the Zero Hedge)

Despite all three arrows of Abenomics, this marks the third recession in four years!

Worst, 3Q contraction has been the deepest since 2011!

Yet 3Q GDP points to even MORE problems ahead! (table from Japan’s Cabinet office)

Investments had really been totally devastated (red rectangle) which has prominently weighed on private demand. While consumers spending has marginally recovered, they may signify a dead cat bounce. 

The saving grace has been “public demand” or government spending (green rectangle). Yet this means that the real economy has been worse off than the headline numbers suggest!

Secondarily, the lift from government spending means BIGGER BUDGET DEFICITS (as tax revenues swoon due to recession while public spending surges). And this would pressure Japanese politicians to impose even HIGHER TAXES in the FUTURE. 

Of course cut spending, cut taxes and reform by liberalization are alternatives, but this won’t be route taken. The mainstream perspective on public management has been embedded from the path of least resistance; borrow, borrow, borrow in order to spend, spend, spend. As an old saw goes, you can’t teach old dogs new tricks

And this reinforces if not validates my earlier suspicion that the QE 2.0 has been designed by the Japanese government for deficit monetization:

And speaking of recession, I believe that the BoJ’s has positioned itself to cover the added fiscal deficits from a possible economic downturn. This is what the BoJ’s QE 2.0 has been about. The 2% inflation rate target is just a camouflage.

With fiscal deficits expected to widen, where debt servicing is now equivalent to 25% of government budget and where the difference between taxes and social spending leaves Japan’s 2015 budget in a 7 trillion yen hole…all of which has been based on optimistic expectations, this leaves the BoJ as the only major source of financing for government or their JGBs.

So the BoJ may have expanded her QE to accommodate more monetization of fiscal deficits aside from possibly including the possible shift by GPIF out of domestic bonds. Of course the latter could function as a decoy as to shield the Japanese government from revealing its anxieties. Time will tell. As September has passed, Japan’s quarterly GDP should be out anytime soon.

And given Japan's excessive leveraging...(chart below from Automatic Earth)

...what Abenomics has done has been to fast forward Japan's portentous destiny.

Japan’s triple dip recession has so far performed as expected; negatively impact the financial markets, as of this writing…

But these would not serve as a clear sign that risk OFF has returned. Those figures have bounced off the lows (chart from investing.com)

In today’s world, bad news have been seen as good news, as markets continues to expect more and more bailouts which drives market pricing apart from fundamentals, thus entrenching the boom-bust cycles.