Japan’s Exports Plunge, Trade and Current Account Deficit Balloons

The popularly held mercantilist view is that weak currency equals strong exports.

Well the above chart is just an awesome unmasking of the mercantilist myth.

Abenomics via the massive debasement of the yen has led, not to an increase in exports, but instead to a sharp decline. January exports retraced by about 15% (m-o-m). Japan’s exports have now reached pre-Abenomics level. Nonetheless Japan’s exports is still up about a measly 9.5% (y-o-y). After all the yen’s debasement, this has been what remains of export growth?

The steep drop in Japan’s exports seem to mirror China’s exports collapse in February. 

I’ve read some excuses by the mainstream bubble worshiping zealots alleging that China’s export drop has been cyclical and due to a supposed “overinvoicing”. But even if there have been some truth to this, none of this explains the degree or scale of the drop. Why 18% and not 5 or below 10%? Why the huge drop? 

And of course if we look at Japan’s top trading partners, it looks like neighboring China has been instrumental in providing substantial external trade. 

Unfortunately, both countries have been playing with geopolitical fire, being engaged in a territorial squabble over some small islands called Senkaku.

And the sharp contraction in Japan’s export growth can likewise be seen in Japan’s exports to China.

I am in doubt if such has been about geopolitics. 

That’s because Japan’s export to Australia has also been shrinking.

And guess the common denominator between Japan and Australia? 

Well the answer is China. China represents Australia’s largest trading partner, where Japan comes only second and the US third.

What does all the above suggest? They imply two things; one China appears to be meaningfully slowing down and second there has also been a significant downshift in the global economy

Going back to Japan. The substantial export decline has only exploded…

…Japan’s trade deficits

as well as her current account deficits

This means that Japan will need foreigners to plug on these or that she will have to draw down from her dwindling domestic savings (18.6% 2012 from 24.6% 2007) or expatriate her externally located capital (NIIP) or…

…even borrow more to compound on her debt yoke. The above table from global finance reveals that Japan’s private and government debt load as of 2011 is at 512% (!!!) of GDP.

And don’t forget the above deficits will add to the ballooning government deficits.

And a major sales tax hike is coming this April.

The above conditions looks like the present emerging market dilemma (weak currency, weak current and trade accounts). Nonetheless given Japan’s policy direction, they seem to be headed that way via a Black Swan event.

But don’t worry be happy. Japan’s stock markets will likely ignore this because bad news has really been good news. All these for Japan’s Wall Street means more easing from the BoJ in order to expand “Abenomics”. 

How Hyperinflationary Policies Ushered in China’s Communist Rule

Austrian economist and professor at Northwest University Richard M. Ebeling in a recent article articulates how the Chinese government’s hyperinflationary policies, which financed her war with Japan 1937-1945 and the civil war compounded by the “dictatorial” Nationalist government, ushered in the communist tyrannical rule.

Here is a slice. From Epic Times (hat tip Bob Wenzel) (italics original)

Inflations have undermined the cultural and economic fabric of society, bringing about social chaos and revolution. Inflation is the enemy of social order and economic stability. Inflation can destroy accumulated wealth, ruin the entire well being of broad sections of a country’s population, and sometimes bring about radical change in a nation’s political system. When combined with war, inflations tear apart the human community.

One example is the Great Chinese Inflation of the 1930s and 1940s. Indeed, the destruction of the Chinese monetary system during this period helped Mao Zedong’s communist movement come to power on the Chinese mainland in 1949.

In the nineteenth and early twentieth centuries, Imperial and then Republican China had no central bank. The monetary system was based on a diverse network of private banks operating in the various regions of the country. While copper was widely used in coins, the primary medium of exchange was silver, and the entire Chinese economy functioned on an informal silver standard for most of this time. A year after Chiang Kai-shek’s Nationalist (or Kuomintang) Party came to power in Nanking in 1927, the Central Bank of China was established with its headquarters in Shanghai, and the country was formally put on a Chinese silver-dollar standard.

Read the details here

 

The real effects of inflationary policies to the Chinese political economy. Again Professor Ebeling

But it is nonetheless true that whatever basis of popular support Chiang’s government might have had against the communists at the end of the Second World War, especially among the country’s middle class, was undermined by the inflation. It destroyed the wealth and savings of the Chinese middle class, and created chaos in virtually all commercial dealings due to the loss of a reliable and stable medium of exchange for purposes of rational economic calculation and business planning.

In addition, the inflation and its effects drove some segments of the rural population into a more severe poverty than even the war had generated. Thus, whatever support the Nationalist government may have had in the countryside soon withered away, as well.

Also, during and after the war, the Nationalist government imposed unworkable price and wage controls as a supposed tool to “fight” price inflation that only succeeded in creating even more distortions and imbalances throughout the Chinese economy due to shortages, black markets, and mounting corruption.

Its policies produced the social and economic unrest that played right into the hands of the communists, as Mao’s revolutionary government promised to do away with the corruption and abuse of Chiang’s Nationalist government.

The hyperinflationary policy followed by the Nationalist Chinese government, therefore, helped bring about more than half a century of Marxist tyranny on the mainland of China, a communist tyranny under Mao Zedong that historians have estimated cost the lives of at least 80 million innocent men, women and children in the name of building the “bright socialist future.”

I find some relevance with China’s inflationary policies of 1930-40s with current stylized policies and politics. Except that the sequence appears to be backwards.

Then inflationary policies had been designed to finance China’s war economy. However today, both China and Japan have been inflating bubbles with the aim of generating economic growth (really—statistical growth, and really—subsidies to the cronies of the Chinese government and State Owned Enterprises (SOE) as well as Japan’s Wall Street) and the ensuring of the tenures of their respective political leaders. 

[Note I included Japan in the above commentary due to the recent controversy which has historical significance.]

However, slowing growth even from statistical measures from the intensifying embrace of bubble policies have placed increased political pressure on both governments. And instead, the current bubble (inflationist) policies have amplified on the credit risks (and other associated risks) for both economies amidst an environment of slowing growth.

So to divert the public’s attention from the real problems, both governments has resorted to diversionary tactic of brinkmanship politics via territorial disputes aimed at the incitement of nationalist sentiment to generate popular support for their respective governments. 

This has also been impliedly contrived to further justify their current inflationary policies with even bigger defense spending. Both China and Japan, a staunch US ally, will raise their defense budget this year.

The peculiarity is that despite the hullabaloo over Senkaku Islands and so the so-called “China threat’ as portrayed by western media, the Chinese government as well as partly Chinese investors continue to indirectly finance the US war machine via record acquisition of US Treasuries. 

The danger of inflationism has been its relationship with wars. The next question is what happens when all these seeming theatrics risks becoming real even by accident? Will massive inflationism lead to World War III or even a nuclear Armageddon?

Or will communism and its close sibling socialism rear its ugly head again, not just in China but to practitioners of inflationism elsewhere?  

Recently Adolf Hitler’s anti-semitic book 'Mien kampf' has seen a surge in sales.

Signs of things to come?

Senkaku Islands Dispute: The Risks from Political Brinkmanship

The US, Japan and China appears to be playing a dangerous geopolitical brinkmanship game.

From today’s headlines at the Inquirer.net

Days after China asserted greater military control over a swath of the East China Sea to bolster claims to a cluster of disputed islands, the US defied the move Tuesday as it flew two B-52 bombers through the area.

China, however, insisted Wednesday it has the capacity to enforce its controversial newly declared air zone over islands disputed with Japan, despite Beijing’s reluctance to intervene after American B-52 bombers flouted its rules.

The US said what it described as a training mission was not flown to respond to China’s latest military maneuver, yet the dramatic flights made clear that the US will not recognize the new territorial claims that Beijing laid out over the weekend.

There are several angles I see here

One these nations have been attempting to promote “nationalism” in order to justify government spending in their respective military industry, to “pump prime” their fragile economies.

If this is true then, then all these has been a smokescreen in favor of pushing the interests of the military industrial complex. (charts above from the Economist)

Second, since China’s central bank recently signaled that they may be scaling back on purchases of US treasuries (euphemism for financing of the US government which includes the military) because these “does not benefit any more from increases in its foreign-currency holdings”, the US taunting of China’s government at the disputed Senkaku islands could have been implicit threat on the Chinese to sustain such such financing arrangement or else…

As one would note, both Japan and China has been providing support to the US government by cushioning the impact of the bond vigilantes through record UST accumulations.

Based on the US Treasury’s TIC September data, Japan holdings of USTs has spiked to record levels while China’s drifts at record levels

So while we see these countries posture and debate on media, behind the scenes Japan and China appear as coordinating their support to the US government via the bond markets against the bond vigilantes.

So we have a strange case of Dr. Jekyll and Mr. Hyde.

Third, the three crisis prone governments have earnestly been trying to divert the public’s attention from the real issue.

As shown above (via the Zero Hedge) despite the so-called 7+% economic growth in China, the PBoC has been rapidly expanding her balance sheet faster than the US.

And with unfulfilled expectations for real economic growth, despite the huge ballooning of central bank assets, governments need schemes to distract the public. And geopolitical brinkmanship with major political economies looks like a convenient way to achieve this.

Of course, it could all be a combination of the above

And we understand that all wars have been financed by inflationism.  

The problem is when games transform into reality.

Abenomics: Weak Yen Not Equal to Strong Exports

In the view of the consensus, currency devaluation serves as a key policy to promote economic growth via implicit subsidies to the export industry through a weaker currency.

Yet Japan’s Abenomics appears to be falsifying such populist snake oil therapy.

From the Wall Street Journal Real Times Economics Blog. (bold mine)

Despite the generally held view that the weak yen can quickly boost Japanese exports by making them more price-competitive in the global markets, many Japanese companies cut their export prices gradually.

They typically employ what is known as “pricing-to-market,” where they basically set the prices of their exports to match prevailing levels in their target markets, and adjust prices so that they are in line with exchange rates at a measured pace.

“Just because the yen falls that doesn’t mean Japanese companies will rapidly slash their prices” if there is no change in internationally accepted price levels, said Takeshi Minami, chief economist at Norinchukin Research Institute. “If they aggressively cut prices, they could be accused of dumping.”

Since the ultimate goal of most companies is to make money rather than boost the amount of goods sold, other economists say that if consumers overseas are willing to buy Japanese products at current prices, firms will be most willing to oblige.

Concern that yen will rebound is another reason why Japanese firms are cautious about lowering export prices, people familiar with the BOJ’s thinking have said. While prices at the same high levels may help to maintain the status quo even if sales suffer, consumers tend to take a more negative view of sudden price increases.

Looking at the four times there was a major upward movement in the dollar against the yen between 1988 and 2007, the BOJ export-price index initially fell by just 1.8% on average.

The “ultimate goal of most companies is to make money rather than boost the amount of goods sold” is indeed why people engage in trade. It has been rare to see articles that gives a balance account of events.

From another Wall Street Journal Real Time Economics Blog (bold mine)

But Japan’s exports declined 2.4% in the July-September period from the previous quarter, according to preliminary gross domestic product data released Thursday.

Officials say, however, that while the weak yen did help exports, economic conditions and policy decisions in destination countries can trump the exchange-rate factor.

If such factors are one-off developments, that could mean there’s still room for export optimism.

Take Thailand, for example. Japanese exports there had been robust until recently due to ongoing reconstruction activities after the devastating floods in 2011 and generous government incentives for new car purchases.

But with the program having expired in December, orders dried up after a backlog of orders was met and imports started to go down.

“Once the Thai government’s car-buying incentives ended, the market quickly lost their impact on overall demand,” said Nobuyori Kodaira, Executive Vice President at Toyota Motor Corp.

Indonesia is another case. The country cut fuel subsidies in June in a bid to reduce its fiscal deficit. That has led to a drop in demand for Japanese cars, and materials for car production, such as steel and machine tools.

In the six months ended September, auto shipments to the rest of Asia dropped 10.4% from the same period a year earlier, according to Japan Automobile Manufacturers Association data.

In both cases, the decline in exports was a result of policy changes by the respective governments, much more than any financial turbulence caused by expectations for a U.S. monetary policy change, a senior Japanese official said.

Canon Inc. last month lowered its net profit outlook for the full business year through December to ¥240 billion from ¥260 billion. “China and other Asian nations accounted for one third” of the downward revision, said Canon Chief Financial Officer Toshizo Tanaka.

Japanese export volumes fell to the U.S. also, but for a different reason. As demand for Japanese cars picked up, auto makers began ramping up local production rather than boosting exports from Japan.

All these developments are likely to be one-off events, however.

The lesson from the above articles has been that trade represents a complex ‘subjective’ dynamic between contracting parties, which have not only been dependent on prices but to many manifold factors, some of which has been cited above. 

Yet the consequences from the combination of these factors are hardly knowable for policymakers to justify interventions. So the simplistic solutions end up backfiring.

Moreover since the initial spike of exports from Abenomics, Japan’s exports has hardly grown.

Importantly the deterioration of the Japan’s trade balance relative to pre-Abenomics (2012), shows how imports have been growing faster than exports. This reveals, so far, that falling exports hasn’t been a "one time event".

And aside from granting political privileges to select or favored members of society at the expense of the rest and inflating debt away via indirect gradualist default (where foreigners own 8.4% JGBs as of June 2013), another reason for devaluation has been to promote nationalism 

Writes the great Austrian economist Ludwig von Mises:

Devaluation of a country's currency has now become a regular means of restrict­ing imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations' currency systems.

Japan’s growing nationalism can be seen even outside the economic context. Geopolitical tensions such as territorial dispute with China over the Senkaku Island has prompted Japan’s government to increase defense spending and a adapt a “new defense equipment production strategy” with allies.

So aside from the failure to attain mercantilist goal of "favorable balance of trade", devaluation, which fosters nationalism, only increases the risks of military conflicts or war.

Patriotism is the last refuge of a scoundrel: Senkaku Islands Dispute Edition

“Patriotism is the last refuge of a scoundrel” has been a popular quote attributed to English writer Samuel Johnson. 

Well, in desiring to prop up unsustainable political economic systems, politicians have resorted to the use of “patriotism” or “nationalism” to mask internally generated entropic policies.

Such seem to apply to the recent territorial dispute covering the Senkaku Islands.

Writes author and editor of the American conservative Patrick Buchanan at the LewRockwell.com (bold mine)

With victory in the civil war with the Nationalists in 1949, Mao claimed to have liberated China from both Japanese imperialists and Western colonialists, and restored her dignity. "China has stood up!" he said.

His party's claim to absolute power was rooted in what it had done, and also what it must do. Only a party with total power could lead a world revolution. Only an all-powerful party could abolish inequality in a way that made the French Revolution look like a rebellion at Berkeley.

Xi Jinping's problem? The Cold War is over. China is herself in the capitalist camp, a member of the G-8, and inequality in the People's Republic resembles that of America in the Gilded Age.

How does the Chinese Communist Party justify control of all of China's institutions today – economic, political, military and cultural?

If Marxism is mocked behind closed doors by a new economic elite and tens of millions of Chinese young, what can cause the nation to continue to respect and obey a Communist Party and its leaders, besides the gun?

The answer of Europe in the 1930s is China's answer today.

Nationalism, tribalism, patriotic war if necessary, will bring the masses back. If the Chinese nation is being insulted, if ancestral lands are occupied by foreigners as in olden times, the people will rally around a regime that stands up for China. Nationalism will keep Chinese society "under control while you go forward."

Japan's Prime Minister Shinzo Abe traces the aggressiveness of Beijing in the Senkaku Islands dispute to a "deeply ingrained" need to appeal to Chinese nationalism in the form of anti-Japanese sentiment dating to the Sino-Japanese War of 1937-1945.

Chinese nationalism, says Abe, is also behind China's quarrels with Vietnam and other nations over islands of the South China Sea.

If Beijing is unable to deliver economic growth, "it will not be able to control the 1.3 billion people ... under the one-party rule," Abe told The Washington Post. He is now denying those quotes.

But China is not alone in stoking the flames of nationalism to maintain legitimacy.

Abe has himself taken a firm stand against China in the Senkakus and is moving rightward on patriotism, security and a defense of Japan's history in the 20th century, and he is rising in the polls. The apologetic and pacifist Japan of yesterday is no more.

As I previously wrote, when the nations engage in massive inflationism, the risk of war increases.

Why? Because as the great Ludwig von Mises warned,

The most important economic element in this war ideology was inflationism.

Inflationism have not been a standalone policy. Accompanying these includes all sorts of social or commercial restrictions—foreign exchange or currency controls, trade controls, price and wage controls, migration and border controls and others—mostly or usually justified in the name of "nationalism" These of course, increases geopolitical tensions and the risks of war.

So from the above, nationalism signifies a tool used by politicians to divert people’s attention from real problems, as well as, to promote their self-interests.

Quote of the Day: A War over Insignificant Scrubby Rocks?

Here is a link to the Google Maps Satellite view of the Senkaku Islands. Take a moment to contemplate how insignificant these scrubby rocks really are. 

Some observations after zooming in and out and panning around. First, there are no visible houses, bases, airstrips, factories, or really anything of value other than some timber and potential (note - potential, not proven) oil reserves. Second, the total size of the islands is 1700 acres - slightly bigger than most modern swim tennis communities in the US. Third, given that Japan, Taiwan, and Mainland China are all well within surface to surface missile distance from each other, these islands offer no military or strategic advantage. Fourth, if there are oil reserves of any significant amount they undoubtedly extend beyond the immediate confines of these tiny islands into the waters of Japan and China. Next time someone tells you we need government to resolve international disputes peacefully, send them this.

(bold mine)

From John Keller at the Lew Rockwell Blog.

In the world of politics, common sense has hardly been common.

Will Territorial Claims Dispute Lead to World War III?

All the bellicose posturing over territorial claims are posing as a risk the real thing: World War III.

Historian Eric Margolis points out why

On 30 January, a Chinese Jiangwei II-class frigate entered the disputed waters around the Senkaku Islands, a cluster of uninhabited rocks in the East China Sea claimed by China as the Diaoyu Islands. A Japanese destroyer was waiting.

When the two warships were only 3 km apart, the Chinese frigate turned on its fire control radar that aims its 100mm gun and C-802 anti-ship missiles and "painted" the Japanese vessel. The Japanese destroyer went to battle stations and targeted its weapons on the Chinese intruder.

Fortunately, both sides backed down. But this was the most dangerous confrontation to date over the disputed Senkakus. Japan and China were a button push from war.

Soon after, a Japanese naval helicopter was again "painted’ by Chinese fire control radar. Earlier, Chinese aircraft made a clear intrusion over waters claimed by Japan.

China’s Peoples Liberation Army HQ ordered the armed forces onto high alert and reportedly moved large numbers of warplanes and missile batteries to the East China Sea coast.

A US AWACS radar aircraft went on station to monitor the Senkaku/Diaoyus – a reminder that under the 1951 US-Japan mutual defense treaty, Washington recognized the Senkaku Islands as part of Japan and pledged to defend them if attacked. Japan seized the Senkakus as a prize of its 1894-95 war with Imperial China.

China’s state-run media claimed the US was pushing Japan into a confrontation with Beijing to keep China on the strategic defensive.

Japan’s newly elected government led by conservative PM Shinzo Abe vowed to face down with China. Spasms of angry nationalism erupted in both feuding nations. The Philippines, Taiwan and Vietnam, who also claim the Senkakus, chimed in with their territorial demands.

A special Chinese crisis group led by new President Xi Jinping has been set up to deal with the Senkakus – meaning any clash there may be more likely to become a major crisis.

Shades of August, 1914, when swaggering, breast-beating, and a bloody incident triggered World War I, a conflict few wanted but none could avoid.

Read the rest here

Oh, you may add to such mounting tensions the recent allegations of Russia’s violation of Japan’s airspace. Japan has ongoing territorial claim dispute with Russia over the South Kuril Islands.

Provocation over territorial claims, for me, have largely been meant to divert the public’s attention over domestic economic issues, as well as, to rally the public’s support by drumming up nationalism against foreign bogeymen.

Although any shooting skirmish that may occur could indeed spark and escalate into the real thing.

Nevertheless wars have been preceded by inflationism. Prior to World War II, I explained how Japan’s pre Keynesian Korekiyo Takahasi’s inflationist policies in the 1930 led to a quasi-coup via the assassination Mr. Takahasi which brought Japan’s military as a political force to the fore, the ramification of which, had been a war economy.

On the other hand, Nazi Germany’s war economy had likewise been mobilized via inflation.

In other words, wars are essentially financed by inflation.

As the great Professor Ludwig von Mises admonished in Nation, State and Economy, (bold mine)

Rational economy first became possible when mankind became accustomed to the use of money, for economic calculation cannot dispense with reducing all values to one common denominator. In all great wars monetary calculation was disrupted by inflation. Earlier it was the debasement of coin; today it is paper-money inflation. The economic behavior of the belligerents was thereby led astray; the true consequences of the war were removed from their view. One can say without exaggeration that inflation is an indispensable intellectual means of militarism. Without it, the repercussions of war on welfare would become obvious much more quickly and penetratingly; war-weariness would set in much earlier.

With almost every major economy wantonly engaging in inflationism, the risks of world at war seems to have dramatically increased. Possible flashpoints are manifold; in the Middle East, the Kashmir region, East Asia’s territorial disputes, or even from the aftermath of a possible collapse of the EU project.

Bank of Japan Goes Unlimited QE; Will Abenomics Be a Replay of the Takahasi-Model?

As anticipated, the Bank of Japan (BoJ) has formalized her assimilation of the policies embraced by her contemporaries, the US Federal Reserve and the ECB

The Bloomberg reports,

The Bank of Japan (8301) set a 2 percent inflation target and said it will shift to Federal Reserve-style open-ended asset purchases in its strongest commitment yet to ending two decades of deflation.

The central bank will buy about 13 trillion yen ($145 billion) in assets per month from January 2014, including about 2 trillion in Japanese government bonds and about 10 trillion yen in treasury bills. The BOJ previously said it would ease until 1 percent inflation is “in sight.”

Like all inflationism, the initial impact has been to trigger an artificial boom whose price will paid overtime via an eventual bust (most likely triggered by the return of bond vigilantes) or from a currency crisis.

Nonetheless Mark Twain once said that history does not repeat itself but it may rhyme. Telegraph’s Ambrose Evans Pritchard suggests that Abenomics could be a replay of "Japan’s Keynes" Korekiyo Takahasi:

Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.

This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who "brilliantly rescued" his country from the Great Depression.

Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran "Keynesian" budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.

He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity.

He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan's textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow -- and there lies the rub, you might say.

Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation.

Then Takahasi’s adaption of inflationism signified as mostly resource transfers to the military, the latter of which became the dominant force in her domestic policy affairs, which as noted above, was epitomized by Takahasi’s assassination.

And instead of reducing deficit spending, the Wikipedia.org notes that, the military influenced government "introduced price controls and rationing schemes that reduced, but did not eliminate inflation, which would remain a problem until the end of World War II". 

And like Germany, the Takashi inspired inflationism resulted to the massive build up of Japan's military might, which thus critically contributed to materialization of World War II.

Yet Japan eventually succumbed to a post war hyperinflation (JapanReview.net).

Things are different today than in the 1930-1945. Japan has the largest debt in the world as % of GDP, where a breakaway of consumer price inflation could easily trigger a debt crisis. Moreover increasing monetization of her debt risks an inflation spiral.

Contrary to mainstream's expectations, once the inflation genie gets out of the bottle it will be hard to contain them, especially with politically influential power blocs resisting them. As in the case of Takashi, the military resisted spending cuts that led to Takashi's fatality.

Although we already seem to be seeing typical symptoms of geopolitical strains from inflationism through the Senkaku Island dispute. 

About a week ago, both the Japanese and Chinese government reportedly scrambled jet fighters over the contested island nearly resulting to a direct confrontation (RT.com). Yesterday, 3 Chinese patrol ships reportedly entered Japanese territorial waters (Japan Daily Press).

The bottom line is that the effects of inflationism will ultimately be destabilizing for both the economy and in societal affairs, as depicted by the unfolding geopolitical developments.

The Paradox of the ASEAN, China, Japan and the US Free Trade Agreement Talks

From Japan Times

The Association of Southeast Asian Nations and its six regional partners, including Japan, China and India, declared Tuesday the start of negotiations for a free-trade agreement that could create a huge integrated market compromising more than 3 billion people.

The move toward creating the Regional Comprehensive Economic Partnership comes as the United States is seeking to create another vast free-trade bloc through the Trans-Pacific Partnership initiative.

If the RCEP and TPP, which is currently being negotiated by 11 countries, are created, each could be similar in economic size to the European Union. The 16 countries involved in the RCEP negotiations have a combined nominal gross domestic product of about $19 trillion, or about 30 percent of the world's GDP.

The RCEP negotiations are expected to begin early next year and to be completed by the end of 2015. But it will be a challenge for the 16 countries with their diverse backgrounds to realize a high-quality agreement to liberalize trade in goods, services and investment.

The countries involved are the 10 ASEAN members — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam — plus China, Japan, South Korea, India, Australia and New Zealand.

Two things here

Any thrust towards the expansion of voluntary trade is always welcome.

Although free trade doesn’t really require FTAs as nations can just unilaterally engage in reducing all forms of trade restrictions (tariffs or non tariff based).

This means that FTAs are not necessarily "free" as they conditional to certain terms and or to specific industries or to particular areas of the economy.

As the great dean of Austrian Economics Murray Rothbard wrote,

If the establishment truly wants free trade, all it has to do is to repeal our numerous tariffs, import quotas, anti-"dumping" laws, and other American-imposed restrictions on trade. No foreign policy or foreign maneuvering is needed.

If authentic free trade evers looms on the policy horizon, there'll be one sure way to tell. The government/media/big-business complex will oppose it tooth and nail. We'll see a string of op-eds "warning" about the imminent return of the 19th century. Media pundits and academics will raise all the old canards against the free market, that it's exploitative and anarchic without government "coordination." The establishment would react to instituting true free trade about as enthusiastically as it would to repealing the income tax.

Yet inflationist policies undertaken by all these nations, especially by the US, Japan and China, which signifies a form of protectionism, essentially offsets any free trade agreement that would be forged.

Nonetheless this leads us to the second point. We have repeatedly been told that frictions over territorial claims have led to political brinkmanship in the region. 

And indeed the open display of mutual animosity has even adversely affected trading output between two major participants, China and Japan, in the FTA.

Tourism between both countries, aside from car sales of Japanese brands have reportedly slumped in September, even after the end of anti-Tokyo protest. 

It has been alleged that China's anti-Tokyo street protests has been orchestrated by the Chinese government that even led to a water cannon shootout between the coast guard patrol boats of Japan and Taiwan, another claimant on the disputed island.

So we are once again seeing the strange case of Dr. Jekyll and Mr. Hyde in terms of regional political and economic relationships between China and Japan (over Senkaku) and China and ASEAN (Scarborough and Spratlys). 

Certainly the conflicting status in trade relations and regional politics means one is a signal and the other is a noise. That’s unless there has been little coordination within their respective governments or that one of the two represents a smokescreen for other veiled agenda.

Senkaku Dispute Controversy: News versus On the Ground Observation

Writes analyst Sherwood Zhang of Matthews Asia Funds (bold highlights mine)

It’s no wonder some pundits began calculating the potential economic impact that strained China-Japan relations may have on Japanese firms. But during my recent week-long visit in Shanghai, my on-the-ground observations following the protests left me feeling as if the concerns might be overstated. An executive of a Japanese restaurant chain operator told me that physical damage to the firm’s stores during the protest was actually quite limited compared to the impact that followed anti-Japan protests in 2005, which were sparked by controversies surrounding a shrine for Japan’s war dead. I also visited a popular Japanese retail store where customers were picking through the season’s new arrivals with no obvious concern for politics. In this globalized economy, boycotting Japanese business interests is no small feat as so many firms are intertwined. One Taiwanese leasing company I met with, which provides much-needed funding for small businesses in China, actually counts a Japanese financial institution as a strategic shareholder. These types of partnerships and joint ventures exist in nearly every sector in China, spanning food and beverage to auto manufacturing.

At the end of my trip, I noticed one last bit of encouragement—a wedding ceremony held at my Shanghai hotel. Seeing the photograph of a happy union between a Japanese bride and her Chinese groom on a television monitor in the hotel lobby gave me some hope for greater harmony between the people of China and Japan.

I have been pointing out that the Senkaku-Scarborough controversial disputes have been about concealed national political agenda and how the Chinese government has had a hand in agitating nationalist uproar, for reasons other than history and oil-gas-natural resources than as cover to or as distraction of the current economic woes, to suppress dissent and as pretext to inflate the system.

The world of politics is a world of smoke and mirrors.

Japan’s First Shale Gas Discovery

I made my case that Shale gas will be the energy of the future which means this will become an international phenomenon (see here, here, and here)

I have also pointed out that Argentina and China have began to access Shale as with Israel’s recent major discovery.

This time it is Japan’s turn.

Japan’s baptism with Shale gas from Japan Times, (bold emphasis mine)

Japan Petroleum Exploration Co. has succeeded in extracting shale oil from the Ayukawa oil and gas field in Akita Prefecture, a first for Japan, company officials said Wednesday.

Japan is trying to diversify its energy sources and develop untapped resources following the Fukushima nuclear disaster.

Japan Petroleum, known as JAPEX, succeeded in obtaining crude oil by pumping hydrochloric acid into a shale rock layer about 1,800 meters deep to remove limestone that clogs cracks in the rocks, the officials said. It started drilling Monday.

Shale oil was confirmed after the extracted liquid substance was put into a centrifugal separator.

Interest in developing shale oil, or oil contained in deep underground shale rocks, has been growing globally, with a sharp increase in commercial production of shale oil and gas in the U.S

JAPEX said it will analyze the ingredients of the crude oil while preparing to dig a new oil well next business year, which starts April 1, and proceed with the drilling process.

The company estimates shale oil deposits at some 5 million barrels for the Ayukawa and neighboring oil and gas fields. For all of Akita, shale oil reserves are projected at 100 million barrels, worth nearly 10 percent of Japan's annual oil consumption.

This again gives evidence that geopolitical frictions from territorial disputes has hardly been about oil, gas or natural resources or about history. These are excuses. 

Territorial controversies are essentially about political smoke and mirrors

As I recently wrote,

War has always been used as opportunities to exploit society (through financial repression) and suppress internal political opposition in order to advance the interests of the ruling political class whose interest are interlinked with the politically favored banking class, the welfare and the warfare class.

The shale gas boom will ultimately expose such political charlatanism.

As a side note, beneficiaries of fossil fuels see Shale gas as a considerable competitive threat so they launch propaganda offensive against it through, for instance, the latest movie by Matt Damon "The Promised Land" has been financed by the United Arab Emirates

Notes the Heritage Fondation 

While left-leaning Hollywood often targets supposed environmental evildoers, Promised Landwas also produced “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits. A spokesperson with DDA Public Relations, which runs PR for Participant Media, the company that developed the film fund backingPromised Land, confirmed that AD Media is a financier. The company is wholly owned by the government of the UAE.

Expect more false evangelism from detractors of Shale gas and of the laissez faire capitalism from which Shale gas has been a product of.