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.

How Inflationism Spurred Singapore’s Labor Protectionism

In August of 2012, I wrote about Singapore’s “gradual descent into the welfare state” as politicians divert the public’s attention by blaming symptoms of bubbles (zooming property prices and wage inflation) on immigrants to justify increased taxes for social spending.

Singapore’s homegrown bubbles as seen via record home prices (as of August) has been fueled by massive credit expansion or the zooming loans to the private sector.

This has been enabled and facilitated by the central bank’s accrued efforts to suppress the domestic currency, the Singaporean Dollar, from rising by accumulating enormous foreign exchange reserves by printing lots of domestic currency, thereby the easy money environment.  And due to such exchange rate management measures, the Monetary Authority of Singapore (MAS) even posted a $10.2 loss last year.

These bubble activities by the MAS have only amplified on the growing nationalism where this year the ruling party lost due to increasing populist clamor for immigration curbs.

Singapore’s housing index has already surpassed the pre-Asian crisis highs. This shows why the recent “FED taper” turmoil in May-June materially affected Singapore’s financial markets.

Now to Singapore’s labor protectionism, from Bloomberg:

Singapore will widen foreign-worker curbs to professional jobs as the government clamps down on companies that hire overseas talent at the expense of citizens, stepping up efforts to counter a backlash against immigration.

The Southeast Asian nation said yesterday it will set up a job bank where companies are required to advertise positions to Singaporeans before applying for so-called employment passes for foreign professionals. The unprecedented policy will target jobs that currently pay at least S$3,000 ($2,400) a month.

“There are concerns among Singaporeans, which I think is fair, and so it’s timely for us to introduce this,” Acting Manpower Minister Tan Chuan-Jin said in a Bloomberg Television interview yesterday. “There are Singaporeans out there, well-skilled and capable, who are looking for jobs and I think this step would actually facilitate that process.”

The country is persisting with a four-year campaign to reduce its reliance on foreign workers, after years of open immigration policy led to voter discontent over increased competition for housing, jobs and education. The move has led to a labor shortage and pushed up wages, prompting some companies to seek cheaper locations…

Singapore will also raise the minimum pay for employment-pass holders by 10 percent to S$3,300 a month in January, the Ministry of Manpower said in a statement yesterday. The job bank will be set up by mid-2014, it said. Companies with 25 or fewer employees will be exempt from the new rules, as well as jobs that pay a fixed monthly salary of S$12,000 or more, the ministry said.

Singapore’s declining economic freedom and the rise of economic nationalism as a consequence of the global and Singapore’s easy money regime is a sad development especially that I have regards for the country. 

Yet one thing leads to another. Since property bubbles and wage inflation are symptoms, policies that address symptoms means the disease won’t be cured. And once the labor-immigration controls fail to stem her bubbles and the perceived political inequalities, the government of Singapore will resort to even more controls or interventions in other areas (perhaps capital and exchange controls, trade, social mobility as the above, deeper wage and labor controls and more), that would mean lesser prosperity for Singaporeans.

And growing politicization of an economy will lead to more social tensions as various parties compete to use government ‘coercive’ machinery as means to promote their self-interests through the repression of the interests of the others. So as economic freedom declines, economic fascism and or cronyism increases.

Inflationism and social controls or political economic interventionism have always been intertwined. As the great Austrian economist Ludwig von Mises warned (On The Manipulation of Money and Credit)

Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism

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.

Graphic: Made Everywhere, Even the Apparel Industry has been Globalized

“Made in China” has been a politically colored phrase not only in the US (US Olympic Uniform controversy), but also in the Philippines –the other day while on a cab, I heard a similar balderdash coming from a local radio announcer, who in ranting against China over territorial disputes included such false claims.

In reality, even the apparel or clothing industry has been about globalization, particularly the supply chain network. (hat tip Scott Lincicome)

To add, the apparel industry’s value added comes from design and post production facilities (marketing and distribution), an article from the Businessweek/Bloomberg.com points this out,

Garment manufacturing is a low-cost commodity business. Most of the value in the apparel industry comes from design, technology, sales, marketing, and distribution—not manufacturing. The successful players in apparel, such as Ralph Lauren and Nike, figured this out long ago.

Because the economics are bad, most U.S. apparel manufacturing operations folded decades ago. Only 97,000 Americans still have jobs in apparel production, according to the U.S. Department of Labor, and most of them are making highly specialized products like DuPont Kevlar uniforms that cannot be made elsewhere.

But just because America doesn’t manufacture apparel anymore doesn’t mean we can’t lead the industry. In fact, the world’s largest apparel companies are almost all U.S.-based, including Nike, VF, PVH, and Ralph Lauren, to name a few. These companies have grown a combined 146 percent during the past 10 years, adding more than $27 billion in revenue. Nike has created more than 15,000 new jobs in the U.S. during this time, Ralph Lauren almost 10,000. And unlike the low-paying production jobs next to sewing machines, these are well-paying jobs in marketing, accounting, design, and management.

These companies are winning globally by out-designing, out-innovating, and out-marketing the competition. Nike, for example, is unveiling a new TurboSpeed running suit at the London Olympic Games that it claims can reduce 100-meter sprint times by .023 seconds. Nike’s gear will be used by teams from many countries, including Russia, China, and of course, the U.S.

What Nike and Ralph Lauren don’t do is make their own products, in the U.S. or elsewhere—and this has become their competitive advantage.

Both companies source products from hundreds of independent manufacturers in more than 30 countries (less than 3 percent coming from the U.S.). The flexibility allows them to be cost-competitive globally. It also allows their design teams to focus on creating the most exciting new products possible without having to worry whether they can be made on a legacy production line.

Remember Fruit of the Loom? Brown Shoe Co.? Cannon Mills? Levi Strauss? In 1970 these were the largest U.S. apparel and fabric companies. They all owned their own U.S. manufacturing plants. They all struggled to innovate and grow, and they either went bankrupt or were bypassed by more nimble competitors who had no factories. If only they had outsourced …

Not only is outsourcing good for business, but the future of the American economy is dependent upon it.

So let’s stop whining about a few “Made in China” tags and start cheering for all of the great athletic performances made possible by superior U.S. innovation.

So when you hear someone rail about “Made in China” you can be assured that the person regurgitating such absurdities have either been ignorant of the real developments or have been deliberately employing deception as part of political propaganda to invoke nationalist (us against them) sentiment.

Will French Politics Swing from Socialism to Fascism?

Far right Marine Le Pen’s strong showing at the recent Presidential runoff in France may have opened the door for politics of the extreme right.

Writes historian Eric Margolis at the Lewrockwell.com

Talk about déjà vu. Such a sweeping change would return France to its pre-war political landscape, when hard Left and hard Right were locked in bitter confrontation. Marine Le Pen could well emerge as the angry voice of many Europeans – a prospect that causes shudders across conservative-ruled Europe.

She could also prove the nemesis of the European Union. Le Pen has vowed to oppose austerity pacts, quit the Euro, restore the franc, and follow economic mercantilism. Her anti-EU, anti-free trade policies are attracting many people across Europe and even in Russia.

Fortunately, Francois Holland could prove a counter-balance to the ascendant Right. He is a moderate, cautious centrist politician given to pragmatism rather than ideology. His popularity and image of geniality and caring about people will help him withstand the forces of both Left and Right trying to pull him in different directions.

Even so, Marine Le Pen and her aggressive rightists are likely to become an ever-increasing threat to the French Republic as economic conditions worsen. It seems only a matter of time before fascism rears its head again in Spain, Italy, and Portugal. Greece is already on the way. Failure to implement austerity plans will bring economic convulsions and with them the bully boys in black

Mr. Francois Holland's victory has been negative enough for domestic entrepreneurs. Many of whom have reportedly been looking for refuge overseas from the prospects of punitive tax increases, if not from asset forfeitures, by the incoming socialist government, whom has openly declared war against the wealthy.

Yet if the prognosis of Mr. Margolis becomes a reality, then the rise of fascism (based on economic nationalism or mercantilism) elevates the risk of regional war.

As the great Ludwig von Mises once admonished,

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.

The current trend of French politics seems locked into a wretched choice between the proverbial devil and the deep blue sea. Beautiful France may not be as beautiful as she is today in the future.

Democracy, as the great libertarian H.L. Mencken said, is the theory that the common people know what they want, and deserve to get it good and hard.

War on Outsourcing: The Specter of US Economic Nationalism (Protectionism)

The Malaya reports

President Aquino appears unfazed by US President Barack Obama’s endorsement of House Bill No. 3596 or "Call Center and Consumers Protection Bill" pending in the US Congress saying it may be an election-related statement.

"We have to take into account that this is an election year but at the end of the day, like any other country, the US would want to make their companies more effective, more competitive, etc. and outsourcing is one of the keys towards that," Aquino said in an ambush interview at the EXL Service Philippines Site at the Mall of Asia in Pasay City.

"At this present time, I was made to understand, that this was an issue that was brought up during the last elections in America and from that time which was four years ago and now, the situation has not changed. Perhaps there isn’t that much of a danger," Aquino said.

"I will assume that it (BPO) will continue, hopefully it will not change because that is one of our sunrise industries," he said.

Aquino said there are no plans at the moment to lobby against the passage of the bill and that he prefers to "cross the bridge" only when the bill is passed.

It’s good to know that Philippine President Noynoy Aquino recognizes what looks like an election ploy. It really takes one to know one.

But it’s unfortunate that President Aquino, beneficiary of the outsourcing boom, would remain passive on this issue. Never mind if America’s turn to protectionism might indeed harm the industry. It would seem better to be bullied into submission. Yet fawn over with plans by the US to expand military presence here.

President Aquino doesn’t seem to realize that the divide-and-conquer and class warfare strategies have been the hallmark of the Obama administration.

As Mike Brownfield of the conservative Heritage Foundation writes,

Obama enacted a purely progressive agenda with his expansion of the state under Obamacare, his trillion-dollar stimulus bill, the government takeover of the auto industry, the proliferation of regulations under the Dodd-Frank regulatory reform bill, the crony capitalism of the Solyndra scandal, and the illegal appointments to the unrestrained Consumer Financial Protection Agency and the National Labor Relations Board. The result: Some 13.1 million Americans remain unemployed, job creation has been abysmal for much of the past three years, and the President’s promise to turn around the U.S. economy has gone unfulfilled.

The difference is that Mr. Obama’s progressive agenda, during this election season, seems to have transitioned from a moderate to hard line stance.

Maybe’s this also part of the desperation to get re-elected considering the Mr. Obama’s near record low approval rating. (chart from Gallup)

Yet here is more proof of President Obama's protectionist urge.

From the Wall Street Journal,

China was dragged into the 2010 U.S. midterm elections, and President Obama is busy ensuring that it will be an even bigger political target during the 2012 campaign. In Tuesday night's State of the Union address, the President joined Republican candidate Mitt Romney in singling out China as a special trade violator.

In announcing that he will set up a new Trade Enforcement Unit to investigate "unfair trade practices in countries like China," Mr. Obama is promising to increase investigations against Chinese exporters. His Administration has so far brought five cases against China in the World Trade Organization (WTO). Late last year it began targeting China's solar industry, while last week it said it would investigate Chinese makers of wind energy towers.

By the way one looks at it, protectionism has been rearing its ugly head as politicians like President Obama and the mainstream Republican candidates appeal to the emotions of the uninformed via nationalism/patriotism to solicit for their votes.

Many are unaware that economic nationalism (or protectionism) fundamentally underpins the philosophy of war or of military conflicts. World War II, for instance has mainly been caused by rabid nationalism.

Again current events have been affirming the admonitions of the great Ludwig von Mises,

Economic nationalism is incompatible with durable peace. Yet economic nationalism is unavoidable where there is government interference with business. Protectionism is indispensable where there is no domestic free trade. Where there is government interference with business, free trade even in the short run would frustrate the aims sought by the various interventionist measures…

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war.

In short the President Obama’s war on outsourcing constitutes part of what seems to be an overall protectionist agenda, which translates to a war on trade against every nationality (including the Philippines).

President Aquino should negotiate to retain and expand free markets and abide by such principles. Otherwise, perhaps Marc Faber’s prediction may come true.