Is Abenomics Working?

We’re getting deeper and deeper into the experiment now known as “Abenomics” in Japan.  Ultimately, the plan is designed to defeat the decades of deflationary pressures in the Japanese economy.  They’ve announced a massive fiscal plan, an official 2% inflation “target” a doubling of the BOJ’s balance sheet and as a result the Yen has declined 30% in a matter of months and the Japanese stock market has surged over 60%.  By the looks of the market reaction you’d think that something had not just changed, but that we’d be looking at a new economy entirely.

But the latest CPI report shows that the deflation is actually WORSENING.   The Statistics Bureau in Japan reported that Japan’s National Core CPI fell to -0.5% in march, down from -0.3%.  This was worse than expectations of -0.4%.  The headline rate fell to -0.9% versus expectations of -0.8%.

The latest reading is the worst reading since 2010.  In fact, it’s the worst reading this year and down almost 1% from when the aggressive Japanese easing was first announced.  In other words, if Abenomics is inflating prices it certainly isn’t working in the real economy and appears to only be “working” where gamblers are placing bets that it will eventually show itself….

Chart via Orcam Investment Research:



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. At what point does Japan become the greatest short ever? It looks like traders have bid up stocks and taken down the Yen in expectation of something huge to come. But it’s obviously not working. It looks like a big house of cards.

  2. Given Abenomics & QEJ, in fundamental terms (i.e. hard expenditures, both of fiscal largesse and BOJ monetisation), had yet to commence in March, that data point can be safely discounted by the Japan bulls.

    The equities-positive aspect to this project is that, objectively, it will be many months and quarters before data points emerge that can give us a clue as to whether Japan’s new fiscal and monetary policy is actually working or not. That creates a temporary data-free bubble in which we can all pretend that equity prices move the economy and not vice versa.

  3. I think the Japanese bond market has to crack for the plan to work. The country has committed to “change” to fight “deflation”. I interpreted this as monetization. Are they going to do it or not?

    Just have the BoJ cancel the debt and pay all the interest on new and outstanding bonds by printing fresh currency. All hell will break loose, but that’s the point. The stock market will not necessarily rise in the short term.

    I’d like to know what people here think. If you had full control and a mandate for change, how would you break deflation in Japan?

  4. So if QE2 in US is now playing out in Japan (e.g. stocks up, Yen down)…what is the catalyst for it all to reverse? Commodities led the QE2 price declines (doesn’t seem to be happening with Japan) before equities finally crumbled and the $ strengthened over the summer after the bond buying ended and the economic data worsened. I’m thinking we would need to see something similar happen in Japan (in terms of economic data not catching up to market expectations) but I imagine we could still be several months (and %) away. If you look at the move in $Yen it has all occurred during London and NY hours suggesting specs are largely behind the move trying to front-run an exodus that may never happen…

  5. Why break deflation, do consumers in Japan not like lower prices.
    Don’t TV’S and consumer electronics become cheaper with time?
    Increased productivity and more robots doing manufacturing faster, more accurately and with less input costs will aid in this deflation.
    Deflation is the natural law, why continue to fight mother nature.
    Is it not in man’s nature to strive to create more from less. An increase in prices is suspect and most likely comes about when interference occurs by governments or friends that influence governments.
    Stop with this desire for a diseased economic state as diagnosed with the inflation symptoms.

  6. I have been saying for ages now that QE is actually deflationary for the real economy. If it causes a rise in bank lending that of course offsets its deflationary tendency. But I doubt if that is happening in Japan – and even if it were, it would lag the deflationary effect.

  7. Abenomics 0, demographics 1.

    That’s my call now, but only time will tell.

    It sure is an interesting experiment to watch.

  8. Agreed. Japan’s problems are more structural than anything else. Defeating the structural problem is probably something that will take a lot more exogenous intervention than a govt can control….

  9. The Japanese have announced a plan for massive BoJ purchasing, but how much buying has the BoJ done so far? I don’t think you can judge the effects of the plan until the plan has actually been implemented.

  10. I’ve seen Warren Mosler argue that QE could be deflationary because it “destroys money” by reducing the size of the deficit. In other words, if the Fed’s balance sheet weren’t so huge they’d be paying more in interest expenses. I don’t think Cullen would agree with the money being “destroyed”. Cullen?

  11. Ask the Japan expert Kyle Bass. I’m sure he has a good idea of when the widow maker will come back home to the family.

  12. When QE2 was first implemented I remember there being a lot of press on how it would take at least 6 months to work it’s way into the real economy (whatever the heck that means).

    Is there any empirical evidence of such things. I could guess and I’m 99% sure I’d be right…but you never know.

  13. The sum of the deficit is less inflationary than it would be if they were paying interest on the full outstanding quantity of t-bonds and MBS that have been QE’d. But then you have to consider things like the capital boost that obviously occurred on MBS via QE1 – was that inflationary? Again, I’d say it was inflationary in that it helped stop the deflation. So QE is kind of like a spending cut in the current environment (though it had much larger effects in 2009 when MBS prices were severely mispriced in my opinion). It’s not necessarily deflationary. It’s just less inflationary than the alternative.

  14. Military Keynesianism. Japan has been punching under its weight by limiting defense spending to 1% of GDP ($60 billion). China spends 2.0% of GDP ($166 billion), the US 4.4% ($682 billion) and Saudi Arabia, God bless them, 8.5% of GDP ($57 billion).

    The Chinese govt dislikes Japan and the Chinese people HATE Japan (Iris Chang’s Rape of Nanking was not a novel). With China’s economy (and defense spending) growing like a weed, Japan’s new govt is wisely starting to throw money at defense.

    But there are miles to go before they sleep. They need to sumo-size their defense budget. This will serve a few useful purposes, 1. Deters the Chinese, 2. Boosts AD in Japanese economy and 3. Strengthens military and economic ties to US, a lot of the new spending money will go to those American defense contractors– reducing the US’s trade deficit w/ Japan).

    What’s more, Japan could buy friends and influence people by providing defense aid to other countries sweating China’s newly assertive military. Not even counting Taiwan or Japan, the Chinese have somehow managed to start territorial disputes with India, Vietnam, the Philippines, Malaysia, Vietnam and Brunei, among others.

    What’s hilarious is all this is like China running a multibillion PR campaign for the US Navy. At the rate this is going, I wouldn’t be surprised if the US military is invited back to Vietnam by our friends in Hanoi.

    But I digress, my point is, Japan could set a goal of matching 4.4% US target (I say, fight crazy with crazy and shoot for Saudi’s 8.5%). They’d go from $60B a year in defense spending to $264B(or $510B!) a year and that my friends would be awfully stimulating.

  15. Spending money in weapons… this is the last step in madness and it’s not very original too, Japan did it in the past, Germany did it also, do you know what happened later ? Weapons are alwayays made to be used and not collected. R.I.P. for mankind if we follow this road again.

  16. Just in case you missed it…

    Richard Koo

    Potential benefits and dangers of “quantitative and qualitative” easing

    He was the first to have it right, still worth a reading.

    I completely agree with you, what will happen in Japan the next 6 – 9 months is a game changer, but we must keep our eyes on the chinese economy too. A lot of things are going to change, the direction will tell us where we’re going too.

  17. I think one of the biggest problems in all these (struggling) developed economies is the decades of over consumption that has occurred. That looked like genuine economic growth at the time but it was just (basically) borrowing a bunch of money and throwing a party with it. Now folks in these nations are sitting at home with a headache and a queasy stomach and don’t feel like heading back to the party (and probably won’t for quite some time now that they are getting the credit card bills they ran up while they were hammered). Can government spending and currency manipulation postpone the hangover? Yes, but not very well and not for very long (hence the lackluster results from fiscal “stimulus” and ongoing QE efforts). Can it ultimately fix the (under) production problem that plagues the developed economies? I don’t believe so because it is focused on re-starting the (over) consumption fiesta and no one (except, it seems, Carl Schramm) is trying to figure out how to fix the problems that, for instance, in the US, are manifested in declining entrepreneurial activity.

  18. Apparently Koo is still talking about the money multiplier. Worth of read though.

  19. If the Japanese government really wanted to cause consumer price inflation they would start sending money out to the consumers (the general public), and make it clear more was coming next year, and the year after. Buying assets doesn’t lead to consumer price inflation, it leads to asset price inflation. Why is that so hard to grasp?

  20. Why would Japan increase defense spending when they have the US there to be their caretaker?

  21. In fairness, here you have to make the distinction between “Japanese equities” and “Japanese government bonds.”

  22. 60% is a pretty nice return. I had some success with trading the EWJ ETF. Only problem with this Casino is no free drinks.

  23. Recruiting soldiers who’ll mostly sit on their ass is probably not going to contribute to domestic growth though. Well they still spend money of course.

  24. Imagine it’s not only consumer goods that fall in prices but also your wages. And then think that things you pretty much need to spend money on like energy, healthcare etc. stagnate or rise in price.

  25. Cullen, given cross-asset/portfolio links, why are you against central banks manipulating asset prices & balance sheets vs. interest rates?

  26. Just a blueprint for what’s coming for my country. And we don’t have a sovereign currency, and immigration doesn’t seem to be a net benefit.

    This is going to be interesting to watch.

  27. Why would they rise? Med care is a monopoly protected by the state and agriculture has a nice powerful lobby . It would not be so bad if wages go down to be in sync with falling prices in other areas.
    It is hard to think any different when you are programmed to think inflation is normal. I would suggest that public servants from this time forward anticipate a negative 2% wage adjustment annually and then we would see some progress. Necessity is the mother of invention!!!!!

  28. If you look at most nations in Europe, they employ a similar policy to Japan. National defense is pretty much left to NATO, which effectively means the USA. Now compare European or Japanese or even South Korean Infrastructure to that of the US, or compare the social safety nets. That’s where those 2-3% of GDP go.

    While over half of Europe has universal healthcare and an extensive social safety net, the US social safety net has four branches: Navy, Army, Airforce and Marines.

    If anything, not having to spend on a national defense is a competitive advantage.

  29. Because energy is a global market dominated by resources that are getting scarcer, and healthcare costs are mostly expended on the elderly. Innovation is supposed to mitigate this effects, but if anything it comes in bursts, not steadily like the rising prices we see.

    I can assure you I’m not programmed, at least not for inflation. But I think deflation is also a function of lower demand. Low demand is bad, mmkay?

  30. I think there’s a big difference between setting the price of overnight reserves (which is a mere influencing factor in benchmark rates) and actually setting something like equity prices. Something like equity prices are primarily priced based on how the underlying corporation is performing. A central bank that manipulates these prices or steers investors to misprice them can create a disequilibrium between the actual underlying performance of the corporation and the price reflected in markets.

    Do you think there’s a reasonable argument for manipulating stock prices? I am open-minded enough to be convinced I am wrong….