Shinzo Abe adding volatility to Japanese economy

Japan’s 10-year bond yield doubled from 0.45% to 0.93% in two months (April 4-May 30). Prime Minister Shinzo Abe’s unlimited quantitative easing has led to massive capital outflows and an all-time high trade deficit in January of 2013. If the United States Federal Reserve’s withdrawal further pushes up the interest rates, the smart investors might rush to sell the Japanese equities and trigger enormous volatility, and spark a stock market crash worldwide.

Japan has never recovered since the yen bubble burst in the early 1990s. Abe has gone crazy printing money to stimulate domestic consumption and export. He turns a deaf ear to the fact that printing money without the required structural changes cannot sustain a real recovery. Adding liquidity alone is mere adding market volatility. Japan cannot directly replicate the American model of increasing liquidity, because the world trusts the U.S. global dominance while Japan is only a subset of the system. Again, Japan’s public debt is double the U.S. level. Smart investors prefer U.S. President Barack Obama’s structural reforms over Abe’s bushido and samurai "seppuku" if he fails.

The U.S. jobless rate, consumer confidence and personal consumption are improving, and GDP is picking up. The U.S. is stabilizing, but China is weakening and Germany is falling. The U.S. Consumer Price Index (CPI) for all items less food and energy increased 1.7% over the last 12 months, the U.S. Bureau of Labor Statistics reported this April. The food index rose 1.5% while the energy index declined 4.3%. The S&P Case-Shiller house price index (Composite-20, SPCS20R) has returned to the 2003 level. It is more than 70% of the mid-2006 peak. In addition to the sharply deleveraging following the 2008 subprime turmoil, the massive low-cost liquidities by Europe and Japan have strengthened the U.S. dollar. America is regaining momentum.

However, Japan’s bold attempt might bring back volatility. From October 2012 to May, the Nikkei 225 index climbed 73%. Investors are getting too bullish about Japan’s quick revitalization after decades of loss. “Our economy is on a steady path to recovery” Bank of Japan Governor Haruhiko Kuroda said.

Abe is launching another round of stimulus measures very soon. This has exaggerated the demand of Japan’s aging population. Japan is the oldest among the world’s top 10 economies. Its median age hits 45.4. The aging population outpaces youth growth. There are public huge public debts for the new generation to repay. In short, only drastic, massive and fundamental structural reforms can revitalize Japan’s debt-ridden stagnant economy. Zombie bank problems must be cleared and deteriorating productivity must be rebuilt. The Japanese mindset has to change.

© Japan Today