Macro Digest: The none mandate for change in Japan (Upper Diet election)

The none mandate for change in Japan

 

The early polls out of Japan sees LDP + New Komeito winning 70/71 seats of the 121 contested – this will bring their total to 130 seats out of 242.

 

Expect USDJPY to open above 101.00 and probably trade above 102.00 during early Asian hours.

 

In the two chamber system in Japan, the Upper House is less powerful but have the power to block legislation introduced by the government hence this is a major victory for Abe, who becomes the first Prime Minister to enjoy a parliamentary majority in six years.

 

The win was expected and the voters turn out indicates it was so as barely 51% of the voters bothered to show up to vindicate what Abe calls: "An endorsement of his economic reforms" Reforms may be a strong word for his politics, which really is more of the same:

 

·         Spend money you do not have – fiscal expansion

·         Print money you do not have collateral for – monetary easing

·         Pretend your intentions to reform and create growth

 

The economic reality of Japan is very different when looked at from the side of cold facts:

 

Using  IMF last article IV visit to Japan it's clear the IMF don't buy the full story, yet:

 

The fund warns that despite the good intentions it's real about execution post the Upper house election:

The macro picture of Japan is telling:

 

So back in 2010 without "Abenomics" growth was 4.7% under the last fiscal expansion – and now with biggest 'bet' ever in any nations the projected growth is +1.6% and +1.4% - Is it only me or is this a matter of interpretations? Actually both 2013 and 2014 growth is expected to be less not more than both 2010 and 2011.

 

If this happened under a strong reform program then it would make sense, but… note how overnment debt have exploded from 216% to expected 245% from 2010 to 2013. A success?  I guess it depends on your definition!

 

The "mandate" given to Abe will be used to work on a number of practical and some very controversial changes:

 

·         Restaring nuclear power plants – which many Japanese oppose

·         Getting Trans Pacific Partnership, a free trade agreement approved

·         Reduce corporate tax from 36%

·         Increase VAT. Value added tax, VAT, will be raised from 5-10% from April 2014 to October 2014.

 

This is line with IMF recommendation, but as IMF points out – this only finance 50% of the needed fiscal consolidation. I repeat: a doubling of VAT will only pay half of what's needed!

As seen by this IMF graph the fiscal adjustment process is basically too big to handle for a society like Japan with extremely poor demographics, low women participation in the works force, and a bloated government spending.

 

Japan is not poor, but it will run out of savings without real reform, not the rhetoric reforms of politicians like Abe – the main difference being, Abe can get "vindication" for pretending to do something, but not for actually doing anything.

 

Why? A net saving society growing old wants deflation and no changes to secure their purchasing power. Not 2% inflation targeting and reform programs. Reality and perception is wide apart.

 

Abenomics will fail not because of what I say,  but because it can't work as growth without SME's, growth without innovation and growth without risk capital is no growth. It's merely a monetary illusion which the Americans taught the world.

 

The same Americans who wrote the Japanese constitution. Few people realize the Japanese constitution was written by General McArthur after World War II – and to me this election and Abe, overall, has never been about growth and change, but always about changing the constitution.

 

Abe is pushing to change Article 96 of the Japanese Constitution but is really trying to change article 9. Sounds complicated? It's not. Article 96 says you need 2/3 majority to change the constitution. Article 9 is the pacific article of the Japanese constitution.

 

Change Article 96 to majority only, and Voila! Abe have his mandate without a 2/3 majority.

 

This have always been his main target. Abe is about restoring the national pride in Japan, about growing out of the shadow of the Americans – I don't actually believe even Abe think his own Three Arrows will work – don't forget he has been Prime Minister before.

No this is about a changing Japan, to a more astute Japan and a Japan who feels more isolated and hence more in need of a geopolitical strategy. This strategy entails becoming a military force and certainly to develop a national identity.

 

Conclusion

 

Prime Minister won a battle but will still lose the war to create more growth and reforms, but he does this in a very calculated way to secure his real political agenda.

 

The loser will be the real reforms, growth in Japan and overall the Japanese .

 

Tonight will probably be the final phase of Abenomics – We could see 120 USDJPY and higher Nikkei again, but I will still bet anyone it is more likely I will be  elected by Bjarne Riis to cycle for Team Saxo Tinkoff than Japan getting 2% inflation.

 

Safe travels from Paris and The Tour De France

 

I have attached a great overview done by my intern Marcus Henglein on my behalf.

 

Steen Jakobsen

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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