BNP Paribas Gives Abenomics Only 10% Chance of Success? - I Think They Are Way Too Optimistic

There's a very interesting article over at Zero Hedge from BNP Paribas parsing out the chances of success for Abenomics. 

Everything is under control!

The article is entitled: BNP Warns Only 10% Chance That Abenomics "Ends Well." Here's a few snippets:

Japan’s core CPI (which excludes perishables) surged 0.7% y/y in July, but the upturn is largely due to higher prices for energy that reflect rising import prices due the yen’s weakness. Despite global exuberance at Abe's "progress", BNP notes that there are still no signs of price growth for rent and service prices, factors behind Japan’s protracted deflation. Crucially, BNP believes that Abenomics could lead to four possible medium-term outcomes: (1) Continued deflation (35% probability), (2) Financial repression (40%), (3) High inflation (15%), and (4) Happy end to deflation via revived trend growth (10%).

On the continued deflation 35% possibility...

Under this scenario, the economic euphoria, yen depreciation and stock market rally triggered by the BOJ’s new dimension in monetary easing (QQE) will be found to be just momentary things based essentially on placebo-like effects. On this score, ever since stock market corrections began from late May, various sentiment indicators have peaked out and started trending lower....

The BOJ’s Kuroda has declared that open-ended easing will remain in effect until 2% inflation is achieved. Because of this, many might feel that this scenario should not have a very high probability. But, as pointed out above, because the long-term interest rate is already very low, no matter how much the BOJ inflates its balance sheet with aggressive purchases of long-term JGBs, the effects will be meager. 

On the 10% chance of success...

Now If Abenomics’ growth strategies were to show dramatic success, allowing the trend growth to significantly revive, the resulting improved growth expectations could encourage households and businesses to increase spending, thereby fostering improvements in the output gap that bring an end to deflation. While ending deflation via revived trend growth would be a happy ending, the probability of this optimal scenario is just 10%.  

We cannot assign a higher probability because growth strategies, even if successful, do not bring dramatic changes. Currently, the government hopes to achieve trend growth of 2% over the coming decade, but that means the per capita trend growth rate will have to climb to 2.7%. Over the past 30 years, the only time per capita trend growth ever approached 3% was during the bubble in the latter half of the 1980s. If we assume that the workforce will continue shrinking almost 0.7% annually (and this figure prices in higher employment rates for women), increasing the per capita trend growth rate from the current 1% to 1.5% will still put overall trend growth at just 0.8%. Seeing how the per capita trend growth rate in America is slightly over 1% and that of the EU about 0.5%, hoping for 1.5% would be very optimistic. The government, however, aims for an even higher target (2.7%) and there is no magic wand to achieve it.  

Now even if this happy ending scenario were to unfold, that does not mean that structural problems, like the swelling public debt and insolvent social welfare, will be headed for resolution. 

Yep. The last line is the killer. The structural problems are not being addressed at all: the debt, bankrupt social welfare... It's better for the government to kick the can down the road...

Ten percent? Really? That's way optimistic, guys. The two biggest reasons why this growth won't happen are:

1) Demographics and aging Japan along with a severe decline in the workforce. Please refer to: Japan’s deflation is a product of shrinking work force, not policy:

In his first testimony before the Diet last week, Bank of Japan Governor Haruhiko Kuroda noted, “Japan’s economy has suffered from deflation for nearly 15 years. This is an extraordinary situation even on a global scale.” 

We would supplement Kuroda-san’s statement with the observation that the working-age population and employment have also been declining for 15 years. This is no coincidence... deflation is a natural consequence of a declining labour supply, as long as technological innovation persists at a faster pace than employment is shrinking. We therefore predict that no amount of monetary stimulus can reverse the trend decline in prices: The roots of Japan’s deflation are not monetary. 

Calculations by High Frequency Economics show quarterly employment in Japan has declined 5 per cent since 1998. As Japan’s huge demographic cohort of baby boomers ages, they are leaving the work force.

2) The devaluation of the yen hasn't shown any good results overall yet. Last month, Japan hit it's 14th straight month of trade deficits and the largest trade deficit in history! From Yahoo: Japan trade deficit swells 25 percent in August: 

Japan's trade deficit swelled to a larger-than-forecast 960.3 billion yen ($9.8 billion) in August, the 14th straight month of red ink, as imports outpaced growth in exports, customs data showed Thursday.  Boosted by higher fuel costs, imports rose 16 percent from a year earlier to 6.74 trillion yen ($68.7 billion) while exports climbed 14.7 percent to 5.78 trillion yen ($58.9 billion). The deficit was a quarter bigger than the 768.4 billion yen gap seen in August 2012.  In surplus for years, Japan's trade account fell into deficit after the March 2011 earthquake and tsunami on Japan's northeastern coast caused meltdowns at the Fukushima Dai-ichi nuclear power plant. With all nuclear plants offline for safety checks or maintenance, imports of crude oil and natural gas have soared.  Costs of imported fuel, which comprise more than a third of all imports, rose nearly 18 percent in August, despite a slight decline in volume.

So, uh, how's that yen devaluation working out for Japan so far? Not good. And with all of Japan's nuclear power plants offline (and Fukushima in the headlines - everyday) there's no foreseeable chance they are going back online anytime soon.

Testosterone Pit slams more nails into the coffin. Please refer to: Trade Is Supposed To Save Japan, According To The Gospel Of Abenomics, But In Reality... 

Trade is one of the aspects that Abenomics has designated as critical. So the Bank of Japan has embarked on a radical money-printing program to devalue the yen and make exports more competitive. The principle of a currency war. It would also render imports so expensive that buyers would seek domestic alternatives. The resulting trade surplus would save Japan. In theory. 

In reality, the opposite is happening.  Exports did jump 14.7% in August year over year, the Ministry of Finance reported. But the rest was ugly. Exports were valued in yen, and the yen had lost 20% of its value over the year. So in most categories, export volume actually declined. 

But Imports jumped 16%, from a higher base, and the trade deficit soared 25% to ¥960.3 billion ($9.6 billion). Analysts were shocked.  It was the worst August trade deficit ever. It was the 14th month in a row of trade deficits, matching the longest such spell of 1979-1980. It was 27% higher than the trade deficit of August 2012. By comparison, in August 2010, Japan had a surplus of ¥63.8 billion; in August 2009, a surplus of ¥165 billion; in August 2007, a surplus of ¥784.6 billion! 

For the eight month period, the trade deficit hit a record of ¥6.8 trillion, up 66% from the same period in 2012, and up 332% from 2011. During that period in 2010, Japan had a surplus of ¥4.2 trillion! Japan’s trade fiasco is on a steep downward slope. August was the worst August ever, July the worst July ever, June the worst June ever.... There’s no discernible turning point on the horizon.

Darn those facts and data! Don't you just hate it when facts and data get into the way? The data looks real bad, but Abenomics has 100% hope... Though "Hope" has never really been a good business plan...

Ten percent chance of success? Like I said, I think that's way too optimistic. Deflation was the best thing to happen to the country in a long time... It, despite government meddling, was a result of free market forces. There's no way a bunch of bureaucrats sitting in some back office could possibly know better than free-market forces what prices should be and there's also no way they can stop forever the power of free-market forces; sooner or later this is going to end badly (probably sooner since Japan's debt is 240+% of GDP). 

Abenomics is nothing more than a continuation of Japanese government policies of huge deficit spending since 1989 (on steroids).

Has a government manipulated economy ever succeeded in history?

Abenomics has a zero to 1% chance of success... 

Am I too optimistic?

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On a related article about out of control government spending, please read: After Thoughts on Tokyo Being Awarded the 2020 Olympics - Will Tokyo 2020 Lose Money?... What Do You Think? 
http://modernmarketingjapan.blogspot.jp/2013/09/after-thoughts-on-tokyo-2020-olympics.html