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

You Wanted Inflation Japan? You Got It! Utility Prices to Rise Up to 20%

Like I wrote last year, this planned inflation by Shinzo Abe and the LDP is going to be the death of Japan's economy.  A few weeks ago, a spike in oil and gasoline prices was announced (You Wanted Inflation, You Got It: Japanese Gasoline Price Rises To Eight Month High) then about ten days ago a 9.75% increase in wheat prices was announced. Please refer to my satirical blog post entitled: Shinzo Abe Resigns as Japanese Prime Minister:

The headlines read, "Japanese Prime Minister Shinzo Abe Resigns!"

... Well, sorry to get your hopes up, but not yet he hasn't... But he will in a few months... Food prices are about to soar over 10% on many items! Shinzo Abe hasn't resigned yet, but let me state it here: Shinzo Abe will not last out 2013. I predict that his tenure could end as early as August 2013. Why?

They wanted inflation; they now have it. Idiots! Food prices in Japan are about to soar. Zero Hedge reports in Japan Food Prices Set To Soar As Government Hikes Wholesale Wheat Prices By 10%.

Well, of course it was all predictable. Really, I mean this isn't rocket science; it's third grade mathematics. I don't know what world these politicians are living in, but in the real world, two plus two equals four. Need I explain more? So, if math doesn't lie then when you devalue your currency by 20%, then your costs are going to go up by 20%... Especially in a country that imports nearly all of her energy needs (and just a few of her nuclear power plants running)!

A weakened yen would help exports, as I pointed out, IF the export business were robust. But it is not. And it's not wholly in the dumpster because of a high yen. Don't look now but the entire world in in recession and that, my friends, is probably the biggest reason the export business is tanking. 

For proof that the export business is near-death worldwide, please refer to Wikipedia and The Baltic Dry Index: 

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides "an assessment of the price of moving the major raw materials by sea.

And....Now that you know what the stick used for measuring the export business is, here is a recent article about that definitive report concerning the health of the export business. From Investment Watch, this article from Dec. 12, 2012 entitled, Standstill: The Charts That Prove The Global Economy Is In Serious Trouble:

Amid growing concern that the global economy is teetering on the edge of a total collapse, governments in Europe, China and the United States continue to manipulate statistics in an effort to paint a picture of recovery and a return to normalcy.

But despite their best efforts to fabricate positive employment numbers, GDP growth, currency stability and stock market health, the stark reality is that the global economy is at a standstill, and has been since before the crash of 2008...

...In essence, the price of transporting goods collapsed – to its lowest levels ever. That old theory of supply and demand was the culprit. You see, when there is no money to buy goods, there is no demand for said goods. This puts pressure on transportation companies who make a living moving products from port to port around the world. But because no one was able to consume, there was no need to ship anything. This forced transportation companies to reduce their freight rates in an effort to stay competitive.

In Here's Why A Weak Yen Will Destroy Japan, I wrote:

The clowns in the LDP think a weak yen will rescue Japan's faltering economy by making exports cheaper... Sounds good... That is, if there anyone to buy Japanese goods.

I fear that the weaker yen will be the last straw in breaking the Japanese Economy. Here's my reasoning why... 

China and Japan are in a row over islands. Boom! Down goes exports to Japan's biggest trading partner. Please refer to the NY Times article, "Japan Trade Suffers as China Ties Deteriorate":

"Shipments to China, which is Japan's biggest trading partner, tumbled 14.1 per cent as demand dropped for Japan-branded products..."

Also refer to Japanese Car Sales Plunge Amid China Rage.

Europe is in no condition to be big spenders on anything as Euro states are already in deep recession.

The USA isn't in good shape either as it is in recession too and Japanese cars aren't selling well due to Fukushima and other issues.

Gee? So what will a weak yen certainly buy for Japan? Answer: How about a 10% increase across the board on energy imports?

OK. I was wrong. It's more than 10%! I was in error. Sue me! 

Now, lucky reader, the other shoe has dropped: Japan has announced a 14% ~ 19% across the board increase in energy and utility prices. Please refer to: Market Watch: Japan's utilities to hike rates amid weak yen

TOKYO--Japanese utilities, forced to idle their nuclear power plants over the past two years and facing higher fuel costs due to a weak yen, are now looking to push through double-digit rate hikes for their commercial customers.

The action comes at a bad time for some Japanese companies that were hoping the fall in the yen and much-trumpeted efforts by the government to turn round the economy would help improve their prospects.

While the government has raised some concerns about the raising of power rates, the move seems inevitable given the prior deregulation of electricity prices. 

--Weak yen pushing up imported fuel costs for Japanese utilities

--Rate rises of 14%-19% expected to come into force

--Higher electricity prices likely to hit smaller corporations most severely

Some people will say, "But Mike, these increases are only for commercial customers!" Yeah, right. As if they won't pass the costs onto the consumer... Once again, I think that mathematics are pretty simple here. If they get hit with a 14% increase in costs, they will pass that onto the consumer. I'll also bet that a 14% increase in costs will cause them to increase the costs of the goods that they are trying to ship overseas thereby damaging exports.

Nah!

Thank you Shinzo Abe and your planned inflation and 18% depreciation of the yen. I reckon we can expect more of the same. 

With things going this well with the yen at 95 to the dollar, imagine how great things will be when the yen hits 120 to the dollar!

Woo-hoo! A 40% across the board increase in energy and food prices! We'll be rich!