Abenomics gives Sato the ‘pip’

In a widely reported speech given in Kochi, BOJ board member Takehiro Sato gave voice to some of the dissent which has riven policy makers – and, we suspect, much of Japanese society – over the issue of whether the government’s latest resort to the Patent Inflationary Panacea (henceforth, the ‘PIP’) is likely to have the desired effect.

Expressing doubts over whether a hard ‘target’ for the attainment of a steady rate of price escalation of 2% a year – that latter-day shibboleth of collectivist Macromancy – Sato made the very reasonable, if little shared, individualist observation that ‘prices reflect the temperature of the economy, not a variable [sic] that can be directly controlled by a central bank.’

Alas! He rather spoiled the pitch for a less extremist monetary mix as well as for a less pusillanimous fiscal approach by advancing what was for him the clinching argument that the outcome of this noxious cocktail was so little assured that he saw a real risk of the Bank suffering ‘a decline in its credibility’ were it to fall short of leading his fellows to the Land of Milk and Honey.

So there we have it: the principal reason not to be even more irresponsible than we already have been in adopting today’s most irresponsible stance in at least two generations is that it might turn out not to be credibly irresponsible [read: they surely couldn’t be that crazy, could they?]; that the god of prosperity whom we seek to propitiate is thus revealed to be no more than a battered old DC3 chugging over the forested highlands, dropping the odd crate of bric-a-brac upon our uncomprehending savage heads. For, if so, who knows what calamities may occur when next the priests of this tinpot divinity try to bamboozle us with their crude sorcery?

The confused tangle of half-digested logic and economic superstition in all this is enough to make one’s head spin. Somehow, the inflation – though clearly only of benefit, in true Cantillon style, to the first recipients and most favoured users of the cash – is supposed to improve employment more broadly by ‘breaking a deflationary mindset’ and so prompting workers to demand – and bosses smilingly to grant on application – pay rises on a routine schedule of ever higher emolument.

Yet it is no (explicit) part of government policy that wages continue to lag behind prices and so swell the aggregate payroll at the expense of the individual salaryman’s real return on effort. Sato himself obliquely recognised this when he noted, albeit in a typically back to front manner, that an essential element of the plan is that the ‘arrow’ (as yet unleashed) of ‘structural’ reform must raise ‘productivity’ – by which he really means the marginal product of all manner of labour/capital combinations – and hence usher in a widespread increase in real wages.

What Sato cannot explain – neither to himself, one suspects – is why this thoroughly benign development would lead to ‘price stability’ (a mealy-mouthed phrase actually meaning a low-level, chronic debasement of the currency) or why greater productivity would help inflation ‘increase moderately’ (since the greater facility in producing goods which is what productivity entails would, ceteris paribus, tend to diminish their prices, not augment them). Nor can we fathom what to make of his contention that this will allow people to ‘enjoy the benefits [sic] of overcoming deflation’.

Even setting most of such the inconsistencies and all of the half logic aside, other critical issues remain not only unresolved but largely unexplored. Wherein, one may justifiably ask, do the incentives lie for this process of ‘ask and ye shall receive’ to begin? If the answer – as well it seems to be – is simple money illusion, then wouldn’t everyone be better off and wouldn’t fewer long terms risks be run (for innocents abroad as well as at home), if we started from the other end of the matter – viz., if instead of reducing the real debt burden by adding a nought to everyone’s income and outgo, we were to lighten it by lopping a zero off that debt’s denomination?

The only credible answer to that question is that the former procedure – for all its attendant ills – boils the frog of Japanese saving in some dingy back-room far too slowly too elicit much more than grumbled discontent, while the latter flash fries the poor little amphibian right there, in the public square, in a manner guaranteed to provoke widespread social upheaval.

As a bonus, the present, poisonously insidious route helps give Japanese banks a stock of inflating assets to hold or to lend against in place of the potentially debilitating exposure they currently bear to JGBs as the counterparts to much of their depositors’ monies. Furthermore, if the state swaps its private sector creditors for a pliable central bank uncle, it never need worry again about facing a buyers’ strike or of seeing its budget fall progressively prey to rising coupon payments, since it will be painlessly plugging its shortfall with the zero interest rate, perpetual obligations of central bank outside money (reserves) instead.

Given this last piece of chicanery, does one really have to have a doctorate in public choice theory to realise that the reason the Abe government felt able to act on the dire counsel of that Antichrist of monetary probity, Paul Krugman, and so to far postpone the second consumption tax hike – much to Sato’s uncomprehending dismay – is that his own BOJ’s hyper-accommodation is shielding the regime from any unwelcome reaction at home while leaving the foolishly embraced collapse of the yen’s value on the exchanges as the only readable barometer of opinion?

Just for the record, export-oriented companies like Toyota may be making impressive, yen-reckoned gains in their earnings column but, overall, even the most short-term of positive effects from Abenomics are hard to unearth among businesses, much less households. As the latest MOF survey showed this week, corporate sales may have risen 3.7% in the past two years in yen, but they are off 26% when measured in dollars. For profits, the relevant numbers are +33% in yen but down 5% in USD. Capex has risen 7.2% over this horizon (though only back to already-depressed 2009 levels) in the local numeraire, but is off 24% to touch that of 2003 in greenback terms. Even exports, when adjusted for changes in the country’s TWI, have not budged for two years after having fallen around a fifth from their post-Crash highs. They are therefore no greater now than they were way back in 2006.

On the other side of the divide, hours worked have only been lower in modern times at the depths of the GFC, with real wages off 2.3% in the past year on a rolling 12-month average basis (so we can only ascribe some of this drop to the April tax hike and, besides, if the hit to people’s pockets that occasioned was deemed to have ‘tipped the economy back into recession’, why is the ongoing assault mounted by the BOJ any less culpable in perpetuating the malaise?). The official difference between disposable household income and routine living expenses has fallen 6.5% in nominal terms and therefore 9% in real ones. Oh, and let the doughty Mrs. Watanabe not think too long on what that hard-scrimped surplus will buy her when next she chooses to holiday abroad.

Given that much of this has begun to be reflected in the opinion polls, it could be a very interesting election this month, one which Abe is unlikely to lose given the disarray among the opposition, but one which might just call his mandate for such radicalism sufficiently far into question that possibly seismic implications for our overstretched borrowers of yen and buyers of global equities could yet ensue.

NB The foregoing is for educative and entertainment purposes only. Nothing herein should be construed as constituting investment advice. All rights reserved. ©True Sinews