Is Abenomics Going to Put Japan Back on the Map?
John Mauldin
May 8, 2013



In a special Outside the Box today, Keith Fitz-Gerald, Chief Investment Strategist for Money Morning, dissects “Abenomics,” the radical, not to say outlandish, fiscal moves that the newly installed government of Japan is making. And Keith has a ringside seat: he spends much of each year in Japan.

In an attempt to cut the Japanese a little slack, Keith comes up with four things that will have to happen for Abenomics to work – but when all is said and done, he says, Abenomics is a recipe for disaster. That does not mean, however, that there is not plenty of opportunity here for short-term profit, and Keith offers a play that is a potential money maker in this volatile Japanese environment.

For a limited time, Outside the Box readers can receive a 60% discount when they subscribe to Keith’s Money Map Report. You can check it out here.

Have a great week.Your up to my eyeballs in information analyst,

John Mauldin, Editor
Outside the Box

Is Abenomics Going to Put Japan Back on the Map?

By Keith Fitz-Gerald

On the surface, Abenomics – the radical unlimited stimulus plan put in place by newly elected Japanese PM Shinzo Abe – appears to be working.

The Nikkei is up 68% since July, 2012, the yen has weakened by 26% over the same time frame, and Japanese consumer confidence is up sharply to the highest levels in six years.

The theory behind Abenomics is that the rising stock market will create capital, and the falling yen will make Japan’s export-based economy more competitive in global markets, while newly profitable companies will hire more workers.

Don’t hold your breath.

As I noted during a recent interview on NHK, Japan’s national public broadcasting network, the beleaguered island nation faces significant challenges:

  • Japanese debt is already nearly 500% of GDP when you add up public, private, and corporate obligations. That’s the highest on the planet and makes Europe’s spending look positively miserly. Mimicking Bernanke’s helicopter hijinks won’t help on anything more than a short-term basis.
  • More money does not equal greater innovation. Many Japanese companies are struggling to remain competitive in industries they once dominated. Examples include Sony, Matsushita, and Fujitsu.
  • Japanese utilities literally can’t produce enough power to fuel a Japanese recovery . Only three out of 54 nuclear reactors are running, and the national LNG import bill hit ¥621 billion in March. That’s more than double pre-quake limits, according to the Ministry of Finance. These costs will continue to rise as the yen weakens further. I doubt very seriously that any increase in export sales will be enough to offset rising energy costs, because margins are going to get pinched.
  • Formerly deep trade surpluses are now deficits.
  • Prices in Japan are rising faster than income at the same time that taxes are being raised. That’s a lethal combination that is serioiusly pinching consumers.
  • Japanese corporations, once keen to return profits home, are now expanding overseas and keeping money outside Japan.
  • Japan’s population is aging so fast that, effectively, there are no new workers, a problem that is compounded by the near complete lack of a workable immigration policy.

The bottom line?

Japan is making the same mistakes we’re making … or we’re making the same mistakes they’ve already made – it’s hard to tell.

Either way, the bottom line is pretty simple: You give me a trillion yen and I’ll give you a good time, too.

In order for Abenomics to work, four things have to happen:

  1. Japanese banks cannot hoard money the way big banks have in the US. They have simply got to keep it moving right through to Japanese citizens and small local businesses.
  2. Japanese bond market participants have to be willing to maintain bidding as the Bank of Japan conducts “market operations,” which is Fed-speak for interfering with normal pricing dynamics in an effort to maintain stability. If bidders walk away, the bond market will fail and the government will have to contend with offshore derivatives traders who are already lining up to play the same games they did in Italy, Spain, Greece, and the balance of the EU.
  3. Japanese consumers have to engage. If wages fail to increase, living standards will decline and Abe will be up a creek without a paddle – and yes, I mean THAT creek.
  4. The international banking community has to allow Japan to debase its currency without punitive repercussions. So far the G20 has acquiesced, but their tacit approval doesn’t really mean much. They have no choice but to go along with Japan’s moves. Kuroda, who is Bernanke’s equivalent at the Bank of Japan and Abe’s sidekick, has made it clear he is fully committed to the program, no matter what the West thinks.

Longer-term, Abenomics is a recipe for disaster – have no illusions about that. Japan, as John Mauldin likes to say, is a bug in search of a windshield. No nation in the history of mankind has ever bailed itself out on anything more than a short-term basis by pursuing a course like Japan’s.

But short-term … that’s another matter entirely, and therein lies opportunity.

Historically, every 10% drop in the yen versus the dollar has translated to a 0.3% rise in Japanese GDP the following year, noted Kiichi Murashima, chief economist at Citi in an FT interview.

You cannot say the same thing about Japanese stocks.

Since the Japanese market’s initially collapse in 1991, the world has watched with bated breath as the Nikkei has risen … and plunged with alarming regularity.

If you’re going to buy and sell like a trader and you’re nimble, you can ride the Japanese equity bull – pun absolutely intended. Most investors aren’t so equipped, though, -and so the “buy and hope” approach they favor is far more likely to leave them disappointed than profitable.

Japanese bonds are probably of dubious value, too. So far they’ve been stable, because Japan has been able to issue mountains of debt to its own dutiful citizens. The cost of debt service has been negligible, because nearly all of it was held domestically.

Now, however, Japan has got a very different situation on its hands. Any rise in long-term rates, let alone a significant one like Kuroda is planning, is going to dramatically hike the cost of debt service to unsustainable levels. Factor in Japan’s rapidly aging population and dwindling workforce, and you’re looking at a far smaller pool of bond buyers.

My expectation is that Japan will be forced into international bond markets no later than 2015, which will effectively double their capital costs. Without meaningful social security reform and spending cuts, that’s going to really impact things.

That’s why I’d rather short the Japanese yen.

Stocks are fickle. Abe doesn’t care whether they go up or down. Bonds are a part of Kuroda’s repurchasing agenda, so those are covered, too. But the yen stands on its own.

In that sense, it’s the key to the proverbial castle.

In order to conduct any sort of serious financial reform, Abe is going to have to move the yen’s needle. Everything in corporate Japan depends on it.

Since I first brought this trade to everybody’s attention in Money Morning in February, 2012, the yen has dropped by 30%, and the investment vehicle I recommended, the ProShares UltraShort Yen Fund, is up more than 60% as it flirts with the psychologically important ¥100/$1USD level.

Now, having come close enough to that target for government work, I think the next stop is ¥125 to the dollar, which means that even if you missed the first part of this trade, it’s not too late to get on board.

And if you’re already holding Japanese equities?

Don’t look a gift horse in the mouth.

Hedge the snot out of them or sell into strength – equity markets are not as directly connected to central banking stimulus efforts. But they are absolutely linked to traders’ expectations, which can and do change all too frequently on nothing more than a whim or an errant “tweet,” as we have recently seen.

You don’t want to be left holding the bag.


For a limited time, Outside the Box readers can receive a 60% discount when they subscribe to Keith Fitz-Gerald’s Money Map Report. Check it out here.

About the Author: Keith Fitz-Gerald is a seasoned analyst, expert media contributor, and futurist with decades of experience in global markets. In his capacity as Chief Investment Strategist for Money Morning and Chairman of the Fitz-Gerald Group, he appears regularly on financial television programs around the world on the Fox Business Network, CNBC Asia, NHK, BNN, and more. He’s been called on for his extraordinary ability to see future trends in such publications as Wired UK and the Wall Street Journal. labeled him a “Business Visionary.” Even Mensa has called him to their stage. Mr. Fitz-Gerald splits his time between homes in Oregon and Japan, with his wife and two boys. He travels the world extensively in search of investment opportunities others don’t yet see or recognize.

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “Is Abenomics Going to Put Japan Back on the Map?”

  1. clay says:

    Wow, this is so bearish even a perma like me is skeptical. Can anyone put a little lipstick on this?

  2. BenE says:

    I think this article has it upside down. Abenomics is good for Japan, however they waited so long to implement it that it might still not avoid an economic catastrophe given Japan’s high debt and terrible demographics and long standing market distortions due to deflation.

    The post does get it right with regards to the yen which will probably devalue severely. The Japanese stock market might do OK and better than in the deflation scenario at least in nominal yen terms but will be limited by labor shortages.

    All in all the Japanese will be forced to realize that a large part of their savings are fictitious as the huge debt cancels them out and there is not enough people in the new generation to carry the burden. Most of the pain will be inflicted on the Japanese savers and retirees.

    Still though Abenomics is necessary as waiting would only have hidden the problem and make it compound into something greater such as an outright sovereign default.

  3. wally says:

    I think I’ll lump this one in with the next (QOTD…8000 points later) post. Category: Bad Yodas.

    Slowly, slowly the world is learning that it is not money that makes economies work, it is MOVEMENT of money. Some may never learn.

  4. PrahaPartizan says:

    I’m not sure what Abenomics is supposed to be buying for the Japanese people, other than a lesser valued yen. The Japanese over the last twenty years have already spent enormous amounts of money on infrastructure throughout Japan, far more comparatively than we Americans have. The Japanese don’t have decrepit bridges, bumpy roads, ancient airports, and retro rail systems. That’s why they have that enormous debt overhang. If the Japanese government ramps up the fiscal policy, just what are they going to buy? Another bridge next to the one they already have in place? Are they going to start tearing down one relatively new structure just so they can put up another? Are they willing to experiment with putting in totally untried systems for power generation and transmission and distribution on a major scale, which at least would offer some potential payback in the future despite the high risk? The only untried fiscal policy the Japanese have not tried over the last twenty years is a major military boondoggle, with all of the build-up and expense that entails. Maybe we could get them interested in invading Syria or Somalia. We might even be able to sell them an older aircraft carrier or two, since they’ve already got the second largest surface navy in the world otherwise.

  5. Bam_Man says:

    If only John Law had had a PhD from MIT or Princeton, there may never have been a French Revolution…

  6. rn says:

    japan does not want to dilute their homogeneous socio-cultural makeup with immigration. At the same time, Japan is trying to reduce the population, without reducing their per capita GDP or quality of living. Their GDP will continue to slip over the course of the next few decades. This may appear to be recessionary. But they are trying to maintain or improve their per capita GDP. This is probably a difficult concept for americans to understand.

  7. nicoacademia says:

    if due to the weakening of the Yen corporate profits soar and these profits are ploughed back into the Japanese people’s lives through wages this model will work.
    i have a long shot guess that due to the culture and perhaps micromanagement of Abe(all hope here) this will be done.
    even though the population will have a smaller base…higher wages hopefully offsets this(all hope x.infinity here) and they plough it back into Japanese govt bonds.
    maybe implement social security to buy bonds as part of monthly contribution from wages etc.

    there is a small path through the ocean i would call this.

  8. DRR says:

    “The only untried fiscal policy the Japanese have not tried over the last twenty years is a major military boondoggle”

    Japan is going to re-militarize with US approval. The US is entering a subtle but real cold war with China and the US can’t afford to finance a pacific military buildup unless it comes out of Japan’s pocket.

  9. Pantmaker says:

    Kyle Bass recently on Japan. “You have to be shitting me, you’re adding a ponzi scheme to a ponzi scheme.” I’m with Kyle on Japan…and think it’s spot on for the US as well.

  10. Greg0658 says:

    one more – and hope this is taken as hope for change & not a trade (to late generally)

    around here we have had multi factory losses by foreign investment and followed by shutdown and sometimes complete gutting of equipment

    LOF > Pilkington > Japan based Nippon
    Lonestar > Italy based Buzzi
    LTV > India based Mittal
    Miller Brewing > United Kingdom-based SABMiller
    Budwesier > Belgium based AB InBev

    remembering that beaver dam story of mine

  11. techy says:

    let me see if I understand this correctly:
    Japan’s around 90% of the debt is owned by its people via their savings. In a way if you were to cancel each other, they dont have savings and Japan’s 90% debt disappears.
    But as long as they can devalue their currency and wages go up due to increased profits from their export, how is that a problem to them?
    Of course they need to fix the energy issues by repairing\building nuclear facilities or some other options.

  12. Willy2 says:

    What Abenomics is doing is – indeed – creating inflation by lowering the value of the yen. But it’s creating PRICE-Inflation, not ASSET inflation. But even PRICE inflation is actually VERY (asset) deflationary.

  13. RW says:

    For the first time in two decades there is sufficient reason not to underweight Japan and I have modified my global portfolio allocations accordingly. Not overweight yet, that must wait for further evidence.

  14. says:

    Some problems with article

    Energy Problem? — Methane Hydrate and how the world will be awashed with excess energy.
    Demographics Problem? — Robots

    Most perma-bear seem to have this notion of limited resources (and hence fear inflation). However, the only thing limited is Human Imagination which needs infinite money supply.

    Japan will be the pioneer in teaching the world the most important lesson of the 21st Century — “How I stopped worrying and start loving the Debt”