By John Richardson
TEN years, a Japanese contact told me, “When we eventually work out the right set of economic policies to get us out of our problems, we will all get behind those policies.”
I gave him a call last week to update our discussion and he said, “The good news is we will still get behind somebody, anybody, who will lead us in the right direction, but we are still waiting for that to happen.”
What those policies should be will be the subject of tomorrow’s post, with the help of our contact above – and a couple of other Japanese friends.
But like my coverage of South Korea last week, our first task is to identify where Japan is currently going wrong.
Abenomics are nothing short of a potential disaster for Japan and the global economy
Here is why:
- The Yen had already fallen to its lowest level in seven years, and it could well get weaker.
- This wouldn’t matter if the global economy was robust, but, of course, it isn’t robust.
- Competitive devaluations of the South Korean Won, the Euro and other major currencies could therefore happen. Why should other countries and regions, which are also struggling with weak domestic growth, roll over and, in effect, die in response to a weaker Yen? They, too, will want to support their exports.
- These devaluations could well also include the Yuan. China will do whatever it takes to grow its exports in order to compensate for weaker growth at home, brought about by the biggest programme of domestic economic reforms for at least the last 20 years.
- The US might then, once again, accuse China of “currency manipulation” followed by the erection of trade barriers, especially as it seems likely that the dollar will further strengthen as other currencies fall. The dollar is on a bull run, thanks to the end of the Fed’s quantitative easing programme (QE) and a general flight to safety by investors.
- China would then likely respond with its own trade barriers and we could end up with a global trade war.
- The irony in all of this that Japan’s current policies will fail to generate “good inflation” domestically. Instead, there is a risk of stagnation – a combination of a decline in real incomes on higher import costs and a slowing economy.
- Last and certainly not least, of course, is this point: Abenomics is adding to global deflation.
Let’s put Japan’s economic some important context, which is provided by investment advisor, Mike Shedlock:
It is worth noting just how aggressive the Bank of Japan has become with the central bank balance sheet already at around 55% of GDP and rapidly heading higher still. Japan is an economy a third of the size of the US doing roughly the same dollar QE.
This feels like nothing short of madness.
Chemicals companies cannot do anything about Japanese government policy.
What they can do, though, is:
- Stress test their businesses against the strong possibility of a Yuan devaluation and/or other measures by China to boost its exports. They must think through the “net effect’ on their businesses. In other words, if they export more chemicals to China, will these volumes merely come back to their home markets in the form of very competitively priced finished goods. Constant “health checks” on domestic customers will need to be carried out.
- Run simulation exercises centred on, “What would we do if we see the Yuan, the Yen, the Won and the Euro all trading 10-20% or more lower in value than we have assumed for 2015?”
There is no room for relying on yesterday’s plans for yesterday’ global economy.