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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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"Plus ca change, plus c'est la meme chose" ..... and that includes Japan

February 19, 2020

 

ref :- "Abenomics on trial as Japan prepares for recession" , The Financial Times, International Section

ref :- "Japan's problem is not enough Abenomics" , The Financial Times, Editorial

 

Apologies for being away from the keyboard for so long .... unavoidably detained and all that.

 

Now, where to start upon our return ? Thank goodness for Jean-Baptiste Alphonse Karr's famous epigram of 1849, colloquially translated of course as "the more things change, the more they stay the same". Some of the drivers behind market moves may have changed, and it goes without saying that there's one ENORMOUS brand new factor overhanging the global economy in the most threatening fashion, but the market reactions have been very familiar. Indeed, one might say that they have merely reinforced the trends that are the market's current fall-back position.

 

We cannot say just how badly the Coronavirus will affect global growth, but it might be unwise to assume that the damage will be anything other than significant. Hence the move into classic safe-haven assets : Gold has broken the $1600 per tonne level and is trading at its highest since early 2013; the Dollar Index is challenging it's high of last September (bad news for emerging markets saddled with dollar-denominated debt) and even the recently ignored Jap Yen is attracting a bid. Government bonds are naturally much in demand with, we're told, "walls of money" ready to buy US Treasuries on any fall in price and rise in yields (Bloomberg).

 

Just a brief potential pandemic ago (i.e. a matter of weeks), the consensus was that the threat of recession was receding in major economies and the hope among investors was that yields might finally be able to break up to more rewarding levels. As it is, US Treasury yields are trading closer to record lows set in 2016. Most startling of all perhaps is to see Italian and Greek 10yr yields trading at below 1.00%. (See also "Greek and Italian debt turns into Bonds on Steroids", The FT , Markets and Investing) . Are you kidding ??  Italy and Greece ?? Italy's economy is virtually at a standstill, with a precariously weak banking system and enormously high levels of government and corporate debt .... half of all eurozone government debt with positive yields is Italian. Greece deserves credit for emerging from the abyss (the EU predicts growth will be 2.4% against a Eurozone average of 1.4%), but has much still to prove. A 10yr yield of 0.94% would not , on the face of it, seem like much of a return in those circumstances.

 

Of course, we know why things are the way they are .....  because investors are truly desperate to buy almost anything with a positive yield, and because of the hugely supportive monetary policies of central banks  --  the ECB is still hovering up Eurozone government bonds to the tune of €20 billion per month, remember. Accommodative central banks are also part of the reason why so many of the world's stock markets are so strong. Notwithstanding yesterday's Apple-led setback, US equities are consistently posting record highs. In the face of the aforementioned potential pandemic that could severely undermine global growth and demand, the old rules would say that surging equity prices makes about as much sense as bond and equity prices moving in tandem. But then, anyone trading by the old rules won't be trading for long.

 

Anyway, where were we ? Oh yes .... Japan , which on Monday announced that the 4th quarter 2109 GDP fell at an annualised rate of 6.3%. Yes, that's 6.3%. Now, this was measured before the Coronavirus effect kicked in and as such can only be viewed as a pretty disastrous set of numbers. If you add Coronavirus into the mix for 1st quarter 2020, it seems inconceivable that Japan will avoid slipping into a technical recession  -- defined as two consecutive quarters of economic contraction.

 

Shinzo Abe was elected PM in 2012, and quickly enacted his three-pronged programme to boost growth and banish the threat of deflation that Japan had been fighting for 20 years. Known as Abenomics, the three tools were bold monetary easing, flexible (i.e. supportive) fiscal policy and structural reform. Many would say that in the most difficult of circumstances Mr Abe and BoJ governor Kuroda have done a decent job (and will continue to be proactive) with the first two polcy"arrows", though even supporters might struggle to identify any great achievements towards structural reform. The biggest "blot" on the record, and one that prompted the last recession, was the increase in VAT from 5% to 8% in 2014. This hike in the sales tax was poison to consumer spending, one of the very things that Abenomics is supposed to boost. So much so that the second leg of the VAT hike to 10% was postponed for fear of its repercussions for growth ..... until October 2019, that is. It seems that the fears were well founded.

 

So why do it ? Japan has at least its fair share of fiscal hawks, and they would argue that the increase is necessary because of Japan's huge levels of public debt (240% of GDP !) and because of the need to pay for its ageing population. The trouble is that the fiscal stimulus that Mr Abe intoduces with one hand is more than cancelled out by the contraction induced by sales tax rises. In other words, the public finances are worse off, not better.

 

We mention the FT editorial because it's always interesting to see an evenhanded article (well, sort of) side by side with an editorial that is anything but. The opinion shapers at the FT are firmly of the view that with Coronavirus set to cause further economic damage now is not the time to worry about debt levels. Japan should reverse the VAT hike and add more stimulus to boost consumption. These days it costs virtually nothing to borrow, so why not go ahead ? Borrow, and spend.

 

The FT is far from alone in leaving behind some of the more cautious guidelines of fiscal management that we used to call "prudent". After all, the current US president has overseen a rise in US Treasury borrowing from $550 billion in 2017 to well over $1 trillion for the last two years. Even little Boris Johnson, UK Prime Minister and leader of a Tory party that has always enjoyed its reputation for (relative) fiscal responsibility, has just effectively turfed out his Chancellor of the Exchequer for not buying into the "drunken sailor" approach to government spending (okay, we exaggerate for effect).

 

It's a funny old world, and that's one thing that definitely hasn't changed.

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