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Hi Blog. Terrie Lloyd offers his perspective on why Abenomics is faltering: Pandering (as the LDP has always done) to special interests, and ignoring the necessary structural reforms (including, he rightfully mentions, a proper immigration policy). Although talking about economies and effective economic policy is a very inexact science, this article is good food for thought and rings true, especially the conclusion about the incentives towards military adventurism. Dr. ARUDOU, Debito

* * * * * * * * TERRIE’S TAKE – BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term technology and media entrepreneur living in Japan. (http://www.terrielloyd.com)

General Edition Sunday, March 20, 2016, Issue No. 843

– What’s New — How the Failure of Abenomics Leads to the Record Sales of Safes

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+++ WHAT’S NEW

After a strong start last year, the ruling LDP government seemed genuinely perplexed when at the end of the year the nation’s annual Real GDP was found to be just 0.5% and for the last quarter a problematic -0.3%. The government’s leadership continue have their collective heads buried in the sand by blaming an unusually warm winter and other external factors for the anemic performance. You kind of feel sorry for them. After all, they have done everything by the textbook (well, the Keynesian textbook, anyway), by expanding the nation’s money supply aggressively, and by implementing various stimulus packages.

But unfortunately Mr. Abe’s crew seem to have forgotten one small thing, they need the public to respond to their pump-priming (the whole point of Keynesian policies), and this means being seen to be making real regulatory reforms for the future, not just recirculating cash among vested interests. Abe needs to make good on his promised third arrow – slashing business regulations and encouraging innovation, liberalizing the labor market, getting tough with the agricultural sector, cutting corporate taxes, and increasing workforce diversity through immigration and improved support of working mothers.

But instead the reverse is happening. For example, if you look at the 2015 statistics for Japan, the allocation of funds for development/promotion of Small and Medium-sized Enterprises (SMEs), the drivers of employment and economic growth in any country, fell from JPY825bn in 2012 to just JPY186bn last year. At the same time, the government spent JPY1.042trn (six times as much) on “stable food supply”, a code for rice farmer subsidies. In other words, it’s business for the vested interests as usual.

And now with the Bank of Japan moving to impose negative interest rates on retail banks so as to force them to start investing their cash instead of parking it, we can all see that the Bank of Japan’s policy makers are running out of ammunition. This means that Abe’s politicians either need to do their share of heavy lifting by implementing reforms or the economy will be pretty much driven by external influences. Right now, those influences are driving the yen back to 100 to the US dollar, and will undo any of the benefits achieved over the last 3 years.

For the rest of us, this means that sectors that have been enjoying increased business because of the cheap yen will see a reversal of fortunes, including the exports, international recruiting, inbound tourism, and banking/investment (i.e., a slow down in the repatriation of overseas earnings by Japan-based parent companies). At least overseas trips and food imports will get cheaper, though… 😉

The media is full of articles speculating as to why Abenomics is not working, and certainly international pressures are one cause. But we don’t think they are the root cause. For that, you need to look at WHY the Japanese public and its corporations are so reluctant to take a risk and spend some of their hoarded cash. Our take is that the malaise is caused by one simple thing: a lack of trust in the government and its policies.

Without trust that there will be innovation and growth, the leadership of big companies see their current record earnings as temporary and don’t want to share them with employees. The employees themselves hold off on spending, thus strangling the birthrate, car ownership, stock market shares, travel, and advanced education. As an end-game the public starts pulling cash out of the system and stashes it literally under the mattress or in safes at home.

This is no joke and the situation is prompting all kinds of abnormal (but perfectly logical) behavior by the public. For example, there has been a surge in cash hoardings, with an extra 6.2% ten thousand yen bills going into circulation last year, the highest jump in demand since 2002. This means that there is now totally about JPY100trn (US$890bn) of cash in circulation, around 20% of the total economy. And to hold all that cash, there has also been a run on home safes, with sales soaring 60% to 70% above last year.

It’s ironic that even as consumers distrust the government, they still trust it to honor the bills it issues.

Well, not everyone trusts the government to honor its paper and as the Japanese are generally well educated there is a growing segment of the community that is starting to buy gold. The price of gold bars has risen to JPY5,027/gram and demand in 2015 was up a whopping 70%, from 17.9 metric tons in 2014 to 32.8 tons in 2015. This makes Japan the seventh largest consumer of gold in Asia, even though as a nation they don’t really have a recent gold culture like the Chinese and Indians do. At this rate, Japanese consumers will spend about JPY300bn in 2016 just on gold.

So what is the government to do with this seemingly intractable situation? There are really only two ways forward for Abe’s government: either confront their personal demons and attack and reform vested interests while funding SMEs who are the real growth engines for the country, OR, devalue all that cash hidden under mattresses through more inflationary policies and distract the public’s attention with a little military adventure.

And what better than a little military adventure against the Chinese bogeyman through a SE Asian proxy such as the Philippines?

ENDS

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