We've talk about this here before, primarily focusing the the so-called three arrow of Abenomics and how it was misguided, misordered and worst of all, most likely untenable.

- FirstPoint Japan Editor

By Nathan Lewis, Contributor
Forbes Magazine

The administration of Shinzo Abe in Japan just approved a rise in the consumption tax (national sales tax) to 8% in April 2014, from 5%. This opens the door for another rise to 10% in 2015. At the same time, the Abe administration plans to spend ¥5 trillion on “stimulus” to offset the negative economic effects of the tax.

I’ve described a typical path of decline as a combination of “stimulus” and “austerity.” The “stimulus” mostly means spending money, or some kind of “easy money” policy. The “austerity” is some kind of tax hike. Put together, they add up to higher taxes, a moribund economy, more demands on the government as the private sector stumbles, more reliance by the government on distributing money as a way of bolstering political support, worsening finances, more waste, and a depreciating currency.
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This is completely contrary to the Magic Formula of Low Taxes, Stable Money — the formula that Japan itself used to grow wealthy during the 1950s and 1960s, and indeed in the 1870-1914 period as well.
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Most of the focus on “Abe-nomics” has been on the very aggressive monetary expansion being conducted by the Bank of Japan. To some degree this is warranted: the average yen exchange value over the past twenty years is about 120/dollar. However, once that point is reached … what then? I suspect that, soon, it will degenerate into not much more than a way of financing the flood of JGBs that still pours forth.

I think most people understand now that the “stimulus” spending isn’t really about Keynesian notions anymore. Rather, it has devolved into the simple purchasing of political support. Perhaps it was never really more than that, but any other justifications have worn too thin to be credible.
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The spending was deemed necessary to preserve political support. When even that didn’t work, they spent more on the military to suppress revolt and revolution. As the private sector economy crumbled under ever-higher taxes, and successive currency devaluations, the king was not so popular anymore. His ministers feared that cutting off payments to nobles and other cronies might erode their base so much that the dynasty could crumble.
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How much is ¥5 trillion in “stimulus”? It is more than half the total annual revenue of the corporate income tax, including prefectural and local taxes (about ¥9 trillion), or the projected amount of revenue expected to be generated by the increase in consumption taxes (about ¥6 trillion) — which won’t actually appear in any case.

What if, instead of “stimulating” the economy by throwing money down a hole to appease cronies, you reduced tax rates instead? It might be popular. But, they never think of that.

Nothing good is happening in Japan. Not much is likely to happen, until sometime after the present dingdongs reduce the economy to smoldering ruin.

Japan's benchmark Nikkei 225 trimmed its losses after plunging as much as 6 percent on Thursday in a vicious sell-off after the yen rallied over 1 percent against the greenback.

Uncertainty over central banks rolling back stimulus saw the dollar/yen drop below the key 95-handle, hitting a new 10-week low. The Nikkei index is now down 21 percent from last month's five-and-a-half-year high of 15,942, placing the benchmark index firmly back in bear market territory.

Elsewhere in Asia, Chinese markets experienced a bout of heavy selling with theShanghai Composite down over 3 percent after being closed since last week. Seoul shares fell over 1 percent fell to a new seven-week low and Australia's S&P ASX 200 hit a fresh five-and-a-half-month low.


Markets in emerging Asia also extended losses as capital flows continue to exit emerging market equities. Philippine's benchmark index slumped 4 percent and Indonesia's Jakarta Composite fell 2 percent

Central Bank Jitters

Nagging worries about the Federal Reserve tapering its bond-buying program and disappointment from the Bank of Japan's policy inaction at its Tuesday meeting have roiled global equity markets in recent sessions, leading the Dow Jones Industrial Average to drop for a third session in a row on Wednesday.

"We are seeing the first signs of a lack of confidence in the ability of central banks to control the interest rates, to stimulate inflation, and real GDP [gross domestic product] growth rates," said Viktor Shvets, head of strategy research, Asia, at Macquarie.

Author: Edward Hugh

The future never resembles the past – as we well know. But, generally speaking, our imagination and our knowledge are too weak to tell us what particular changes to expect. We do not know what the future holds. Nevertheless, as living and moving beings, we are forced to act. – John Maynard Keynes

Discussions of the population problem have always had the capacity to stir up public sentiment much more than most other problems.
- Gunnar Myrdal

Last Thursday the yen broke through the psychological threshold of 100 to the US dollar. On Friday the slide continued (see chart), even dropping very close to 102 to the USD at one point before strengthening slightly on the run in to the G7 finance ministers meeting.  

The ostensible source of the sudden shift was a news release from the Japanese Ministry of Finance detailing the fact that Japanese investors bought a net total of 514 billion yen ($5.2 billion) in foreign bonds during the two weeks to May 3. Speculation had been rife that Japanese money funds would start to respond to continuing yen weakness and low Japanese yields by investing abroad. It is still far from clear that this is really going to happen in the short term, but nonetheless the news was sufficient to spark bets on more yen weakness.

Naturally the fall has drawn comment, especially during the run up to last weekend’s G7 meeting. US Treasury Secretary Jack Lew told CNBC that while Japan had “growth issues” that needed to be dealt with its attempts to stimulate its economy needed to stay within the bounds of international agreements to avoid competitive devaluations.”I’m just going to refer back to the ground rules and the fact that we’ve made clear that we’ll keep an eye on that,” he said in a comment that was widely seen as drawing a red line in the sand.

But really, what else do external observers expect? On 4 April Bank of Japan governor Haruhiko Kuroda announced he was going to increase the money base by 1% of GDP per month for the next two years. That is to say Japan’s monetary expansion will be incremental and continuous. Kuroda has even stated he will continue to increase the money base beyond the initial 24 months if the targeted inflation doesn’t come. It was always clear that the country was going to have a difficult time trying to generate inflation and that one of the knock-on consequences would be to continually weaken the yen. So you can’t realistically expect him to turn round and say now, “sorry, we didn’t know it would offend you so,  I’m cancelling the policy”. Anyway, that move would throw financial markets straight into turmoil. Didn’t they understand what they were signing up to when they accepted “Abenomics” at the last meeting?

Obviously there is still a considerable amount of confusion around about what exactly Japan’s problem is, and what the policy is trying to achieve. I have tried to examine the more theoretical background to the problem in my  A-b-e of economics post, but looking through the comments to that piece I realised that I was very tightly focused on one, examining only one aspect of what has come to be known as Abenomics, the inflation targeting component and its theoretical justification. Since ideas about what exactly it is the Japanese government is trying to achieve seem to be many and various, I thought it might be worth coming back and taking a second look at the experiment.

Three Arrows Into The Sunset

The aim of Abenomics is obviously to shake Japan out of its deflationary lethargy and return the country’s economy to a more pronounced growth path. In order to achieve this Japan’s Prime Minister has notoriously identified three policy arrows, or transmission mechanisms:

1) Aggressive monetary easing

2) Strong fiscal stimulus

3) An extensive programme of growth enhancing structural reforms

Achieving the inflation target is effectively the key objective of the first arrow, and weakening the yen is basically the transmission mechanism which achieves the objective. In fact while we have heard a good deal concerning the first two arrows, there is still relatively little on the table regarding the third one, as some commentators have started to wryly note.

Japanese yen's plunge vs. the dollar makes its exports cheaper and its companies more competitive. G7 finance ministers will focus on the Japanese yen at talks in the UK this weekend.  

By Martin Benedyk and Pan Pylas

Financial leaders from the world's top seven developed economies are gathering in the U.K. to discuss how to shore up the global recovery just as the stimulus measures of one its members,Japan, has caused its currency to take a dramatic slide.

Supporting the global economy and the role of central banks are set to be the key points of this weekend's discussions among financial ministers and officials from the Group of Seven countries — the U.S., Germany, Japan, the U.K, Italy, France and Canada. But attention will also turn the financial markets, which on Friday were dominated by developments surrounding the yen and the Bank of Japan's super-aggressive monetary policy.

The dollar breached the 100 yen mark late Thursday — the first time in a little over four years. Over the past few months, the yen has dropped sharply as the new government in Japan tries to bring an end to the country's two-decade stagnation.

Japan's central bank has been pumping money into the economy in the hope of stoking inflation — the country has suffered from falling prices for much of the past 20 years, which has hit company profits and halted growth. One consequence of the new inflationary approach has been the sharp fall in the value of the yen against other countries' currencies.

So far there's been a certain amount of support for Japan's economic gamble — even though the yen's decline makes the exports of other countries more expensive.

That's led many in the markets to conclude that the Japanese monetary authorities are actually targeting the exchange rate, a charge officials in the country have consistently denied.

Nevertheless, talk of a currency war — where countries use their exchange rates as an economic weapon — has not died down. If other countries respond to the falling yen by debasing their currencies, Japan will be back at square one and the world economy could suffer.

The champagne used to flow at Heartland, the bar in Tokyo’s Roppongi Hills complex that drew bankers from the Japan headquarters of Goldman Sachs Group Inc. (GS) and Lehman Brothers Holdings Inc. upstairs.

“Every day, there was a party,” said Mai Shioya, the 39- year-old manager, who started in May 2008 before the global financial crisis that led to Lehman’s bankruptcy.

Bankers in well-cut suits would come in about 5 p.m., hand bartenders corporate credit cards and let their friends charge drinks to the tab until 2 a.m., said Michio Nakamura, 45, who’s been running events and entertainment at Heartland since its opening as part of the famed Roppongi Hills development in 2003. After the financial crisis, many disappeared, cutting revenue by 30 percent, Shioya said.

“Those customers and that age have gone,” she said.

The void is being filled by a new group of bar patrons: information-technology workers. While financial firms have cut staff in Japan, technology companies have boosted hiring, and as bankers vacated offices at Roppongi Hills, companies including Google Inc. (GOOG) and Lenovo Group Ltd. (992)moved in. As early as this month, Apple Inc. (AAPL) will also make the complex its home in Japan, two people familiar with the plan said in January.