Puppet Masters

Is this Japan's last stand? PM dissolves Parliament, puts off tax rise to save 'Abenomics'

RT
Tue, 18 Nov 2014 19:45 UTC

Japanese Prime Minister Shinzo Abe says he is going to dissolve the lower chamber of parliament on November 21 and call early elections in an effort to save his grand economic strategy dubbed "Abenomics."

Abe has also put off another sales tax rise to give the economy more time to recover.

Increasing the sales tax from 8 percent to 10 percent has been postponed for 18 months until April 2017. Monday's GDP figures show the country has slipped back into recession. Japan's economy shrank 1.6 percent in the third quarter of 2014, which marked the second consecutive 3-month period of contraction.

The news was a shock to financial markets and another blow to Abe's three-stage economic plan aimed at putting an end to two decades of stagnation and deflation.

The plan involved using heavy monetary stimulus from the Bank of Japan and a sharp, two-stage increase in tax on consumption to curb Japan's public deficit, and deregulation of a range of business activities.

Japan's public debt exceeds $10 trillion which is twice the size of the country's economy.

Initially the economy reacted well to the massive government spending, also called the first "arrow" of Abenomics, as the yen fell sharply and fears of deflation started to fade away. However, the Japanese government raising sales tax from 5 to 8 percent in April led to a drop in demand.

Abe said raising consumption tax to 10 percent planned for 2017 will no longer be postponed and promised this would help improve the country's financial system without having a negative impact on the economy.

The Prime Minister suggests the elections will help his government with its economic and financial policies and extend the tenure of his party for another four years.

Comment: With Japan's recently announced reduction in GDP, could this be a portent to Japan's last stand?

As Sean Corrigan sarcastily notes:

So, if the BOJ can just move prices up for long enough, people will start to demand higher wages while companies will gladly accede, since they will be able to count on the Bank printing enough new money for them to meet the extra expense. As such higher wages are spent, this will mean that both the employers' sales and, miraculously, their profits will increase to the extent that they will soon be jostling to hire more of these nominally costlier workers.

Somehow or other, in one of those Deep Purple, 'I want everything louder than everything else' moments, wages will outstrip prices (so avoiding a disastrous fall in real incomes) yet payrolls will rise alongside wages since profits will outpace the gain in the outlay on labour.

Moreover - and here we get to the crux of the issue - though all this new cash is being generated by monetizing vast, ongoing government deficits, the debt stock will rise more slowly than prices, so postponing, if not indeed averting, the nation's long feared budgetary implosion as it is painlessly inflated away.

Oh - and there will be no first-user Cantillon inequities, no unintended consequences, no spill over to other countries, no undue
enrichment or undeserved immiseration of any member of the domestic populace along the way.

Real Japanese wages are anything but rising.

And as Michael Pento points out:

There is a popular American military term called a "last stand", which is meant to describe a situation where a combat force attempts to hold a defensive position in the face of overwhelming odds.The defensive force usually sustains very heavy casualties or is completely destroyed, as happened at Custer's Last Stand. General Custer, misreading his enemy's size and ability, fought his final and fatal battle of Little Bighorn; leading to complete annihilation of both himself and his troops.

The Japanese government is now partaking in a truly incredulous measure to expand its QE program in a desperate attempt to de-value its currency and re-inflate asset bubbles around the world. In other words, Japan is constructing its own version of a "last stand".

In a final attempt to grow the economy and increase inflation, Japan announced a plan to escalate its QE pace to $700 billion per year. In addition to this, Japan's state pension fund (the GPIF), intends to dump massive amounts of Japanese government bonds (JCB's) and to double its investment in domestic and international stocks. All this in a foolish attempt to increase inflation, which Japan mistakenly believes will spur on economic growth. But these failed policies have now caused Japan to enter into an official recession once again, as GDP fell 1.6% in Q3 after falling 7.1% in the previous quarter.

...

Japan is now guaranteed to be successful in the total destruction of its currency, the complete destruction of its economy and the collapse of the markets it is attempting to manipulate around the world. To fully understand its misguided reasoning, we have to explore how Japan got here in the first place.

With the rumored delay of its sales tax, Japan is clearly making no legitimate attempt to pay down its onerous debt levels. Therefore, one has to assume this huge addition to their QE is an attempt to reduce debt through devaluation and achieve growth by creating asset bubbles larger than the ones previously responsible for Japan's multiple lost decades. This will not return Japan back to the days of its "economic miracle", where the economy grew on a foundation of savings, investment and production.

...

The sad reality is that Japan is quickly surpassing the bubble economy achieved during the late 1980's. Its equity and bond markets have become more disconnected from reality than at any other time in its history. The nation now faces a complete collapse of the yen and all assets denominated in that currency.

This is clearly Japan's last stand and there is no real exit strategy except to explicitly default on its debt. But an economic collapse and a sovereign debt default on the world's third largest economy will contain massive economic ramifications on a global scale. Japan should be the first nation to face such a collapse. Unfortunately; China, Europe and the U.S. will also soon face the consequences that arise when a nation's insolvent condition is coupled with the complete abrogation of free markets by government intervention.