Martin Spring 's On Target
Comment of the Day

June 27 2013

Commentary by David Fuller

Martin Spring 's On Target

My thanks to the experienced author for his interesting letter covering a variety of topics. It is posted in the Subscriber's Area but here is a brief sample from the opening topic on Japan
Japan 's Pre-emptive Strike

In Japan , reality is never what it seems to be.

Its stock market has soared this year and there's been a strong pick-up in economic growth, all attributed to a spectacular reform programme introduced by the new government of Shinzo Abe, dubbed Abenomics.

However, that programme is quite unconvincing. It's a mishmash of policies that have been tried repeatedly in the past and largely failed, and good intentions on which it will be very hard politically to deliver.

So why has it been so effective, at least for its first few months?

Because its real purpose has been one Abe cannot admit to, in fact he publicly denies it. It has been a pre-emptive strike -- a devastating broadside in the escalating international currency war, driving down the exchange rate of the yen.

Although it's been bouncing around a lot, at 98 to the dollar the yen is now about 20 per cent lower than it was just eight months ago.

That has given an adrenaline boost to the sluggish economy, and in particular to all those businesses in the export sector. Economic growth surged to a 4 per cent annual rate in the first quarter. Shipments to foreign markets are up 10 per cent.

Corporate profits have started to surge and equity investors clearly believe there's lots of good news to come. Companies have started to distribute some of the benefits to their employees, with the promise of higher summer bonuses.

By scaring the markets with the promise of a tidal wave of “printed” money, Abe has achieved in a few months most of the boost to economic growth implied by his entire stimulus programme. Seemingly it's also about to achieve his other objective -- securing a majority for his party in the upper house of parliament in the elections scheduled for next month.

After that, for a while the markets are likely to remain optimistic that Abe will have the political power to implement the structural reforms needed by Japan 's sluggish economy… and to drive through mega-doses of old failed policies.

However, my own expectation is that disillusionment will set in within 12 months.

David Fuller's view Martin Spring is right to question the viability of Shinzo Abe's programmes to revitalise Japan 's economy. There have been too many failed attempts in the last 20 years and it has paid to be cautious about Japan . He brings up a number of important points in this detailed assessment and Japan bulls in particular should be aware of them.

This item continues in the Subscriber's Area.

Abe's first, crucial step was to devalue the yen, shown inversely as USD/JPY (historic & weekly) which had been the world's strongest currency for far too long. This had hollowed out Japan 's domestic economy and was a heavy weight on corporate profits.

Abe's next challenge is to win at least a workable majority for his party in next month's upper house of parliament. He should achieve this but if not , for any reason ; the stimulus programme will lose momentum.

Thereafter, Abe will not need more infrastructure projects, as Martin Spring points out. Instead, his real challenge will be to reignite Japan 's entrepreneurial spirit. If this is ever going to happen, the timing is probable right. Currently, I would still give Abe's efforts and Japan 's economy the benefit of the doubt.

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