September 2024 Monthly: The last chance for Japan to
revive is coming with the snap election on October 27th!
With an early snap election
to hide slush funds, the new Ishiba LDP administration, which will
double-exploit the general public with a 10% consumption tax rate and rising
inflation tax, will collapse!
With the new Ishiba
administration, which is hereditary and economically illiterate, and the Bank
of Japan held hostage by the financial market, Japan will only die like a
boiled frog.
Monday, September 30, 2024
Ishiba does not deny the possibility of
dissolving the House of Representatives and holding a general election in
October.
When asked about the dissolution of the
House of Representatives and holding a general election in October on an NHK
program on the 29th, LDP President Shigeru Ishiba said, "I do not deny
various possibilities." According to a Nikkei Shimbun article, he also
said on a Fuji TV program on the same day, "The sooner the better."
The mask of the new LDP President Ishiba
has already come off. It has become clear that this is merely a fourth rehash
of Abenomics, simply a continuation of the third rehash of Abenomics from the
Kishida administration.
In the future, they will probably aim for
an early dissolution of the Diet with a big lie to hide the issue of slush
funds and the former Unification Church, aiming for the general election on
Sunday, October 27th.
In the NHK program mentioned at the
beginning, regarding the Bank of Japan's interest rate hike, even though
inflation has already exceeded 2% for about two and a half years, Ishiba even
insisted that "the direction of monetary easing must be maintained. We
cannot say anything about interest rates when we cannot yet say for sure that
we have overcome deflation."
Furthermore, when asked about the
continuation of Chief Cabinet Secretary Yoshimasa Hayashi in the NHK program,
Ishiba also replied, "I will basically take over from the Kishida
administration. There must be continuity in foreign affairs, security, and
economic policies. It is natural that such a person should be appointed as
Chief Cabinet Secretary."
While ordinary citizens are suffering from
at least the triple hardships of a declining birthrate, long-term stagnation of
consumption, and high prices, the essence of the new Ishiba LDP administration,
which exploits ordinary consumers, especially by using a 10% consumption tax
rate and high inflation tax, through hereditary, privileged, and vested
interests, has not changed at all.
The three arrows of Abenomics, 1) bold
monetary easing, 2) flexible fiscal spending, and 3) a growth strategy to
induce investment, have already degenerated into 1) endless currency
depreciation and high prices, 2) unlimited temporary fiscal handouts, expanding
fiscal deficits, and expanding government debt (national bonds), and 3) vested
interest politics with party tickets for (large) companies that favor friends
such as the Japan Business Federation.
And that's not all. Abenomics still has two
shackles remaining: 1) the permanent increase in the consumption tax rate to 8%
in April 2014, and 2) the permanent increase in the consumption tax rate to 10%
in October 2019.
In addition, the new president of the LDP,
Ishiba, who is a poor economics expert, confesses in his book that when he was
a student at Keio University, he would leave the exam room 20 minutes after the
exam without answering any questions in mathematics or physics. He has already
thrown away the honesty and sincerity that were his only strong points, and has
clearly become an arrogant, despicable, and old-fashioned president of the LDP
without a cause, even before he was nominated as prime minister.
Fortunately, in the same NHK Sunday debate,
the new leader of the Constitutional Democratic Party, Noda, showed a
willingness to thoroughly pursue the slush fund issue and the former
Unification Church issue, and not only took a bite out of the corporate
donation issue, but also showed a positive attitude toward reviewing the accord
between the Bank of Japan and the government on the price stability target
policy, and, if I'm not mistaken, a reduction in the consumption tax.
Noda has already begun to show his
extraordinary desire for the ruling LDP to lose its majority, harshly
criticizing Ishiba's suggestion of an early dissolution as a "dissolution
of slush funds" or "dissolution to cover up a bad smell."
In the end, unless we permanently lower the
consumption tax rate to 5% toward the abolition of the consumption tax and
quickly normalize monetary policy to a positive real policy interest rate over
the next two years or so amid accelerating inflation, the boiled frog may
sooner or later die.
Indeed, the final and likely golden
opportunity for Japan's revival is coming up with the snap general election
approaching in late October.
Now is our only chance to win a bright
future for Japan with price stability and sustainable economic growth, based on
true freedom, democracy, and market capitalism.
Please, cast your vote.
Next, let us look back at the significance
of the FOMC meeting held on Wednesday the 18th (local time), arguably the most
anticipated meeting in September for the global economy and international
financial markets, and the Bank of Japan's monetary policy meeting held on the
same weekend (the 20th).
Is
the Fed's 0.5% large interest rate cut the right thing to do?
As expected by the market, the US Federal
Reserve Board (FRB) moved to cut interest rates for the first time in 4.5
years. Moreover, the fact that the cut was 0.5%, twice the usual amount, came
as a surprise to financial markets.
According to the median of new forecasts by
FOMC members, interest rates are expected to be cut by a total of 0.5% in the
remaining two meetings this year, and by a total of 1.0% over the course of
2025.
However, will such a large interest rate
cut not exacerbate the pain in the Achilles' heel of Powell's Fed, which is the
contradiction between the US economy, which has continued to achieve high real
GDP growth of about 3% on an annualized basis compared to the previous quarter,
and the long-term neutral interest rate that is too low, to an unbearable
extent?
As the US economy continues to achieve
sustained high growth, we are simply beginning to see signs of de-inflation (a
decline in the inflation rate). With rising prices in the US due to the threat
of rising living costs and rising asset prices such as rising house prices, we
would not consider a large interest rate cut to be problematic as it could lead
to a re-acceleration of inflation and a further increase in asset prices.
In fact, looking at US economic data, the
most recent August core CPI was up 0.3% from the previous month (simple annual
rate +3.6%), and inflation accelerated again. Not only did the unemployment
rate fall (improve) to 4.2% in the same month, but the average hourly wage in
the same month was up 0.4% from the previous month (simple annual rate +4.8%),
and even signs of a vicious cycle between wages and inflation are beginning to
appear.
Can we really say that Fed Powell is
becoming data dependent?
Although the Fed's premature and large
interest rate cut may please the US financial markets in the short term, it
could threaten price stability and sustainable growth in the US economy in the
medium to long term.
Incidentally, a medium-term review of the
Fed's monetary policy framework is scheduled to be carried out in the next few
months. The Achilles heel of Powell's Fed, which has a neutral interest rate of
only 0.9% in a US economy that continues to grow at about 3% in real terms, is
likely to be seriously damaged sooner or later.
In addition, with the US presidential
election on November 5th just around the corner, the Fed's political
neutrality, which has implemented such a problematic large interest rate cut,
is likely to be subject to severe criticism, especially from the US Republican
Party.
I have no intention of defending the
unorthodox Republican presidential candidate Trump, but it cannot be denied
that the rising cost of living and the amplification of asset bubbles such as
housing prices and stock prices have been the Achilles heel of former candidate
Biden and current Democratic presidential candidate Harris under Fed Powell.
In short, the drastic interest rate cut by
Fed Powell just before the US presidential election could leave a major legacy
of disaster for the US economy and international financial markets, both from a
purely economic and political perspective. For example, before the US
presidential election scheduled for November 5, there are still hurdles to be
overcome, such as the September US employment statistics scheduled for October
4 and the September CPI scheduled for October 10, as well as the October employment
statistics scheduled for November 1.
If inflation were to accelerate again or
the asset bubble were to grow, there is a risk that a "major revolt"
in swing states, especially those where people are dissatisfied with rising
prices due to rising living costs and rising housing prices, could allow Trump
to be re-elected, even though Democratic candidate Harris is currently seen as
the favorite.
In fact, on the 19th, Trump claimed that
the decision by the US Federal Reserve on the 18th to lower the key policy
interest rate by 0.5 points was a "political move," and said,
"That was a political move. Most people thought it would be half the
number. That would probably have been appropriate."
He then said, "That was a political
move to keep someone in office. But inflation is in an extremely bad state, and
it won't work." He also criticized Federal Reserve Chairman Powell, saying
that he "overlooked inflation."
Needless to say, if Trump becomes the new
President, he may force Fed President Powell to make a complete turnaround and
significantly cut interest rates after the election, which could lead to a
further acceleration of U.S. inflation after 2025 and further aggravation of
the asset bubble.
The
Bank of Japan is held hostage by the financial markets and is unable to move.
In response, the Bank of Japan kept the
policy interest rate at 0.25% at its monetary policy meeting on September 20th.
As detailed in the August Monthly, the experience of the stock market crash and
the sudden appreciation of the yen on Monday, known as the Japanese Black
Monday of 8.5, must have been very tough for the Bank of Japan to bear.
The Nikkei editorial the following day
stated that the reason for keeping the policy interest rate unchanged was not
the Japanese economy but rather the stable convergence of overseas economies
and the dollar-yen exchange rate, but the editorial does not consider there to
be no problem.
As mentioned above, concerns about a
recession in the US economy are probably unfounded. Although it would be
inconvenient for the Bank of Japan's President Ueda to admit that 8.5 was a
Japanese Black Monday, it is clearly wrong to shift the blame to the US
economy.
In addition, although the dollar-yen
exchange rate was indeed relatively stable in September, the insistence that
there is "time to spare" for policy decisions is unacceptable.
This is because Japan's inflation (trend in
price growth) is clearly accelerating at present. If that is the case, then
unless the Bank of Japan speeds up monetary normalization, inflation will
become increasingly uncontrollable, and the probability of a sudden, large
interest rate hike will increase sooner or later.
For example, on the morning of the day of
the Bank of Japan's Monetary Policy Meeting (September 20), the national core
CPI for August was up 2.8% year-on-year, up from 2.7% in July, and the
accelerating rate of price growth was up 0.4% (simple annual rate of +4.8%)
from the previous month, making it increasingly clear that inflation is
accelerating.
In addition, although this was not
discussed at all at the Bank of Japan Governor's press conference, according to
the national CPI statistics for August, the price of rice, the staple food,
increased significantly in August to +28.3% year-on-year, up from +17.0% in
July. There are no clear signs that the so-called Reiwa rice riots have
subsided by September.
In any case, it is dangerous to ignore the
fact that the acceleration of inflation across Japan in August has occurred
despite the decline in import prices due to the rapid appreciation of the yen,
which became clear with the outbreak of Black Monday in Japan on August 5.
In other words, not only will the
"divine wind" that our government and the Bank of Japan have been
hoping for, such as a virtuous cycle of wages and prices, not blow, but we
cannot deny the fear that we are now standing at the beginning of a vicious
cycle of an inflationary spiral between wages and prices, as described in
Western economics textbooks.
The background to this is that, as seen in
the rice riots in the summer of Reiwa 6, expectations (concerns) of
accelerating inflation are spreading among consumers and companies (including
JA), and there is a growing possibility that inflation is becoming
uncontrollable as a result of the spread of price hikes and other measures.
The Bank of Japan may be complacent about
the "relative stability" of financial markets such as foreign
exchange and stock prices, and may be able to temporarily please international
financial markets by claiming that it has "time to maneuver" to cover
up the situation, but it cannot deceive the harsh economic reality and economic
logic in the long term.
For example, if the Bank of Japan had moved
toward normalization in the spring of 2022, it would be a different story, but
the normalization of monetary policy by the Bank of Japan in the second half of
2024 will be too late and too small a step.
For example, with the current (nominal)
policy interest rate level of 0.25%, in a climate where inflation is
accelerating, the real policy interest rate will sink even deeper into negative
territory (will be pushed down significantly), which could lead to even greater
inflationary pressure in the future.
Even in the midst of this extremely serious
and emergency situation in the Japanese economy and the international financial
markets, the Bank of Japan is unable to take any action, and is only boasting
that it has "time to spare," perhaps due to the nightmare of the
August 8 Black Monday crash of Japanese stocks and the sudden appreciation of
the yen.
In short,
the Bank of Japan Ueda is now merely a "prisoner of the international
financial markets."
By the way, even though the Japanese
economy is clearly in inflation, it has fallen into a deflationary gap of minus
0.9% of GDP in Krugman's terms, and total demand has been chronically
insufficient compared to total supply (the Cabinet Office estimated the GDP gap
to be minus 0.6% on September 17).
Furthermore, the basis for the government's
estimate that personal consumption in the real GDP statistics for the
April-June period expanded compared to the previous period is actually quite
dubious, as seen in monthly statistics on household consumption, automobile
sales, etc. for the same period. The slump in household consumption and car
sales has not changed since July.
In this way,
the Japanese economy is in a state of long-term consumption stagnation due to
the double whammy of rising inflation, high consumption tax rate, and rising
inflation tax, and we cannot help but worry that stagflation, which is
inflation and economic recession, will become more widespread and become even
more serious.
Clearly, the Bank of Japan has strayed from
the path to simultaneously achieve price stability and sustainable growth in
the Japanese economy. Not only has the Bank of Japan not been able to fulfill
its accountability, but it is no exaggeration to say that inflation is becoming
uncontrollable.
In the end, as I pointed out at the
beginning, unless we permanently lower the consumption tax rate to 5% toward
the abolition of the consumption tax and hurry to normalize monetary policy to
a positive real policy interest rate in the next two years or so amid
accelerating inflation, the boiled frog-like Japanese economy may sooner or
later die.
Should wise citizens and investors really
continue to blindly trust the new Ishiba administration and the Bank of Japan,
which are busy simply keeping Japan alive like a boiled frog?
Heuristics of international financial
markets seen in the "Takaichi trade" and "Ishiba shock"
By the way, in trading on Friday, September
27th, the day of the LDP presidential election, the "Takaichi trade"
and the "Ishiba shock" were hot topics. They refer to the financial
market's reaction to the results of the recent LDP presidential election.
The Takaichi trade refers to the phenomenon
in which the yen weakened and stock prices rose when it became clear that Sanae
Takaichi would be elected as president. Takaichi's aggressive fiscal policy and
opposition to the Bank of Japan's interest rate hikes raised expectations for
short-term economic growth, and indeed, on the surface, temporarily caused the
yen to weaken and stock prices to rise.
On the other hand, the Ishiba shock refers
to the phenomenon in which the yen strengthened and stock prices fell rapidly
after Shigeru Ishiba was elected as president. Ishiba's victory was unexpected
for the market, and the yen in particular swung sharply to a stronger yen.
Indeed, such short-term price movements in
financial markets, especially if they are temporary, tend to increase the
legitimacy of the rationale behind the "Takaichi trade" and the
"Ishiba shock," making people more likely to fall into an illusion.
However, the adaptive market hypothesis,
which has been attracting attention in recent years, suggests that financial
markets are merely learning from past experience, and that the current
"temporary heuristic" of positive feedback may well be reconsidered
as negative feedback in the future.
Of course, the opposite is also true, and
negative feedback may also turn into positive feedback.
The
Japanese election anomaly
In addition, there is a phenomenon called
the "election anomaly" in the Japanese stock market. In particular,
the empirical rule that "dissolution is buying" is well known. This
means that stock prices tend to rise in the period between the dissolution of
the House of Representatives and the voting day of the general election.
Specifically, it has been confirmed that
the Nikkei average has risen in almost all general elections involving the
dissolution of the House of Representatives since 2000. This phenomenon is
thought to be influenced by various economic policies and political
expectations that are put forward during election periods.
Although it is a bit old, in an article
titled "Japanese stocks love elections: Dissolution is a buy, triggering
revaluation" published in the Nihon Keizai Shimbun on September 3, 2021,
editorial committee member Ken Kawasaki states that it is necessary to be aware
of two anomalies (rules of thumb) unique to Japanese stocks regarding
"elections and stock prices," and first lists the rule of thumb that
"dissolution is a buy."
"Since 1990, when the Toshiki Kaifu
administration implemented it, 10 general elections for the House of
Representatives have been held over the past 30 years, and stock prices have
almost always risen during the election period from the day of dissolution to
the day of the general election," Kawasaki points out.
"The Nikkei average's win rate, which
is calculated as "win" if the stock price rises and "lose"
if it falls during this period, is 10 wins and 0 losses, reaching 100%. The
Tokyo Stock Price Index (TOPIX) also has a record of "9 wins and 1
loss." "There are few anomalies as strong as this, even when looking
at the market as a whole," he emphasizes.
He also points out that "the average
increase in the Nikkei average during the 10 election periods (about 28
business days on average) was 4.2%, and the figure is 7.3% for the last five
elections since 2005. In the past five general elections, foreign investors
have bought an average of about 3 trillion yen worth of Japanese stocks (spot
and futures combined) in the seven weeks before the vote."
Secondly, there is also an anomaly that
"the closer the election is expected to be, the greater the rate of
increase in stock prices during the election period." Of the past 10 snap
elections, the top three with the largest increase in stock prices during the
election period were those in which the difference in support rates between the
ruling and opposition parties was small.
However, Kawasaki harshly points out that,
even if the market is dry and cannot afford to be any more disappointed, stock
prices will rise even if politics become chaotic, but the market is not so
lenient that stock prices can be maintained high just by expectation of a snap
election.
"What is important for stock prices in
the long term is whether economic policies that are worthy of the market's
evaluation are put forward after the election. If not, the election day will be
the ceiling for stock prices. This is the third rule of thumb regarding
elections and stock prices that the market has not yet factored in,"
Kawasaki's conclusion in the article, based on a chart from Nomura Securities,
is still quite persuasive.
It seems that many investors are using such
anomalies to create investment strategies, but caution is required as the same
results will not necessarily be obtained every time.
Finally, unless the consumption tax rate is
permanently lowered to 5% toward the abolition of the consumption tax and
monetary policy normalization toward a real positive policy interest rate in
the next two years or so amid accelerating inflation is quickly underway, the
boiled frog may sooner or later die, and it may be necessary to pay special
attention to the fact that the probability of the snap general election in late
October 2024 overturning Japan's previous election anomalies may not be small.
In any case, let us vote.
With a high voter turnout, the road to
Japan's revival is not just a dream.
Tomo Nakamaru
A former World
Bank Economist
