October & November 2024 Merger
Monthly: "Suspended Japan" will be blown away by market revolt or
Trump tariff shock
Tuesday, November 12, 2024
Shocking
Trump landslide victory
Although it is regrettable that the heretic
Trump, who may disregard free democracy and market capitalism, will return to
the next US presidency, it was by no means unexpected.
However, what was quite surprising was the
landslide victory of President Trump and the Republican Party he leads, which
painted the US House and Senate red with Republican colors, and the US
political situation is becoming such that it may give the heretic President
Trump a free hand to return to power.
Until now, the United States has been
respected as a mirror of the democratic world, but it may be undeniable that
there is a danger that it will fall from democracy to authoritarianism or
totalitarianism like Russia and China in the next four years. In any case, it
is concerned that uncertainty will become increasingly serious not only in the
United States but also around the world.
Contrary to the opinion polls which
predicted a close race beforehand, why was it possible for Trump to win by such
a shockingly large margin?
The US economy continues to enjoy a boom
and high employment (low unemployment rate), but on the other hand, the price
level continues to remain high, which is a crisis in living standards, and on
the other hand, the soaring house prices have made it increasingly difficult
for ordinary households to afford their own home. Although it may be
presumptuous, these were almost exactly as the author predicted.
According to PBS News immediately after the
presidential election, about 70% of the US electorate believe that the current
economic situation is worse than it was four years ago, and it seemed as if the
so-called American Dream of the past was now crumbling.
In addition, the dollar continued to rise
against the backdrop of high US interest rates, and the slump in manufacturing
(declining export price competitiveness) in the decaying US Midwest (Rust Belt)
may have been the final blow to Trump's election, as workers and entrepreneurs
in the battleground states sought change from the dissatisfied status quo. In
the end, it is worth noting that the Republican president-elect Trump won in
all of the battleground states.
Thus, it is clear that high prices and a
strong currency were behind the return of the heretic Trump. Of course, other
social issues such as racial division and immigration issues were also factors,
but there is no doubt that this is simply a repetition of history in which
economic issues ultimately matter in American politics.
However, when it comes to the future of the
United States, it is difficult to say whether the return of the heretic
President Trump, who won a landslide victory, will be able to restore the
greatness of the United States like MAGA after January 2025.
For example, the US economy may accelerate
inflation in the future due to Trump's promise to significantly raise import
tariffs. As many American Nobel Prize winners in economics have pointed out the
contradictions in Trump's promises and severely criticized Trump's economic
policies before the presidential election.
In addition, if the US dollar continues to
appreciate further, Trump may not hesitate to intervene in the currency by
devaluing the US dollar in order to strengthen the international price
competitiveness of US manufacturing. A trade war centered on tariffs could
easily turn into a currency war.
In any case, shouldn't we consider that the
biggest contributor to Trump's return to power was not only Biden's
mismanagement, but also Fed Powell? This is because, in particular, the Fed
failed to quickly and accurately recognize the acceleration of US inflation in
2021, and at one point allowed a 9% year-on-year inflation rate, resulting in
price stability being behind the curve.
However, on the other hand, after that, in
September 2024, with the US economy barely showing any signs of recession, it
decided to significantly cut interest rates by 0.5%, further amplifying asset
bubbles such as stocks and housing prices even as signs of a re-accelerating
inflation were already visible. Shouldn't we also consider the immaturity of
Fed Powell's monetary policy, which cannot help but be seen as belonging to the
bubble cleanup faction, to have become an "accomplice" in Trump's
return to power?
Who
is Fed Powell's additional rate cut for?
At the FOMC meeting on November 7, when the
results of the November 5 US presidential election had already been decided,
Fed Powell moved to further cut interest rates by 0.25%, as expected by the
market.
However, there is a sense of incongruity in
the monetary policy of Fed Powell, who lowered the US nominal policy interest
rate to 4.75% (although it is not comparable to the Bank of Japan's Ueda, who
has still left the real policy interest rate in a deep negative zone).
For example, the latest SEP (Summary of
Economic Outlook) in September, which moved to a significant rate cut of 0.5%,
forecasted real GDP growth rate for 2024 at 2.0%, but the actual actual result
for the most recent July-September 2024 period was 2.8%, significantly
exceeding the FOMC forecast.
Next, regarding the unemployment rate, the
latest October data recorded 4.1%, compared to the FOMC's 2024 forecast of
4.4%, and we cannot help but see that the US labor market is tighter.
Furthermore, core PCE inflation recorded
2.7% in the latest September data compared to the FOMC's 2024 forecast of 2.6%,
so inflation is overshooting.
Only PCE headline inflation is only 2.1% in
the latest September data compared to the FOMC's 2024 forecast of 2.3%. This is
seen mainly as a reflection of low resource prices and a strong dollar.
In other words, of the four major economic
indicators that the FOMC focuses on, the only one that can justify an
additional rate cut after the September SEP is the last, PCE headline
inflation.
As mentioned above, there is no doubt that
in the 5 November US presidential election, the US electorate chose the return
of the unorthodox President Trump and a major advance for the opposition
Republican Party, mainly for economic reasons, namely the high price level in
the US against the backdrop of the crisis of rising living costs.
For whom exactly is Fed President Powell
continuing to lower interest rates?
In any case, regardless of the tariff hikes
and tax cuts proposed by the next President Trump, US inflation will soon
accelerate again, and it is inevitable that the US economy and its asset bubble
will likely become uncontrollable.
Expectations that not only the unorthodox
President-elect Trump, but also Chairman Powell, who leads the Fed, which is
not an exaggeration to call the world's central bank, will lead not only the US
economy and its financial markets, but also the global economy and
international financial markets, on the path to price stability and sustainable
economic growth may be greatly betrayed in the future.
Japan
cannot change even if the LDP and Komeito lose their majority
On the other hand, almost as expected, the
ruling coalition of the LDP and Komeito lost their majority for the first time
in 15 years in the 10.27 Lower House election in Japan.
As a result of the Lower House election,
the LDP's seats fell to 191, down 65 from the number they had before the
election. In addition to two current cabinet ministers, many former cabinet
ministers were defeated, and more than half of the candidates involved in the
faction slush fund issue lost their seats. This shows the strong criticism of
the public against the problem of "politics and money".
The LDP remains the largest party in the
House of Representatives and aims to continue the coalition government together
with Komeito, with whom it has once again reached a policy agreement, but the
opposition parties hold a majority in the House of Representatives, and if a
motion of no confidence in the cabinet is submitted, it may be passed, so there
is no doubt that they will be forced to run a tough government.
The top priority that must be addressed is
a fundamental reform of political funds. The Political Funds Control Law was
revised in response to the slush fund issue, but many loopholes remain, and it
must be revised again in the next extraordinary Diet session to make political
funds more transparent.
Conclusions must be reached quickly on the
opposition parties' requests to abolish corporate and group donations, quickly
establish a third-party organization to monitor political funds, and disclose
the use of the 1 million yen per month provided to Diet members for research,
public relations, and accommodation expenses (formerly known as document,
communication, and transportation accommodation expenses).
However, it is truly regrettable that the
voter turnout for the October 27 House of Representatives election was 53.85%
in single-seat constituencies, the third lowest since the war. As this historic
low turnout clearly shows, we cannot help but see that the road to reforming
Japan's political and economic system, which is rife with hereditary
succession, privilege, and vested interests, and establishing a scenario for
the revival of our country remains quite difficult.
In any case, as pointed out in the
September Monthly, if Ishibanomics, which is nothing more than a fourth-rate
version of Abenomics, continues, the Japanese economy and its financial markets
may encounter the greatest crisis since the war against the backdrop of
political uncertainty amid the quadruple economic difficulties of a declining
birthrate, long-term stagnation of consumption, a weak currency, and rising
inflation as exemplified by the Reiwa rice turmoil.
Even though the LDP and Komeito have lost
their majority, a policy mix is essential that combines a
permanent reduction in the consumption tax rate to 5% to revive Japan, with a
steady and gradual increase in the Bank of Japan's policy interest rate over
the next two years or so into positive territory above the 2% inflation target,
and the normalization of monetary policy.
Without this, far from being a virtuous
cycle of wage increases and rising prices, which is nothing more than a
"divine wind hope," we cannot help but fear that it will soon turn
into a vicious cycle of mainstream Western economics, leading to an
inflationary spiral.
In the end, under Ishibanomics, which seeks
to continue stimulating aggregate demand indefinitely through fiscal and
monetary policy, like running two engines at full throttle in an inflationary
environment (even though a deflationary gap exists), the Japanese economy and
its financial markets may find themselves plunged into an inflationary
firestorm before the Japanese people themselves can draw up a convincing
economic scenario for Japan's revival.
Bank
of Japan Ueda is too timid
At the Bank of Japan Monetary Policy
Meeting held on October 31, the market was expecting almost 100% to keep
interest rates unchanged, but the author was expecting an additional rate hike
as a "best case scenario."
In Japan, whether the economically
"completely" tone-deaf Ishibanomics or the economically tone-deaf
Noda, the leader of the Constitutional Democratic Party, becomes the prime
minister of Japan, as Taro Yamamoto of the Reiwa Shinsengumi harshly criticized
in the recent House of Representatives election, there will be a vicious cycle
of currency depreciation and inflation, as the dollar-yen rate is starting to
exceed 150 again amid a temporary period of lavish spending on fiscal policy.
If this vicious cycle is not immediately broken, what is the purpose of the
Bank of Japan's existence as the guardian of prices and currency?
In particular, the October Tokyo ward CPI,
released on Friday, October 25th, just before the October 27th general
election, recorded a price increase of +0.5% month-on-month (simple annual rate
+6.0%) for almost all of the overall, core, and core-core. In particular, it
was revealed that the price of rice, which is considered a staple food in
Japan, was boiling at about 65% compared to the same month last year. It is no
exaggeration to say that the Reiwa rice riots were in the midst of a major
explosion of inflation.
In addition, the Monetary Policy Meeting
held on October 31st was also the time when the quarterly outlook (aspirations)
report was also released, and now that high inflation is clear, it was
objectively necessary for the Bank of Japan to further raise interest rates at
the end of October, even though it was right after the October 27th general
election.
In any case, it is noteworthy that at the
regular press conference after the Monetary Policy Meeting, Governor Ueda
clearly indicated that at the next Monetary Policy Meeting on December 19th, he
will publish a "multifaceted review of monetary policy," which he has
promised since taking office in April 2023.
Although Ueda is completely behind the
curve, he will likely have no choice but to raise interest rates further at the
next Monetary Policy Meeting.
However, there is still more than a month
until the next Monetary Policy Meeting. During this time, the Japanese economy
and financial markets may encounter some kind of unexpected shock. Are we
prepared to withstand them?
"The first to get going wins the
race." The future of the Ueda Bank of Japan, which is not trying to act
proactively rather than passively, is as precarious as Ishibanomics, which is
tone-deaf to the economy, as the Reiwa Representative Yamamoto's style.
This is because, although it is true that
domestic and international political situations are fluid, when we look
specifically at the domestic political situation, all political parties are
loudly advocating temporary, large-scale fiscal handouts. For example,
Ishibanomics plans large-scale fiscal spending in the form of a supplementary
budget totaling about 13 trillion yen, just over 2% of GDP.
Unlike a permanent reduction in the
consumption tax, temporary fiscal handouts that have no permanence will only
have a temporary, ephemeral effect on expanding the economy.
Moreover, while leader of the Democratic
Party for the People, Tamaki, is eager to further expand the large-scale fiscal
stimulus of Ishibanomics, he has clearly warned against the Bank of Japan
raising interest rates further by next spring.
Thus, amid rising inflation, there are loud
calls for temporary, large-scale fiscal support as a measure to combat prices,
but no political party is accurately calling for the Bank of Japan to hurry up
and normalize its monetary policy, which is necessary on a permanent basis to
stabilize prices. It is truly regrettable that extremely irresponsible economic
policy debates are rampant in both the ruling and opposition parties.
In light of this political situation, the
Bank of Japan, which has allowed inflation to exceed the 2% price target for
more than two and a half years, should not continue to be the government's
watchdog forever, but should, as the guardian of Japan's prices and currency,
immediately resume gradual additional rate hikes to bring the policy interest
rate, which is only 0.25% in nominal terms, into positive real territory.
Now that Mr. Ishiba was re-elected as the
next Prime Minister at the special Diet session on November 11, temporary
lavish spending will continue in terms of fiscal policy, while the US long-term
interest rates continue to rise against the backdrop of continued high growth
in the US economy, the dollar-yen exchange rate has once again exceeded 150,
raising concerns about a further depreciation of the Japanese yen.
If the Bank of Japan does not immediately
put an end to this vicious cycle of inflation, which consists of a weak
currency and rising domestic prices, there will be no point in its existence.
One cannot help but be concerned that the future of the Bank of Japan led by
Ueda, who is unwilling to read into the future and take proactive action, is
just as precarious as Ishiba's economics, which can only be seen as completely
ignorant of the economy.
Where
is "Japan hanging in the air" headed?
Coincidentally, the Mainichi Shimbun
published a very persuasive editorial in this morning's morning edition
entitled "Second Ishiba Cabinet Launched: A shift to politics that
emphasizes the Diet." In particular, there has been a lot of criticism of
the "Diet hanging in the air."
However, this may be better seen as
"Japan hanging in the air" rather than a "Diet hanging in the
air."
Either way, the last chance for Japan to
revive, which was finally born with the reversal of the ruling and opposition
parties on October 27, may be lost forever if things continue as they are.
Is it possible that Japan will never be
able to build a policy mix of fiscal and monetary policies that combines a
permanent reduction in the consumption tax rate to 5% toward the abolition of
the consumption tax and a gradual increase in the Bank of Japan's policy
interest rate over a period of about two years toward a positive policy
interest rate on a real basis that exceeds the 2% inflation target?
Unfortunately, if things continue as they
are, Japan, hanging in the air, could be blown away in a storm like a kite with
a broken string, by a financial market rebellion against drastic fiscal
stimulus measures like those that led to the Truss administration in the UK in
the fall of 2022, or by a Trump shock such as a large increase in US tariffs
(including a large devaluation of the US dollar, like the Plaza Accord).
Tomo Nakamaru,
former World Bank economist
