Optimism Is Growing That Abenomics Will Succeed in Japan

When Prime Minister日本首相安倍晋三(Shinzo Abe)推出了他的economic reform programa year ago, he hoped to change psychology as much as anything else, considering that a vital step to breaking Japan’s long deflationary slump. Signs are that he’s succeeding.

When I polled a group of global宏traders last June about the outlook for Japan, they were almost evenly divided, with 52 percent betting that Abenomics, as the prime minister’s policies are known, would succeed in reflating the economy and 48 percent disagreeing. Since then Japan’s consumer price index has accelerated, with core inflation hitting a five-year high of 1.2 percent in November. In January the Bank of Japan predicted that core inflation would rise to 1.9 percent in the fiscal year beginning in April 2015, within a whisker of the 2 percent target set by BOJ Governor Haruhiko Kuroda(see also “Small-Cap Growth in Japan Hints at Success of Abenomics“）.

Optimism among global宏traders has risen in step with the data. A poll of three dozen traders in December produced the following forecasts:

• It’s a 1-in-5 probability that Japan’s core inflation rate will exceed Kuroda’s 2 percent target in 2014, a 50-50 chance that the CPI will rise between 1 percent and 2 percent, and 1 in 3 that inflation will be below 1 percent.
• The odds are 28 percent that gross domestic product will expand by more than 3 percent, 48 percent that it will grow by between 0.5 percent and 3 percent, and 25 percent that growth will be below the 0.5 percent mark.
• There is a 1-in-3 chance that the yen will depreciate to trade above 110 to the dollar, a 45 percent chance it will trade between 95 and 110, and a 1-in-5 probability that it will appreciate to a rate below 95 to the dollar.

“Massive yen depreciation boosted exports and corporate profits and the Nikkei, but consumption recovery is the key, and that ultimately depends upon an increase in real wages,” claims a Tokyo-based hedge fund strategist, who spoke on condition of anonymity. “The Abe government can jawbone firms to pay employees more in 2014, and the Keidanren [Japan Business Federation, Japan Inc.’s top corporate lobbying arm] can cheer on wage increases, but neither can order firms to pay more.”

我们的交易员认为,最危险的tail risk for the Japan trade is that sustained fiscal deficits, even assuming the Abe government goes ahead with its planned hike in value-added tax this spring, will destabilize the market for Japanese government bonds (JGBs). With the country’s gross debt standing at a towering 240 percent of GDP, that’s no small concern. Subtracting Japanese government debt held by other agencies forpensionsreduces the net debt figure to 135 percent of GDP, but that’s still very high. For the sake of comparison, U.S. government gross debt stands at 105 percent of GDP, and Greece’s is at 160 percent. An increase in the interest rate on JGBs would blow a huge hole in the already stressed budget of the Japanese government, a quarter of which goes to servicing interest on its debt.

然而，即使我们的贸易商将这种情景视为可怕的情况，他们也同意（平均而言），2014年不太可能发生，因为Kuroda的Boj通过其自身版本的量化宽松购买大量的JGB。“我没有赌Ben Bernanke在国库市场上，因为他的价格比我的价格更多，甚至是Pimcohas,” mused a London-based trader. “Kuroda has more yen than I have, too.”

When a country’s nominal GDP growth rate exceeds the nominal interest rate on its debt, the government can stabilize its debt burden and then, over time, grow out from under the overhang. So the Abe government clearly needs to deliver a GDP growth rate higher than the JGB rate. If it fails, the JGB market will eventually crush bondholders (and the Abe government).

“People don’t realize the enormity of the situation in Japan,” says Kyle Bass, founder and principal of Hayman Capital Management, a perma-bear when it comes to Japanese debt sustainability. “They have $14 trillion worth of debt, which is about the same as the U.S., except they have a little more than a third of our population. We are about to see what a heavily indebted Western society looks like when it implodes or explodes. The seminal event in the world in the next couple of years will be Japan.”

Ominously, a recent study by the Organization for Economic Cooperation and Development revealed that Japanese banks’ holdings of general government securities equal 100 percent of their tier-1 capital. According to the study, a 1 percentage point upward shift of the JGB yield curve would wipe out 70 percent of this tier-1 capital. An earlier Bank of Japan study estimated that a 1 percent rate rise would wipe out only 15 percent of banks’ tier-1 capital.

2014年日本经济复苏的其他危险尾部风险是塞卡库群岛的潜在军事冲突，这是一小组在北京呼叫他们钓鱼岛的北京群岛的一小群岛岛屿。在六月民意调查中，交易者在2013年期间，涉及涉及船舶或飞机的严重军事冲突以及超过25个死亡人员的赔率，涉及船舶或飞机的损失以及超过25个死亡事件。没有发生这种情况，但中国没有发生这种情况升级岛上的紧张局势。11月23日，北京突然单方面宣布防空地区的防空识别区（Adiz）通过金融市场派出了震颤。这一举动伴随着北京的棘手言论。“中国的武装部队将采取防御性应急措施，以应对在识别或拒绝遵守指示中的航空器，”国防部在一份声明中表示。

“The Abe government is unlikely to bend to Chinese pressure on the Senkakus,” predicts one Tokyo-based trader, who pointed to the prime minister’s public statements and his December visit to Yasukuni Shrine. The shrine, a memorial for Japanese soldiers, includes the remains of several World War II war criminals and is widely viewed as a red flag to Beijing. “The prime minister is a proud nationalist and campaigned on a conservative national security agenda.” If this prediction is correct, then Japan’s Self Defense Forces will increase their patrols, both maritime and aerial, around the islands, increasing the risk of a collision or shoot-out with the People’s Liberation Army of China.

I was in New Delhi watching India’s Republic Day parade on January 26, an event at which Prime Minister Abe was the chief “distinguished guest.” The Indians put on a display of everything from goose-stepping turbaned commandos to Russian-sourced T-90 battle tanks and cruise missiles, climaxed by a deafening flyover of Sukoi-30 fighter-bombers. Just a month ago, the Japanese military and the Indian navy conducted their first bilateral exercises in the Indian Ocean, much to the annoyance of the Chinese.

有趣的是，数据分析表明，藐视中国对日本市场对日本市场产生积极影响，这似乎对我来说令我反对。Kensho是剑桥，马萨诸塞州的初创公司，使用谷歌（许多创始人）开创的软件技术来计算政治和经济事件对资产价格的影响，以炽热的速度。（全面披露：我在公司的咨询委员会上服务。）

A肯奥study performed in October 2013 predicted an uptick in the Japanese stock market generally and entities of the Mitsubishi Group in particular (as a proxy for leading defense contractors) based on market reactions to Yasukuni visits by previous prime ministers. The average gain in the IShares MSCI Japan exchange-traded fund (EWJ) was 2 percent during each visit, whereas shares in Mitsubishi UFJ Financial Group (MTU) showed an even more striking 4 percent uptick. In the two days following Abe’s surprise December 26 visit to Yasukuni, EWJ rose 1.6 percent and MTU gained 2.71 percent.

In contrast to this positive impact on equities, rising tensions with China could have longer-term negative effects on Japan’s exports. China accounts for one third of Japan’s exports, and a serious clash in the East China Sea would cause another backlash, like the public outcry and boycott of Japanese goods that occurred in China after the Japanese government bought some of the Senkakus from their private owners in September 2012 in a bid to keep ultranationalists at bay.

2014年前瞻性的交易者的民意调查在东南亚国国或日本的协会中，对中国部队与其邻国之间的严重冲突相同的1-in-5概率。关于日本可能争取的可能争夺的可能性足以让交易员长日元和JGBS在凌晨醒来醒来。

Though often ignored in this equation, South Korea is also part of the three-way claim over the East China Sea around the Senkakus, and South Korea responded with its own ADIZ claim in response to the Chinese announcement. It was an unintended act of solidarity with Japan, with whom the government of President Park Geun Hye had tense relations throughout 2013. But viewed from Seoul, the risk of an incident over the disputed islands is much less than the threat of another provocation from the brutal North Korean regime of Kim Jong Un.

The purge and brutal execution of Kim’s uncle, Jang Song Thaek, on December 12 suggests that Kim may have consolidated power — or that fissures within the regime continue to threaten its survival. In the former case, the removal of Jang will leave Kim with no adult leadership to constrain his actions, including possible military provocations, during 2014. In the latter case, continued infighting in Pyongyang or even a potential coup would hardly inspire confidence. At this point tattooed basketball legend Dennis Rodman may have more insight into Kim’s real intentions than does Pyongyang’s Politburo.

In the June 2013 poll, the mean forecast for another bloody-minded incident by the Kim government was 14 percent. Jang’s execution has apparently caused traders to up that risk. The December poll assigns a slightly higher 18 percent probability of provocations by the North in 2014.

“2014年关于朝鲜半岛的主要风险是一个成功的铀核试验或远程导弹测试，展示可交付的核弹头能力，概率维克多·乔说，概率为30％至40％，”Georgetown University who served on George W. Bush’s National Security Council, where I worked with him on Korea policy from across the Potomac at the Pentagon. “A slightly higher risk but lower-probability event in 2014 is a conventional military altercation between the two Koreas, for example in the West Sea area, that could escalate, with a probability between 20 percent and 30 percent. The highest risk but with the lowest probability is internal instability in North Korea stemming from leadership struggles and political discontinuities, not from famine or economic downturns, with a probability of 10 percent.”

令人惊讶的是，近期历史表明，平壤将挑衅到罗尼尔金融市场。正如肯尼奥的研究证明，韩国股票和韩国股权对朝鲜事件越来越不敏感，甚至核试验，迅速耸耸肩，因为KENSHO的研究表明。在2006年至2013年期间，使用由朝鲜活动的11位里程碑教授编制的清单，肯尼研究表明，韩国股市曾经对每次挑衅进行了击中，直到2010年，当时的ishares麦考韩国加盖了ETF（EWY）开始积极回应每个朝鲜活动。显然市场得出结论，平壤对经济援助的勒索更感兴趣，而不是在发射阿姆扎德。

詹姆斯·什南（jshinn@princeton.edu）是普林斯顿大学工程学院的讲师，泰泛情报首席执行官。在华尔街和硅谷的职业生涯之后，他担任中亚的国家情报官在中央情报局，然后作为五角大楼亚洲亚洲助理国防部长。他在牛津分析咨询板上服役;kensho;和CQS，一个基于伦敦的对冲基金。

Also from this series:

• 全球宏观前景是阳光明媚的，在地平线上有风险
• Emerging Markets Offer Opportunity and Risk in 2014
• Oil Seen Trading Steady to Lower in the Absence of Supply Shocks
• Euro Crisis? That's So Last Year
• 中国经济留在轨道上，但重新平衡仍然存在