April 04, 2013

April 04, 2013

Japan’s Recovery Continues to Strengthen

Japan has seen “false dawns” during its decades-long deflation — moments when it seemed that some policy shift would be able to lift it back to the growth and dynamism of “Japan, Inc.”  Those hopes have until now always been dashed, often by the impatience of the Bank of Japan — tightening monetary policy before the economy had time to build a head of steam.

What makes us think that the current optimistic mood will be different?

Fundamentally, the fact that there is finally a resonance among the major sectors of state and civil society — in political leadership, through the Abe administration, and the cooperation it has received from the opposition; in the Bank of Japan, through actions and signals from its unprecedentedly dovish new directorate; and in the deflation-weary public, through their positive sentiment and support for the bold actions of their leaders.  It seems that this time, Japan’s will is aligned and focused on the goal.

Abe’s “Three Arrows”

Prime Minister Abe said when he was elected that he had “three arrows” to shoot at the heart of Japan’s long economic malaise.  Two have been fired.  One is still coming.

Note: News flash today the Bank of Japan (BOJ) announced it will double the monetary base by the end of 2014.

First was a ¥10.3 trillion (about US $110 billion) stimulus package, passed on January 10.  The effectiveness of this stimulus is likely to be fundamentally marginal, but psychologically substantial; it’s not very large, and it’s entering an economy so saturated with public spending that the debt-to-GDP ratio is expected to reach 245 percent this year.  Bank of Japan governor Haruhiko Kuroda called this level “extremely high” and “abnormal” in comments last Thursday.  It is a psychologically important addition by a new pro-growth, pro-inflation, anti-deflation administration that we believe will cause global investors to sit up and take notice.  In the last six years the Japanese Yen has strengthened against the U.S. dollar by over 33 percent and this much higher yen made Japanese goods much more expensive.  The stimulus is meant to send a message that the Yen must fall in value.  It appears obvious that U.S. and Europe are both willing to let this happen so that Japanese economic strength can be reestablished, thus helping to strengthen global economic growth.

Second was the promise to ensure that monetary policy at Japan’s central bank was solidly and reliably accommodative, please see the link to the BOJ press release below.  The BOJ emphatically underlined their commitment.  Japanese financial history includes the successful navigation of the Great Depression through the then-unconventional monetary and fiscal policies of finance minister Takahashi Korekiyo.  Nevertheless, in the twenty plus years of Japan’s current doldrums, the Bank of Japan has maintained a hawkish stance — frequently reacting to tighten policy before it had been able to have the desired effects, and thwarting the kick start that easing could have given the real economy.  Abe campaigned on the promotion of accommodation from the BOJ leadership.  The installations of Haruhiko Kuroda as governor, and Kikuo Iwata as his deputy, have likely accomplished that goal.  Both are very dovish, and both are avowed supporters of Abe’s strategic vision for Japan.  Consistent support from the BOJ, and an end to its habit of premature tightening, will cheapen the yen, boost exports and corporate profits, promote the restructuring of venerable Japanese industrial corporations, and give them some cash for long-needed investment in research and development. (BOJ Press Release)

His first two arrows were simple — Abe could get those shots off fairly easily, with political and public support rallied behind him…

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On the Ground: The Near-Term Outlook…

Abe’s Third Arrow: The Longer Term…

Sectors to Watch…

What Could Go Wrong?…

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More Americans Seek Assistance to Afford Food, Even as Employment Improves  

In our biweekly installment about the rising cost of basic, essential needs, we often discuss how the standard of living in America is eroding — hurt by stagnant incomes and the rising costs of necessities.  One effect of this is that more and more Americans are relying on Federal government assistance to help them feed their families.  An article in last Thursday’s (3/28) Wall Street Journal by Damian Paletta and Caroline Porter discusses that even though the economy has improved after the 2008 to 2010 recession, enrollment in the Supplemental Nutrition Assistance Program (SNAP), which is the modern-day food-stamp program, has stayed high.  In 2008 food-stamp recipients numbered about 28.2 million.  While unemployment has fallen from a peak of 10 percent in October 2009 to 7.7 percent today, SNAP participants grow.  Today, enrollment stands at about 47.8 million Americans, costing the government about 74.6 billion dollars in 2012.

Enrollment .jpg

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Another Cause — Government’s Generosity Expanded

Since 1996, when the Clinton Administration and Congress set in motion the overhaul of the welfare system — a process that continues under the current Administration — more Americans have become eligible.  At Washington’s behest, many states are opting to relax the requirements.  Now, people with good income and savings can qualify… and so more are using it.

Typically as economy improves, government programs don’t have to help as many people… Yet the graphs below show that some programs keep growing
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As Food Prices Climb, the Numbers of People Using Government Assistance to Eat Will Stay High

The Guild Basic Needs IndexTM(GBNI) tracks the rising costs of certain food, clothing, shelter, and energy components that people must consume every day.  Food components represent 30 percent of the Guild Basic Needs Index(the other components and weights are Clothing 10 percent, Shelter 30 percent, and Energy used for heating, cooking, and transportation 30 percent).  In developed countries, the average person spends 10 to 15 percent of their income on food items.  In the U.S. the percentage is at the low end of that range, but we believe the percentage is going to grow.  The food components that we measure in our GBNI have risen an average of about 108 percent since January 1, 2000.

Unless wages start keeping pace, or unless unemployment falls a lot more, the government’s SNAP is looking like a permanently growing budget item.  In the grand scheme of things, SNAP $75 billion may not be a huge budget item, but the trend is in place for it to get out of hand.  A lethargic economy, rising food prices, and the government’s increased generosity are all driving its growth.

To track the effects of rising prices of basic, essential needs, and our discussion of how it affects American policy and society, visit www.gbni.info.

Guild Basic Needs IndexTM

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