It has not been a good “second coming” for Shinzo Abe, whose first stint as prime minister of Japan ended in disgrace in 2007 after an allegedly crippling bout of explosive diarrhea forced the then-prime minister to resign. To say that Abenomics has been a dismal failure would be an understatement: unable to boost inflation, unable to boost wages, plummeting trade with both exports and imports crashing to post crisis lows…
… and lately failing miserably to boost the stock market after Kuroda’s epic debacle with Japan’s NIRP lunacy, Kuroda had one loophole: a tiny fiscal stimulus in the form of delaying the once-already delayed sales tax.
The only problem: over the past few months, Kuroda had trapped himself when he said that the only conditions under which he would delay the sales tax would be only if “another global economic contraction or Lehman-style market shock jolted the Japanese economy.“
That explains why Abe was desperate to get the G-7 to warn of the risk of a global economic crisis in the final communique issued as the summit wrapped up last Friday in Japan.
He failed. In fact, the final statement went the other way and declared that G-7 countries “have strengthened the resilience of our economies in order to avoid falling into another crisis. The global recovery continues, but growth remains moderate and uneven, and since we last met downside risks to the global outlook have increased,” the statement says. “Weak demand and unaddressed structural problems are the key factors weighing on actual and potential growth.”
Ironically, Abe is actually quite right, and the world remains in a state of post-Lehman shock: after all why would central banks need to engage in a “secret” Shanghai Accord more than 7 years after the global financial crisis to prevent markets from crashing? The answer: because nothing has been fixed and the entire world remains on edge day after day. However, as we also noted citing economist Glenn Maguire, “the G-7 is obviously aware of the ‘announcement effect’ the official communique has” and “in such a situation, warning of negative risks and sentiment can become self-fulfilling.“
Hence, Abe was snubbed.
Unfortunately for the Japanese premier, there simply was no other choice, and as leaked repeatedly by virtually all Japanese media sources, Japan’s sales-tax hike scheduled to take place in early 2017 will be delayed after all, with or without a Lehman style shock: for Abe there simply is no other choice.
This is where the problems for Japan begin, because as the chief of Mizuho Financial Group said over the weekend, Japan risks a credit-rating downgrade if Prime Minister Shinzo Abe delays a scheduled sales-tax increase without explaining how the government plans to cut its deficit. Actually not if, but when; and as we know, the “when” is likely to be as soon as this week, when Abe admits fiscal failure and that Japan simply has no hope of ever containing its ridiculous debt load.
And here is why Abe was so desperate to get the G-7 to “validate” his worldview as one where things are on the brink: as otherwise it would mean Japan’s economy is in far more dire shape than realized, and it will need to incur much more debt in the coming years.
Quoted by the WSJ, Yasuhiro Sato, president of Mizuho, Japan’s second-largest bank by assets, said Abe’s framing of such a decision would determine whether it sparked concerns about the government’s credibility regarding its plans for fiscal consolidation.
“The worst scenario is [the government] will just announce a delay in the tax increase. That could send a message that Abenomics has failed or Japan is heading for a fiscal danger zone and then it will harm Japanese government bonds’ credit ratings,” Sato said in an interview, referring to the prime minister’s growth program.
As the WSJ adds, Abe acknowledged for the first time Friday that he was considering delaying an increase in the sales tax to 10% from 8% scheduled to take effect in April next year. He said he would decide before an upper house election to be held in July, but Japanese media have reported that a decision could come this week.
Abe has delayed the tax increase once, after the rise to 8% in April 2014 derailed an economic recovery. Consumer spending has yet to fully rebound, and some economists say the prospect of another tax increase next year is already weighing on spending.
Sato acknowledged that raising the tax again would pose a risk to Japan’s economy, although the alternative – admission that Abenomics has failed – is just as bad, which is why Abe is now in a pickle, and why we anticipate his bathroom runs will become increasingly more frequent… just in case a rerun, pardon the pun, of 2007 is in the works and Abe has to quit due to some new scapegoat.
“There will be a risk in either case of raising the tax or not, so as long as the government demonstrates a clear road map for fiscal reconstruction, Japanese credibility likely won’t be hurt so much,” Sato said, although sadly for Japan, there just is no such road map.
Some bankers say Japan could damage its international credibility if it fails to raise taxes on schedule. The tax increases are part of long-standing efforts to reach a primary government surplus by 2020. A primary surplus is a balanced budget excluding interest payments on government debt. Japan’s government debt, when including corporate and personal debt, is the largest in the world relative to the size of its economy, standing at over 400% of GDP.
Worse, a dwbt downgrade for Japan will be merely a formality once Abe delays the sales tax. Moody said in a March report that “postponing the next [sales-tax] increase regardless of the reason would pose a big fiscal burden for Japan.” Moody already downgraded Japan’s credit rating by one notch to A1 from Aa3, the same rating it has assigned to Israel and the Czech Republic, after Abe decided in November 2014 to delay the tax increase the first time. It will do so again.
Standard & Poor’s and Fitch Ratings have also lowered Japan’s credit rating in the past two years, but investors continue to accept near record-low yields on the government’s debt.
On Sunday, Yasufumi Tanahashi, a senior member of the ruling Liberal Democratic Party, explained why the tax increase might need to be delayed.
“If tax revenue doesn’t grow despite increasing the tax rate, then from a medium-to-long term perspective it’s necessary to respond flexibly,” he said during a political TV program. Mr. Tanahashi said a delay would require a law to be amended and debate within the ruling coalition to reach a consensus.
Back to Mizuho’s Sato, who didn’t take a position on whether the tax increase should proceed as scheduled, said Japanese banks’ dollar-funding costs could rise further if a credit-ratings firm downgrades them again.
“We’ve seen a rise in dollar-funding costs since the second half of 2014,” he said. “There is no way lending will boost our profitability.” To balance weakness in lending, Mizuho has focused on income from fees, including from its M&A advisory and underwriting businesses. Mizuho aims to increase its fee income from 54% to 60% of the total in the three years through March 2019.
Of course, downgrade or not, what is left unsaid is that as long as the BOJ continues to monetize all net issuance of JGBs, as it does now, yields on Japan’s Treasuries will remain record low, and mostly negative. However, if enough official red flags accumulate against the monetary lunatics in Tokyo – who are merely a decade ahead proxy for the rest of the world as Japan is a decade ahead of everyone in the global race to the bottom but also has the most deflationary demographics to boot – in the form of rating downgrades, not even the BOJ buying up all the Japanese bonds, stocks, REITs and ETFs will prevent a global revulsion to Japanese assets as the world finally realizes, and admits, that Japan is finished. That process could start as soon as this week with Abe’s sales tax delay announcement.
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