Will the plummet in the price of crude oil rescue Japan’s economy and Abenomics ?

The weekend just past has seen a flurry of economic news and activity. Who said that this time of year was one of torpor and the doldrums? We have of course gold and precious metals digesting the impact of Switzerland deciding not to put 20% of its (very large) reserves into gold. It would have been a sort of gold standard lite. But the main player has been the continuing fall in the price of crude oil which fell into bear market territory a while ago now but continues to drop. The price of a barrel of Brent Crude Oil is now below US $69 as I type this which means that it has fallen another 2% this morning. Of course daily moves will ebb and flow but my concentration today will be on a market which has fallen some 37% over the past 12 months. This provides both a reflationary boost to the world economy overall as well as a disinflationary one especially if we add in the fact that other commodities prices have fallen.

What about Japan?

A fall in the oil price is likely to be extremely welcome for an economy which imports more than 90% of the energy it uses. The US Energy Information Agency describes it thus.

Japan is the world’s largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer.

So we have an immediate thought that Japan may be the biggest gainer from the oil price decline. For example its trade position will improve as the cost of the energy imports fall and this will provide a boost to economic output as net trade is a factor in Gross Domestic Product measurements. Also there will be a reduction in costs for Japan’s producers and manufacturers as they look to compete on the world stage. We can try to put this into numbers as according to the EIA the state of play is this.

Japan consumed nearly 4.6 million barrels per day (bbl/d) in 2013, down from 4.7 million bbl/d in 2012

So in US Dollar terms the daily cost to Japan has fallen from US $506 million to US $317.4 million. Quite a drop is it not as we see the economic boost? Of course this is just the boost from oil’s fall but we have something of a handle on quite a positive change for Japan. Sadly the meddlers have been meddling and the story begins but does not end there.

Abenomics misfires

There is a clear conceptual issue between a force for economic good which lowers measured inflation and the official Japanese economic policy of Abenomics which is to raise consumer inflation to 2%. This is exactly the sort of economic mess that my own country the UK has often managed to get itself in!

The value of the Japanese Yen has been extremely volatile today but at the time of typing it is just above 118 to the US Dollar which means that it has fallen some 15% over the past year against it. Accordingly our rule of thumb sees a situation where some 40% of the gains from the falling oil price have been eroded as the economics of Shinzo Abe stubs its Samurai sword in its own foot.

I would imagine that the proponents of Abenomics will be rather quiet about this as I wonder if it is behind this from a man once known as “Mr Yen” Eisuke Sakakibara. From the Wall Street Journal.

“Advanced economies are in an age of zero growth. We have to accept that,” Mr. Sakakibara said. “If growth is around zero, prices shouldn’t be allowed to rise. If prices rise in an economy that is barely growing, that is going to be trouble.”

I am not sure how much more off message he could be especially if we allow for the cultural restrictions on such open criticism in Japan. Indeed the statement below poses all sorts of questions.

“All of a sudden he could change his stance dramatically, depending on the situation. When you are dealing with markets, you often have to change your stance in a dramatic manner…He also has that mindset.”

Moodys Ratings Downgrade

Above we have taken the advice that Graham Parker and the Rumour proffered some years ago.

Just like in travel brochures, discovering Japan, discovering Japan

Discovering Japan
Discovering Japan
Discovering Japan

Having done so we see that at last Japan has seen something which gives it an economic boost albeit one which has been weakened by the central planners. So a ratings upgrade?

Er well no…

Moody’s Investors Service today downgraded the Government of Japan’s debt rating by one notch to A1 from Aa3. The outlook is stable.

I suppose it was nice of them to confirm one more time a theme of this blog which is that ratings agencies have a reaction time so slow that by the time they respond to events they have often changed. So much for reform of them as we wonder why they are still there?!

However the underlying analysis is often thorough if mistimed so let us examine it.

1. Heightened uncertainty over the achievability of fiscal deficit reduction goals;

2. Uncertainty over the timing and effectiveness of growth enhancing policy measures, against a background of deflationary pressures; and

3. In consequence, increased risk of rising JGB yields and reduced debt affordability over the medium term.

The first point has been true since the credit crunch began and has just got worse and worse. Actually if one wishes to be blunt the reality is that Japan cannot hit its fiscal goals unless something dramatic like nuclear fusion technology becoming workable happens. If you think about it the pursuit of a soft style default via higher inflation confirms that Japan’s government thinks so too. In the big scheme of things,how much difference would a further rise in Japan’s Consumption Tax actually make?

Point two is very confused because as I have described above the “deflationary pressures” are in fact reflationary pressures for Japan. Perhaps the economists at Moodys need to go back to school to brush up on their definitions. Or perhaps they do not wish to be too publicly critical of Abenomics and have got their message in a tangle.

Japanese Government Bonds (JGBs)

This is rather like the story of the bumblebee who according to the laws of aerodynamics should not be able to fly like it does and yet we know reality is different. Whilst the Moodys report does say in the “medium term” some might define that as say five years and looked what happened to five-year JGBs today. From DailyFX.

Japan’s 5-yr govt note yield falls to match record low

We increasingly need the equivalent of a microscope to check the yield which is now 0.09%. If we move to ten-years we see that it is 0.42%…….

Of course the credit crunch era has been full of “surprises” and on this blog at least we would not be surprised if all time lows were followed by highs! However for now the blocking ball is the Bank of Japan which is buying some 80 trillion Yen a year of JGBs. Accordingly it is virtually impossible for bond prices to respond to events and if the pressure is relieved anywhere we see it in the currency markets vis the fall in the Yen.

Let me add this section as I think it is the highest estimate/trajectory we have seen for Japanese public-sector debt.

The trajectory of government debt, projected at 245% of GDP in 2014 according to the IMF, will only start to decline under the most favorable combination of economic and fiscal reforms,

Comment

There is much to consider in today’s news from Japan. The timing of the news from Moodys leaves it with egg on its face but I guess ratings agencies have an immunity to shame and embarassment. However the struggling Japanese economy will get a considerable boost from lower energy and commodity prices. Sadly that will be weakened by the moves of the central planners as Abenomics finds itself over-taken by events and scores an economic own-goal. I suspect that Paul Krugman will be wondering if it was yet another mistake to publicise his recent intervention encouraging Shinzo Abe to “Pump It Up”?

I will leave you with a thought which is that on GDP per capita grounds poor struggling Japan appears to be doing better than the economic success story which is the UK. Oh well! Time for some music from the band Japan.

Somewhere there’s a sound of distant living
Welcome in high society
It seems so artificial
Why should I care?

Oh ho ho
Life can be cruel
Life in Tokyo
Oh ho ho
Life can be cruel
Life in Tokyo

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6 thoughts on “Will the plummet in the price of crude oil rescue Japan’s economy and Abenomics ?

  1. Hello Shaun,
    Thanks again for the interesting and thought-provoking blog. As a non-economist, I would like to ask two genuine questions. What proportion of the stock of JGBs does the BoJ hold? Is there any economic reason why Japan can’t just cancel the JGBs held by the BoJ?

    • Hi Ian

      The Bank of Japan is edging closer and closer to owning 25% of all public debt in issue in Japan. Its planned purchases are around 7% of the stock per annum although some care is needed there as of course the stock is rising fairly quickly too. Reuters did some projections a month ago.

      As to a debt cancellation then there is the issue of the expanded money supply and presumable weaker Yen. That may cause future problems. Outright debt monetisation tends to be associated with a currency falling but of course that is official policy.

      The other issue is the lack of choices for Japanese investors who hold enormous amounts of JGBs but are increasingly being forced elsewhere. Has the Nikkei 225 been pushed artificially high? An argument which applies to other stock markets too but is more pronounced in Japan.

  2. Hello Shaun,

    In general the price of oil is a 2 edged sword although I’d side on the cheaper is better rule for us users .! The tax man may differ but then again if petrol tax being too high was an economic suppressant why is so high in the first place? ( and today we see another drop with even Minitru speaking about another world recession)

    Gas prices will be a greater factor for Japan. so will be restarting their nukes

    as for abenomics , was it really any different from the last try ?

    expect to hear the rising screams and howls from these economic no nothings for more more more !

    to infinity and beyond !!

    Forbin

    • Hi Forbin

      The oil price had a late on dead cat bounce today (apologies to cat lovers) and closed just shy of the US $73 level for Brent Crude. These sort of things can bounce higher than you might think before fading away as if they never happened! Japan definitely wants and needs lower oil prices.

      It is interesting is it not for the world recession story to spread just as we are given an economic boost from the oil price?

  3. “Also there will be a reduction in costs for Japan’s producers and manufacturers as they look to compete on the world stage”
    ______________
    But there will be no competitive advantage gleaned, because everyopne will gain.

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