13 February, 2015

NEWSLETTER 2: ABENOMICS

Japan's Reluctant Consumer

Rob Medd

In 2012, Japan’s savings institutions ran out of capacity to fund the government’s overspending. Abenomics was then launched with great fanfare to persuade the world, and particularly the Japanese people, that money printing and currency debasement would revitalise Japan’s economy. The implicit hope was that this “revitalisation” would encourage exports and domestic consumption. A rebirth would generate sufficient tax revenues to balance the budget and save the government from choosing between defaulting or spending cuts.

A fine mess


To set the scene, it is worth re-iterating the key budgetary numbers for the fiscal year to March 2015:

  • A whopping deficit where central government spending is 1.5x revenue (¥83trn vs income of ¥55trn), the largest of any developed economy

  • Interest costs of ¥10trn on ¥970trn debt consume 18% of government revenues when interest rates are just 1% (let’s hope rates don’t rise!)

  • Additional revenue generated from the recent consumption tax hike and the proposed next one has already been allocated to fund previously promised further increases in spending – in other words, they were not intended to narrow the deficit

  • The Bank of Japan is not just funding the deficit but is now effectively funding close to 100% of government spending

  • Pre-tax consumption, 57% of GDP in the fiscal year ended 2014, appears to have fallen 20% in this fiscal year

  • Japan remains a net importer of goods and services.


No change so far


Unfortunately, despite the enthusiasm with which Abenomics was launched, Japan’s finances have barely changed. The government continues to overspend and with interest rates close to zero, the Bank of Japan is debasing the currency as fast as possible by money printing. On the back of this, the yen has fallen close to 30% since March 2013, as the chart shows.

Figure 1: JP¥/US$ Exchange Rate



Source: GMT Research

Consumption tanking


But are there any signs of it working? Well, we can track Japanese consumption through tax collection receipts which are published monthly. Historically these have correlated very closely with private consumption which has typically accounted for around 55% of GDP. Assuming the collection relationship is still valid, the tax collection data implies that pre-tax consumption has fallen dramatically since last year and looks like it will fall 20% YoY for the fiscal year ended 3/2015, as shown in the table below. If consumption is still more than 50% of GDP, this implies that Japan is back in a recession. While Krugman-like economic theory may win prizes, it continues to fail in the real world. An ageing Japanese population, worried about funding their old age simply refuses to go on a spending spree.


Corporate revenues slowing


Corporate tax receipts might have picked up the slack from disappointing consumption tax receipts. However, even here we have concerns. Whilst revenue grew at over 10% for three consecutive quarters in 2013, it slowed to under 4% by the end of 2014, as the following charts shows. This could suggest that corporate tax collected in the first half of the year was based on over-optimistic projections for full year profits. If this is the case, then tax receipts won’t hit their target and the budget deficit will barely have changed even with the increase in consumption tax. In other words, the whole exercise will have been futile.

Figure 3: Annual Change in Consumption, Corp. Revenues and GDP



Source: GMT Research

Perhaps this decline is structural


There might be more to this collapse in consumption than simply the base effect of higher taxes. Worryingly, it may be reflect consumers’ permanently lower spending power because incomes are shrinking as more workers retire, taxes rise and imports cost more.

Abemaths does not add up. As such, we’ve written a number of reports detailing stock-specific investment strategies for investors. You can check out some summary videos on our very own video channel.

In next month’s newsletter, Gillem will be discussing ways to pick up on financial shenanigans whether it is companies’ window dressing their financial statements or generating dubious profits from curious assets.