What a world! Abenomics is working.
Prices are rising. Now, we have world where Japanese CPI is now ABOVE the US or Europe. Who would have bet on that one year ago?
This is profoundly important, especially when you read the comments from PM Abe (see below).
1) The government is aggressively working to increase wages. I bet this will start happening in the US and Europe in the next two years. The pure capitalists and Austrians will have even more to be apoplectic about.
2) The Bank of Japan is following through on its expansion. (email me for attached PDF).
3) Technological advance, especially in financials but also in most white collar jobs, is creating a Pan-western wage recession. Workers lose and entrepreneurs win — this is the essence of Gilded Age Capitalism.
The market cap of the Japanese banks is now the same as Wells Fargo at $240 bn. Japanese banks are still the cheapest banks globally. They are smaller than Canadian banks and are one-third smaller than Australian banks. Deflation destroys banks just standing still – loans stay the same as do rates, while wages and revenues decline, thus creating structural default. On the contrary, inflation (and time) is the cure of all banks. It has a profound impact on the operations of a bank balance sheet as it “inflates away” debt and allows (forces) banks to lighten up on bonds and increase loans.
It is the explicit policy of the BOJ to have the banks deliver these bonds to the BOJ. Look at the BOJ balance sheet up to November (awesome chart from my old pal, Ed Yardeni). It is staggering and the BOJ has ample firepower. As a percent of GDP, it is now second only to China — and MUCH larger than the Fed or ECB.
MUFJ (8306) is trading at FY13e 0.9x book. It has a FY13e 17% CAR, one of the highest in the world with a super-liquid 64% LDR and safe leverage. A tax increase can act as a brake on inflation. Japan has the wonderful sensation for the first time in a generation of having to worry about inflation. Hallelujah! The dirty secret is that capitalism cannot work without inflation.
Japan gets it. Prices have moved. The BOJ has moved. The currency has (finally) moved. Wages will move. This is a recipe for allowing the banks to move further.
From PM Abe on Project Syndicate (Jan 7):
[We now have a shared sense that the government, major industries, and organized labor should work together to increase wages and bonuses (while facilitating incentives that could enhance productivity).
Needless to say, wage levels ought to be determined solely by management and workers. But it is equally true that the emerging consensus among the government, business leaders, and trade unions already has led a growing number of companies to promise significantly higher wages and bonuses.
This is the essence of the wage surprise. It will be an entirely new phenomenon, one that, together with the massive ¥5 trillion fiscal stimulus, will more than offset the potential negative effect of a sales-tax increase. Most important, it will continue to put Japan’s economy on a sustainable growth trajectory. Of this I am certain. ]
US 1.2%: CPI YOY INDEX
Euro 0.9%: ECCPEMUY INDEX
Japan 1.5%: JNCPIYOY INDEX
Data from Bloomberg as of Nov, 30, 2013
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Paul Schulte has had a career in equity research which spans 22 years on both the buy and sell sides covering the Asian and emerging markets. He also has 5 years of government policy experience in emerging markets. He has been frequently ranked in top-five…read more
