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Jobs and Japan

August 3, 2013

Michigan beach

Another lovely week of summer has passed in the northern hemisphere. In American financial markets, the July jobs report dominated the weekly economic indicators. While the actual number was worse than expected, the real problem is the composition of the US labor market. Of all 953,000 jobs created in America in 2013, a whopping 77% were part time while only 23% full time jobs were added.

Employment growth America

It is no wonder that life is getting tougher for regular Americans who don’t benefit from the nominal asset stimulus(aka QE) that the Federal Reserve provides. If only they could print jobs…

According to the Associated Press “Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.” http://finance.yahoo.com/news/exclusive-4-5-us-face-175906005.html As for the financial markets the trend continues with rising large cap equities and rising interest rates(despite a bond rally Friday).  As I stated last week, this trend  will continue until something breaks. Perhaps Japan?

Japan

Abe

It has been 9 months since Prime Minister Abe took office in Japan and introduced “Abenomics”. While it is still too early to fully judge the economic reaction to the policy of monetary explosion, a few trends are clear to see. The stock market is up by about the same amount as the yen is down and interest rates have roughly doubled. While the Financial Times hailed the highest inflation since 2008, it is worth noting that the only price increases are found in the cost of living via food and energy while wages are stagnant. http://www.ft.com/intl/cms/s/0/46018c54-f5c1-11e2-8388-00144feabdc0.html#axzz2avlOeADF In effect, the standard of living is falling for most Japanese as their wages are dropping in real terms. After all, Japan imports practically all of its energy and farming/fishing/forestry is marginal in Japan as well(1.3% of GDP). http://en.wikipedia.org/wiki/Agriculture,_forestry,_and_fishing_in_Japan

How about industrial production in Japan? Take a look at the current development there.

Japan Industrial Production 2007-2013

http://www.financialsense.com/sites/default/files/users/u783/images/2013/Industrial-Production-2007-2013.jpg

As you can see Industrial Production is dropping fast and hard despite a lower yen and deserves to be monitored further.

Government debt

Is is rather stunning that the Japanese government can still finance itself at 0.8% for ten years considering it owes 240+% of GDP.  This fact is proof of the strong savings culture in Japan and also testimony of former economic prowess. Unfortunately, it currently takes the Japanese government 30% of all tax revenue to simply service this mountain of government debt at 0.8%. In other words, when interest rates triple, the government will be officially unable to service its debt(and operate). Given that critical interest number is only about 2.5% an eventual  JGB (Japanese Government Bond) rout and default seem inevitable. In my opinion, Japan will be at the root of the next global financial crisis unless a miracle happens soon.

Japan debt

As for the financial markets, they continue to listen to every word that comes out of global central banks. After all, the economic facts are in plain sight yet the true variable is the future amount of money creation by the central banks that will determine the nominal value of assets(for now). I wonder what Chairman Bernanke would say about his own comments from 2002: “I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers’ attitudes than to the economic fundamentals that by rights should determine the allocation of capital.” – Ben Bernanke, October 15, 2002

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2 Comments
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