Is Japan on the Cusp of Revival?

Signs of Life in the Land of the Rising Sun

LDP's Back in Power● LDP's new supra-majority in the Diet's Lower House ostensibly

means the end of political grid-lock. With Komeito coalition partners, they now have a supra-majority (325 of a total 480 seats), and can ram through budget and spending bills as well as override Upper House opposition.

● But DPJ still controls the Upper House, and the LDP needs to gain a majority in the Uppwer House elections in July 2013 to demonstrate it has a clear voter mandate.

● While a poor LDP showing in the July 2013 Upper House election could mean yet another change in Prime Ministers, looks like the LDP is back in power to stay.

Abe-nomics:Investors Liking What They Hear

Abenomics

● Bank of Japan 2% or higher inflation target● More aggressive BoJ debt monetization● 10-Year JPY200 trillion program for infrastructure spending● Nuclear energy role in Japan's electric power supply● A structurally weak JPY, to at least JPY90/USD.● Immediate JPY10 trillion supplementary budget to bridge budget

process gap caused by December 16 election.● Talk of fund to purchase foreign bonds

Simply Repeating Past Mistakes Won't Work● From beginning of Heisei Malaise to 2012, past drastic BoJ liquidity

injections (expanded monetary base) have failed to increase broader money supply (M2).

● Central government spending on "industry" (roads to nowhere, etc.) is the most wasteful. Govt. needs to let local cities spend the money and focus investment on agriculture and land conservation, where historical multipliers are over 2 and 1 respectively.

Did Abe Just Push JPY Off Mt. Fuji?

Source: Bank of Japan

Still News: Is the Trade Deficit Now Structural?● Exporter breakeven rate is JPY85/USD. Above JPY90/USD, exporter

competitiveness begins to recover, especially against rivals South Korea and China.

● If LDP restores as least some nuclear electricity production capacity, this will greatly help to reduce imported energy volume, imported energy drag on trade balance.

● Meanwhile, import costs in JPY will rise as currency weakens. Thus greater export volume, reduced import volume than currency move is needed to improve balance of trade.

Overseas Investment Returns Still Supporting Overall BoP Surplus

Source: Trading Economics

No Nuclear and Weak China are Main Reasons for Trade Deterioration

Source: Trading Economics

Exporter Breakeven JPY/USD is 85, But Real Effective Rate More Important

Source: Cabinet Office, BoJ Tankan

Japan GDP Already Recovering

Source: Trading Economics

Impact of Infrastructure Spending● How and who spends the money is crucial to effectiveness of

planned 10-year infrastructural spending.

● According to IMF study (WP/10/10), most effective spending multipliers are, Agriculture (2.04), Land Conservation (1.15), Livelihood (local roads, educational facilities, public sewage, 0.35).

● Multiplier of money spent by local cities substantially more effective (at 0.78) than central government expenditures (0.26).

● Central government spending on "industry" (main highways, harbors, infrastructure) most wasteful, i.e., more of the same old LDP won't work.

More Aggressive BoJ: Will More Actually Work?

Source: Nomura Research Institute, Bank of Japan

Upside PotentialJPY/USD and Nikkei 225

JPY Back to Pre-Disaster Levels is Doable and Not Debt Threatening

Source: Yahoo.com

Nikkei Yet to Establish Complete Breakout

Source: Yahoo.com