3 years of massive stimulus spending in Japan has had no impact on the problem it was supposed to solve. This is highlighted by new government data on household spending for 2015, as the charts above confirm – they compare 2015 data with that for 2012, before Abenomics began:
- Spending was almost exactly the same at every age group in 2015 versus 2012, when premier Abe took office
- Spending in the peak age range of 50 – 59 was just ¥250/year higher, and ¥7900 lower in the 40 -49 age group
- It still declines 31% once people reach the age of 70 – critically important with Japan’s ageing population
- In US$ terms, of course, the numbers are lower due to Abe’s focus on devaluing the yen since he took office
- US$ spending in the two peak age groups of 40 – 49, and 50 – 59, has fallen by $15k/year to $29k/year
This matters, because consumer spending is 60% of Japanese GDP.
The quite scary result is that the Bank of Japan has spent ¥200tn ($1.84tn) since Abe came to power on its quantitative easing programme. Yet the Abenomics policy has completely failed to achieve its major objectives of boosting GDP and inflation:
As a result, Japan now has the world’s highest level of government debt as a percentage of GDP at 226%.
Yet premier Abe and Bank of Japan Governor Kuroda refuse to accept that their policies have failed. Instead, just like the European Central Bank yesterday, they have decided to implement their policies on a greater scale. Thus Japan introduced negative interest rates in January, meaning that the Bank now charges you to deposit money with it.
Clearly these are increasingly desperate measures, which have a vanishingly small chance of being successful. Past performance is no guarantee of future results, but it is usually the best guide that we have. And understandably, Japan’s Diet (its parliament) is becoming very concerned – Governor Kuroda has been summoned for questioning a record 25 times so far this year.
One major concern is that Japan’s value proposition for foreign investors is looking increasingly unattractive:
- Foreigners have to pay the government to lend it money (and so are guaranteed to get back less than they lend)
- They also know devaluation remains a key policy, meaning that the return in their currency will probably be lower
- And GDP growth is almost impossible with Japan’s median age now 47 years and its population will decline 600k/year by 2020
Premier Abe initially promised that he would restore the country to growth within 2 years, and push inflation to at least 2%. Today, 3 years later, his Abenomics policies have entered the end-game. Some investors will no doubt continue to maintain positions in Japan, as it is still the world’s 3rd largest economy.
But they will no doubt be keeping a close eye on their exit opportunities. When the rush starts, nobody will want to be left behind.
China’s slowdown is continuing to reverberate around the world. One way of measuring this is to look at auto sales in countries closely linked to China’s market such as Japan, Russia and Brazil. As the chart shows, they did well during China’s stimulus period, but they are struggling now. By comparison, more self-sufficient India has so far avoided the worst of the storm:
- Japan’s sales fell 24% in January versus 2014, confirming the 1.4% decline in its 2015 GDP
- Russia’s sales almost halved, as its currency collapsed in response to China’s slowdown
- Brazil’s sales were hit even more badly, down 52%, as the political crisis continues to escalate
- Only India was a relative island of calm, seeing its sales rise 7% over the period
Overall, January’s sales in the 4 countries were down by almost a third, 29%, to 800k. And during the 2008 – 2013 period, when China’s stimulus programme went into over-drive, the 4 countries sold 1 in 5 of all cars sold in the world. Today, they are back at just 16% of the global total, close to 2005′s level.
Its easy to overlook these second order impacts. But they are just as important, perhaps even more important collectively, than the direct impact of the slowdown in China itself.
One key issue is that China is aware of its problems, and has been focused for the past 3 years on overcoming them – hence its New Normal policies. But Japan, Russia and Brazil had no thought for the future:
- Japan introduced its own form of stimulus in Abenomics in 2013, even though the previous 20 years of stimulus showed this would inevitably fail
- Brazil and Russia assumed their export revenues would always continue, and allowed corruption to flourish at the expense of economic reform
- Only India has set out on a realistic reform programme since Premier Modi’s election victory in 2014, focused on meeting real needs for toilets and better living conditions
Russia highlights the scale of the reversal. Its real wages (ie adjusted for inflation) fell 11% last year. People don’t buy many cars, or other non-essentials, against this type of background. Yet less than 3 years ago, just as the bubble burst, Boston Consulting had forecast it would be the world’s 5th largest market by 2020, with sales of 4.4m.
These developments create major challenges, even for those not doing direct business with China. They highlight how the chemical industry has reached a fork in the road, just like the auto industry – its major customer. GM’s President, Dan Ammann, put it very well last month, when he warned:
“We think there’s going to be more change in the world of mobility in the next five years than there has been in the last 50 years”
His use of the word “mobility” is also significant. People around the world will still need mobility, but will they need to own cars to achieve this? Probably not, if they live in cities, which most people now do in the wealthy developed economies. Ammann highlighted this in June 2015, when commenting:
“It’s the last thing you should do because you buy this asset, it depreciates fairly rapidly, you use it 3% of the time, and you pay a vast amount of money to park it for the other 97% of the time”.
This paradigm shift is one of the main topics in our new Study – “Demand – the new direction for profit”, which will be published early next month. In it, we focus on describing the new business models needed for future success, and detail practical ways of using these to develop major new revenue and profit streams for the future.
The world, as we see from the second order impacts of China’s slowdown, is dividing into Winners and Losers. There really is no going back to the BabyBoomer-led economic SuperCycle. And whilst all change is uncomfortable, the experience of Japan, Russia and Brazil suggests that failure to change can produce an even more unpleasant result.
This week’s economic data from Japan confirmed, once again, that demographic changes are far more important for the economy than monetary stimulus.
Japan’s premier Abe took power in 2012, promising to end the decline in Japan’s economic growth. He appointed a new Governor for the Bank of Japan, and claimed that his “3 arrows policy” would quickly create an economic boom. But as the chart shows from the Guardian/Zerohedge, Monday’s data showed that Japan has gone back into recession again.
It didn’t take rocket science to forecast this back in April 2013, after Abe had announced his new policies:
“Unfortunately, however, this bold new initiative is also doomed to fail, for one simple reason. As in all developed economies, household consumption accounts for almost 2/3rds of Japan’s GDP. And Japan not only has the oldest population in the world (median age is 45 years). Nearly half of its population are over 50 and so are already in their low-spending years”.
The latest data for Japan’s consumer spending confirms there has been little change since 2013, as the chart shows:
- It highlights how spending declines past the age of 50 in virtually all major areas
- The reason is simple common sense – older people already own most of what they need, and their incomes decline as they move into retirement
Instead, the main result of the stimulus has been to boost Japan’s financial markets, and to devalue the currency. It has been a wonderful ride for the speculators, as the Nikkei Index has soared from 8750 at the end of 2012 to a peak of over 20000 last August. Similarly the value of the yen has fallen over 50% versus the US$ over the same period. The Bank of Japan claimed this would boost inflation by causing import prices to rise, but this theory has also proved incorrect with Japan’s consumer price inflation back at 0% in September.
Unfortunately, Abe’s failed experiment has not been cost free. The Bank of Japan began its stimulus programme in April 2013 by spending Yen 60tn/month, and increased this spend to Yen 80tn/month in October last year, making the total cost roughly equal to $1tn by the end of this year. This debt still has to be repaid, putting a further burden on the economy. And, of course, there is no guarantee that premier Abe will now abandon his failed experiment – as last year, he may simply decide to increase the cost still further.
Even more worrying is that the lesson of the failure is still not recognised by other policymakers. Thus the European Central Bank seems likely to repeat Japan’s mistake of “doubling down” on its own stimulus policy, despite clear evidence that it has also failed to achieve the promised results.
The combination of ageing populations and declining fertility rates means the world is following the Japanese model into deflation – despite all the efforts of policymakers to artificially induce price rises via their money-printing. As discussed last November, under the title. ”Oil price fall set to push Japan back into deflation“, it was already clear then that the impact of Abenomics had peaked in mid-year.
Inflation had temporarily hit 3.7% after the sales tax increase and yen devaluation. By November, a panicked Governor Kuroda, head of the central bank, was pushing through an emergency stimulus policy. But as the chart above confirms, his measures have had little effect. July inflation was just 0.2%. The issue is one of common sense:
- Most policymakers insist on seeing supply/demand balances through rose-tinted glasses
- They imagine that demand is always constant, if only the right tax and spend policies are adopted
- They thus ignore the human factor altogether, and claim that 70 year-olds will spend as much as 30 year-olds
- Yet their own official data confirms what common sense would tell us on this issue
What worries me now, is what happens next? Japan’s former central bank head, Governor Shirakawa, had an excellent grasp of the economic impact of demographic change. He was a major influence on our thinking in Boom, Gloom and the New Normal, as he argued that Japan’s:
“Low growth was mainly attributable to demographics, or more specifically, a rapid aging of the population”….
“The implications of population aging and decline are also very profound, as they contribute to a decline in growth potential, a deterioration in the fiscal balance, and a fall in housing prices. Given that other developed countries will face the same problems despite some differences in timing and magnitude, the economic effects of demographics deserve further study.”
Today, the failure of his successor’s policies is confirming the wisdom of Shirakawa’s insight. 70 year-olds are not 30 year-olds:
- They do not have the income that would enable them to spend in the same way
- And they do not need to spend the same amount as they already own most of what they need.
Japan’s recent policies have been the equivalent of trying to make water run uphill. But now China’s New Normal policies are the catalyst for reality to appear. Today’s chaotic markets are a sign that investors are starting to realise they have been fooled.
It is going to be a very bumpy ride as we return to a world that operates by the fundamentals of supply/demand, and not by central bank stimulus.
Hi data for auto sales in world’s top 7 markets is confirming my suggestion last October that global auto sales had reached their “top of the mountain moment“. Total volume was down 2.1% versus 2014, with sales in Russia and Brazil showing major downturns. As the chart shows, the sales decline is focused on the BRIJ nations (Brazil,Russia, India and Japan), where only India is now in positive territory.
These had previously been expected to show fast growth, but the picture has changed with China’s slowdown underway:
Russia is the worst affected, with sales down 41% versus 2013 and 37% versus 2014. It has been hit by lower oil prices and the Ukraine-related sanctions. Ford have now joined the list of foreign companies having to recapitalise their business. And Russia’s Industry Ministry and Boston Consulting Group analysis suggests recovery could take till 2020. One sign of the liquidity problem is that used car sales are down 24% at only 1.8 million.
Brazil is also badly affected, with sales down 26% versus 2013 and 20% versus 2014. It has been hit by China’s slowdown, which has impacted its major commodity exports. Around a quarter of the economy depends on the auto industry and already 10k employees have been laid off, with 36k on paid leave – even so, inventories have risen to 55 days. Dealers’ association Fenabrave now forecasts a 23% fall in total 2015 sales – equaling 1998′s collapse after the Asian crisis.
Japan saw sales down 3% versus 2013 and 12% versus 2014. Its key problem is its ageing population – older people drive less than when they were young, as they no longer drive to work once retired or need to act as a taxi service for children. Auto sales thus confirm the lack of logic behind Premier Abe’s vast stimulus programme. People brought forward auto purchases in Q1 2014, in advance of April’s sales tax increase. But contrary to the government’s expectation, sales have still not rebounded after this downturn.
India remains the bright spot amongst the 4 markets, with sales up 6% versus both 2013 and 2014. Its 1.34m volume means it has now overtaken both Brazil (1.27m) and Russia (0.8m), and is heading back towards its peak year of 2012. But it will take a long time for car sales to catch up those of motorbikes, which continue to dominate the market at 81% of total sales: car sales are currently at just 13%.
One interesting development is Eicher Motors‘ launch of a diesel truck that doubles as a miniature power station. Retailing at just Rupees 232k ($3645), its 3kW supply could be ideal for wealthier homes and small businesses amongst the 300m Indians who lack reliable electricity supplies.
Bill White’s important critique of the policies being followed by his former central bank colleagues echoes his warnings before the 2008 Crisis. One of his key points is that they have focused on manipulating the value of financial assets, ratehr than on developments in the real economy:
“The price of financial assets, just think of Bunds and equity prices, has gone through the roof as have property prices in many countries. Zombie companies are being kept alive by zombie banks and a sharp increase in Merger and Acquisition activity might also be contributing to growing “malinvestments”. Moreover, problems in the Advanced Market Economies have now spread to 6 of the Emerging Market Economies, with all of the BRIICS in deepening trouble.”
The chart above provides a useful snapshot of the issue, in terms of January – April auto sales in the 4 smaller markets in the ‘Top 7′:
- Japan’s sales were down 15%, with sales of the most popular smaller cars (“kei cars”) dropping 23% as a tax hike went into effect. Awareness of the looming hike had boosted sales in 2014, and now the hangover is underway. The kei cars typically account for 40% of Japanese sales, so this downturn is further evidence that Abenomics has run into the sand. And with government debt/person now $100k, more tax rises seem inevitable
- Russia is again the world’s worst-performing auto market, with sales down 40%. Mercedes is the best performing brand, with sales down only 6%, whilst Lada, Hyundai and Kia are down between 14% – 22%. The other top 10 brands are down by over 50%.
- Brazil sales were down 19%, with April seeing a worsening trend as sales fell 25%. The market should, of course, be doing very well in the run-up to the Olympics next year, but instead the economy has gone into recession as China’s downturn impacts its previously buoyant commodity exports. In addition, the Petrobras corruption scandal continues to throw a shadow over the government.
- India remains the only relatively bright spot, with sales up 8%. But as Team-BHP comment ”Going forward, Auto CEOs are a bit cautious, as the rural outlook isn’t bright. 2-wheeler sales are the best indicator of the rural market, and they’ve been nothing to write home about in April.” And, of course, as I noted yesterday, India’s car market has been going nowhere for 4 years, so it is hard to be too optimistic about the outlook.