Abenomics, JGB’s and the Japanese Yen

Sometimes it is hard not to laugh and the stupidity of voters and how they tend to make every effort to fulfill the basic principles of insanity. On September 26^th 2006 Shinzo Abe became the 90^th Prime Minister of Japan by a special session of the Japanese upper and lower house referred to as the National Diet. He was the youngest Prime Minister elected since World War II and resigned less than one year later on September 12^th 2007.

During his eleven and a half months as Prime Minister he introduced what is now known as Abenomics to the Japanese economy which backfired and was nothing more than a counter-productive move which gave Japan more of the same and rightfully so. Japan decided to bailout its massive financial system as the Japanese were clouded by pride and stated that no Japanese financial institution will fail. The Japanese government bailed out its failing banks and welcomed an area of recession, depression and deflation from which it has yet to recover 14 years later.

After his resignation a string of other Japanese Prime Ministers left their stamp of failure and resigned within less than one year after winning elections. As the Japanese economy endured recession after recession and the Bank of Japan slashed interest rates down to zero in an idiotic attempt to force Japanese savers to take their money out of banks and invest as well as consume, the Japanese Yen grew stronger as it was regarded as a safe haven and used as a carry trade.

Japanese exporters grew disgusted with the strength of their currency and the Bank of Japan vowed to come to the aid of the only function sector of the Japanese economy; its export sector. In order to make Japanese products more competitive from a pricing perspective they adopted a weak Japanese Yen policy.

Abenomics failed terribly, but Japanese voters worked hard to display their utter lack of memory and on September 26^th 2012 Abe was elected Prime Minister again. Yes, you guessed it right; with his electoral victory he brought back Abenomics. This time he made a pledge to turn things around and kick-start the Japanese economy with Abenomics. Same approach as six years ago based on hope for a different outcome equals insanity.

The Bank of Japan, you know the ‘independent’ one, announced a massive QE program on April 4^th worth $1.4 Trillion over the next two years. The amount of complete lack of economic understanding and fiscal as well as monetary stupidity only rivals the Ben, the Septic Tank, Bernanke out of the US Fed. The Japanese Yen started to tumble and the USDJPY currency pair moved from below 78 to above 103 in less than six months.

Japanese exporters were extremely pleased, but things have changed rather fast. The Japanese Yen experienced a sharp reversal trade and collapsed back down to 94 just as dumb money analysts called this currency pair to 110 by the end of 2013 and 120 by the end of 2014. Rogue Forex Trader calls this pair to end 2013 between 88 and 92. All other major Japanese Yen crosses experienced the same fat in the forex market.

The fall and rise, yes it was just like that and not the other way around; of the Japanese Yen is not even the biggest problem for Abe, the Bank of Japan and their moronic economic policy. The forex market already mocked the Bank of Japan and their ultra-short term approach to a decade old problem and shoved their quantitative easing campaign down their anus.

Even worse for Japan and as a direct result of Abenomics is the performance of Japanese Government Bonds or JGB’s. Abe and the Bank of Japan hoped to lower interest rates and force consumers to spend their money in order to generate economic activity and invite inflation. The 10- Year JGB traded below 0.32% and remains historically very low especially if compared to other sovereign debt.

After QE was announced it jumped at some point above 1.00% before settling in the 0.80 range. This is just another example why you do not operate based on hope. The Bank of Japan vowed to purchase 70% of new issued debt every month and hoped long-term interest rates would drop even lower. It works different in the real world and long-term interest rates rose which starts to give Japanese consumers even less incentive to spend. Abe and the Bank of Japan achieved the exact opposite of what they desired.

In order to top things off, Japanese Banks already unable to earn a decent return started to dump their holdings and shed 10.8% in April alone and applied further upward pressure to yields on the JGB. Additionally they have hiked prime interest rates in order to cover the shortfall in earnings from JGB’s which now offers cautious Japanese consumers another reason to not spend money.

The rise in interest rates will now impact Japanese debt and further hammer the Japanese economy and could initiate a death spiral of bond selling which will allow yields to skyrocket and interest rates to rise even further and ensure deflationary pressures will haunt the Japanese economy. Japan is the most indebted nation in the industrialized world and is proud to have a record 230% debt-to GDP ratio. The Bank of Japan took what idiotic steps they could in order to try and control the JGB market which backfired severely and is about to do so even more drastically.

This is a perfect example why governments as well as central banks should not interfere with financial markets and the economy. All the Japanese problems can be dated back to the massive financial bailout of their financial system back in 1999. This utter socialistic move destroyed Japan and continues to haunt them. The US made the exact same mistake in 2008 and will face the same outcome. Those who disagree simply fulfill the definition of insanity just like Japanese voters did in September 2012, US voters in November 2012 and so many others.

The Nikkei 225 entered a bear market last week and dropped over 20% in less than four weeks and implied volatility on JGB’s maintained a level above 5% for several trading weeks while the Japanese Yen began to strengthen. After it is all said and done, Abenomics was the same failure as before and Prime Minister Abe as well as the Bank of Japan have accomplished the exact opposite of what they intended.

This is what happens when you vote unqualified individuals into decision making positions and allow their lack of real world comprehension and amusing moronic approach infested with socialism interfere in what should be a free market. The more you decide to mess with a capitalistic idea the worse the impacts will be. Sometimes the economy will revert into a recession and the best policy is to allow the financial system to work as it does because it works perfect as the Abenomics – Japanese Yen – JGB example displays.