Abe, Thank Mario – The Abenomics Success Story and the ECB

2 years into Abenomics and on the day of reckoning for the ECB Q€ ( I particularly like the way the market is using the € for the E to differentiate from the FED’s QE).

I think Japan has come a long way since and I really did not expect Abe to survive the public bashing last year when Abenomics was lambasted to bits on all fronts as their birthrate plunged to a record low and suicides rose and small businesses folded by the thousands culminating in the bankruptcy of their 3rd largest airline, Skymark, in January this year.

Japan’s trade deficit quadrupled and the country fell into a technical recession for Q3-4 2014 and Abe’s popularity plunged which more or less matched the average 2 year tenure for all of Japan’s past 60 odd prime ministers.

The BOJ had to step in with a surprise stimulus package in Oct and now Japan is looking like a role model recovery story mirroring the footsteps of dear of USA as they emerge, albeit feebly, from their recession and CPI looks on track to make BOJ proud – THE HIGHEST CPI IN ALL OF THE G10 COUNTRIES !

Highest CPI achieved with JPY only weakening 12 % against the USD since 1 Jan 2014 as compared to the 22% weakening of the Swedish Krona and Norwegian Krone, 20% weakening of the EUR and Danish Krone and 14% weakening of the Canadian Dollar.

Japan is cool !

The icing on the cake is now Abe’s advisor is warning the BOJ on an OVERHEATING economy compared to their doomsday prophecies just less than 4 months ago ? http://on.wsj.com/1zCwQ8k

Wage growth is now fastest in 15 years since 1997 even though Korean wages have overtaken Japan’s. http://on.ft.com/1DDm18v

Graphical Chronology

The Nikkei Index is at  levels not seen since 2000 despite the weak consumer sentiments onshore.

And if you ask me who should Japan thank for all this ?

I say, errr, Mario Draghi.

Japan could not carry the baton alone and inflation is important in reducing a country’s debt burden (because a dollar today is worth less tomorrow).

If Eurozone had not descend into the cauldron of negative yields and their insane bond buying programme that would enrich nations like Switzerland, making good money from issuing bonds (paying negative interest rates), there is no way Japan could have escaped the market scrutiny that allowed it the breathing space to crawl out of their pit to be received benevolently by the markets today.

We can thank Greece too for their part in the melodramatics and of course, Switzerland their Scandinavian counterparts’ roles in making sure the world got properly indoctrinated into the “new normal”.

Europe benefits too…. because Japan is will be another QE success story to add to their QE pitch book.

Headlines into ECB’s Q€ are ranging from catastrophical to insanity, even ex Pimco’s El Erian is warning of “market distortion”. http://www.bloomberg.com/news/articles/2015-03-04/el-erian-warns-of-qe-market-distortion-as-italy-s-bonds-advance

And we head into tonight’s ECB decision day (at 845 PM SG Time), we are not worried about the rate decision but awaiting more details on the buying which is supposed to start this month.

What can I say ?

Look at Japan – initial pain for medium term gains and long-term-I-dunno-what (because the US appears to have hit a soft patch).

With skeptics abound, exactly as how Japan played out, we should not expect much more weakening in the EUR currency which is currently at its 11 year lows. Not especially when we have the FOMC in a fortnight (19 Mar 2AM SG Time) and the Deflation tune playing on all radio channels around the world (except Japan).

Expectations are running high as sentiments have gone over the edge. This is evidenced by the 2 trillion worth of bonds trading at negative yields when the ECB has only pledged to buy 1 trillion over the next 18 months. We need a sustainability audit here.

One thing we can be certain of is that European equity markets will go higher just like the non stop rally in the Nikkei (except for 1 quarter of breather back in 1Q14).

But with the world breathing down their necks, will the ECB Q€ be given a chance to work ?

Yes. It is working already.

1. Business growth a 7 month high http://www.businesstimes.com.sg/government-economy/euro-zone-business-growth-at-7-month-high-in-feb-pmi
2. Economic data are beating expectations with the Citi Economic Surprise Index at a 2 year high. http://www.businessinsider.com/r-for-first-time-in-years-euro-economy-starts-surprising-on-upside-2015-3?IR=T&
3. Peripheral economies are running on full steam in Ireland, Spain etc.

Given that the entire Q€ is more than twice priced in (2 trillion vs 1 trillion), I wonder how much lower the EUR can depreciate ?

And just like the USDJPY back in 2013, I would play for a pull back (until they bring out more).

Good luck ! It is Chap Goh Meh (hokkien) today and the last day of the lunar new year ! And the Indian HOLI festival tomorrow marking Spring.

I did see some auspicious signs today …