Abenomics: Japan's Thermidor

The following article provides the context in which the Japan’s new administration is going.  The so-called Abenomics has huge ramifications for Korea (e.g., currecy war, geopolitical relations, etc.)

From Businee Insider:

The ascent of the Democratic Party of Japan marked the end of Japan's one-party state, dominated by the Liberal Democratic Party since the 1955.  However, the DPJ was unable to address the challenges Japan faced, was internally unstable, as illustrated by the revolving door in the prime minister's office, and spent scarce political clout to support a controversial retail sales tax increase.

The LDP has returned to power.  Its ascent is a victory for the old elite.  Reports suggest that half of the cabinet positions were given to members of parliament who had inherited their Diet seats from their families.  

The LDP's program, or Abenomics as it has been dubbed, seeks to strengthen the domestic economy and enhance Japan's ability to project its power internationally.

The LDP program has three components:  monetary policy, fiscal policy and nationalism.   It is monetary policy that most recently has captured the imagination of observers and investors alike.  Essentially, the Abe government wants the Bank of Japan to be more aggressive.  The BOJ adopted a 1% inflation target in early 2012, which is missed in 2012, as deflation still is evident (as it has been for around 15 years).  The government wants a 2% target.  The BOJ is set to debate increasing its inflation target at the next board meeting (Jan 21-22)

Complimenting what the aggressive expansion of monetary policy, the LDP-led government will pursue an aggressive fiscal policy.  A supplemental budget is being cobbled together, with reports suggesting a JPY10 trillion package.  When Finance Mnister Aso was Prime Minister (2008-2009) he also offered extensive fiscal support, as the global credit cycle ended dramatically.

Compliments aggressively accommodative monetary and fiscal policy, Abenomics wanted the yen to fall. 

 Without taking a single action, Abe and the LDP appear to have been more successful than BOJ intervention in weakening the yen.  Finance Minister Aso has suggested a JPY90 target, which is within striking distance. Some Japanese producers have weighed in, preferring a JPY100 target.

Moreover, as the yen has weakened the Nikkei has rallied.  Foreign investors, who had been large buyers of Japanese government bonds earlier in 2012, finished the year as strong buyers of Japanese shares.  In a weak yen environment, Japanese stocks outperform bonds.  Japanese 10-year bond yields have crept higher recently, but have actually outperformed US Treasuries, German bunds and UK gilts in recent weeks.

The third-prong of the LDP's program is nationalism. It has taken several forms. The DPJ eschewed controversial visits to the war shrine.  Top LDP officials do not.  The LDP has suggested interest in re-writing a 1995 apology about its aggressiveness and colonization policies in East Asia.

It has not shown any conciliatory tone in the dispute over the Senkaku-Diaoyu islands with China.  This simmering dispute with China seems to be doing what North Korea failed to do by launching missiles in Japan's direction and what US urging was unable to accomplish, namely an emerging consensus favoring a re-militarization of Japan.  Perhaps most telling about the regional tension with a more assertive China, the Philippines recent endorsed the re-arming of Japan.

http://www.businessinsider.com/abenomics-japans-thermidor-2013-1