Why “Abenomics” deserves more (consumer) credit

Market Realist

"Abenomics": A bull market for Japan's consumers? (Part 3 of 5)

(Continued from Part 2)

Japan’s consumer credit

The below graph reflects modest growth in consumer credit in Japan. Over the past two years, consumer credit balances have grown about 11.0%. That isn’t a bad growth rate for a country whose real GDP (gross domestic product) output rate is still stuck at 2005 levels. Given that Japan’s GDP is roughly 600 trillion yen, 33.1 trillion yen ($330 billion U.S. dollars) in outstanding consumer credit represents 5.5% of Japan’s GDP. In comparison, the U.S. Federal Reserve Bank currently notes $2.8 trillion on a 2013 GDP of $15.7 trillion, or about 18% of U.S. GDP.

Political football: Consumer credit post-2010

The introduction of the 2010 Money Lending Business Law in June 2010 caused a significant decline in Japan’s consumer credit, as these laws cut allowable interest rates from 29.2% to 20.0%, and limited loans to one-third of a borrower’s annual income.  This drove one of the big four consumer lending companies, Takefuji, into bankruptcy by September of 2010, three months after enactment. These laws were enacted because Japan’s national police agency had reported that financial problem-related suicides had reached 9,000 per year.

This change in consumer credit policy came about as Japan’s long-time ruling party, the Liberal Democratic Party (LDP), had lost the August 2009 election to the Democratic Party of Japan (DP). This transition of political power occurred in the wake of the global financial crisis. The economic problems of the Japanese public have intensified during this time, and predatory lenders were facing harsh scrutiny under the new regime. New guard leader Minister Hatoyama was succeeded by two more new-guard, Democratic Party prime ministers (Naoto Kan and Yoshihiko Noda) prior to the November 2012 elections, which once again brought the Prime Minister title back to the old-guard LDP, headed by the current Prime Minister, Shinzo Abe.

Note that current Prime Minister Shinzo Abe had been Japan’s Prime Minister from September 2006 through September 2007, having succeeded LDP Prime Minister Junichiro Koizumi, who had served as LDP Prime Minister from April 2001 through September 2006—an astounding five and a half years. So, politically, you could see that the Japanese political leadership has come full circle post–2008 crisis. Abe is once again picking up where he and his LDP predecessor, Junichiro Koizumi, had left off back in 2007, when Japan and other global economies were doing very well. Subsequent LDP ministers Fukuda and Aso had simply fumbled the ball after Abe resigned in 2007 (apparently related to low approval ratings in the wake of suicide and financial scandals at the Ministry of Agriculture). Plus, the decline of the global financial system was just starting to take hold after Abe resigned in 2007, only to be replaced by two old-guard, 12-month, pinch hitters (Fukuda and Aso). The ephemeral rise of the new-guard Democratic Party (DP) of Japan under Hatoyama, Kan, and Noda from September 2009 to December 2012 might have been the product of the global crisis, which seems to have waned in sync with the Democratic Party. (Perhaps the United States exhibited a similar pattern as the U.S. Presidency shifted from Bush to Obama).

Back to business

With the global financial crisis under control, the Liberal Democratic (LDP) party of Japan is back in the driver’s seat, and is once again headed by Shinzo Abe as Prime Minister. Given the historical clout of the LDP party in Japan, it would be hard to imagine that the prior ruling party, the DP under Hatoyama, would have been able to gain support and implement its version of “Abenomics” (“Nodanomics,” “Kanonomics,” or “Hatoyamanomics”).

As such, Prime Minister Abe’s party, the LDP, is seeking to roll back the provisions of the 2010 Money Lending Business Law. Bloomberg’s news reported Loan-Shark Lending Surge Feared in Japan, as of August last year, while the LDP’s Masaaki Taira, a prior business owner and entrepreneur, continues to push forward with the agenda to scrap the recently implemented law. With “Abenomics” set to deliver economic growth, higher wages, and possibly inflation, perhaps it’s easier for individuals and small businesses to borrow at 30% APR instead of the low rate of a mere 20% APR. (Somehow, I doubt that inflation expectations are that high just yet.)

“Abenomics” and consumer spending: Raising expectations of future inflation

As noted in the first part of this series, Japan’s new Prime Minister, Shinzo Abe, in conjunction with Bank of Japan Governor Haruhiko Kuroda, will attempt to end the post-1990 deflationary spiral that has gripped the Japanese economy. These policies, known as “Abenomics,” will attempt to encourage private investment through a more aggressive mix of monetary and fiscal policy. “Abenomics” aims to end deflation by targeting a 2% rate of inflation, as well as to increase fiscal spending by 2% of GDP.

Essentially, “Abenomics” seeks to raise inflation expectations in Japan. If “Abenomics” works, the average Japanese consumer will be more inclined to think that the prices of items in the future will be higher than they are today. This will encourage Japanese consumers to buy more things today, instead of saving their money at a 0% interest rate. As the Japanese yen weakens and corporate profits improve in Japan, the recent, though modest, improvements in income growth, consumption growth, and consumer credit growth should likely gain momentum.

Outlook

These developments have significant implications for the future trends in Japanese equity markets in relation to its regional export competitors of China and Korea. As 2013 progresses, investors could see a continued outperformance of Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics”. Plus, as Japan pursues unprecedented monetary expansion, and the U.S. Fed ponders monetary tightening, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), State Street Global Advisors Dow Jones Index SPDR (DIA), and Blackrock iShares S&P 500 Index (IVV).

For further analysis of how China is being affected by Japan and “Abenomics,” please see China’s exports: Is the Golden Age of Cheap Labor Coming to an End? For further analysis of how United States–related consumption trends could impact Japan’s ”Abenomics”-led recovery, please see U.S. consumer spending: Sustaining the unsustainable? For further analysis of how exports in Japan are being affected by “Abenomics,” please see Japanese exports: Are we seeing an “Abenomics”-led recovery in Japan?”

Continue to Part 4

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