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Michael Baxter

Bull and bear: Money printing and more clashes with China: that will be the shape of new-look Japan

Written by: Michael Baxter on December 17th 2012

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Money printing and more clashes with China: that will be the shape of new-look Japan. UBS faces $1 billion fine. Apple scores in China, but is its defence too leaky. US inflation dips below target

Money printing and more clashes with China: that will be the shape of new-look Japan

The experiment didn’t last long. Japan’s Liberal Democrat party had dominated Japanese politics for half a century, and then three years ago change was ushered in. With the arrival of the Democratic party, it seemed as though Japan’s political map had been changed for good.

Well, that was then. Yesterday, it was election time again, and guess who won? The Liberal Democrats are back. Japan’s new Prime Minister will be Shinzo Abe. Well, he is new and old, because Mr Abe also became Prime Minister in 2006.

It’s curious isn’t it? Japan’s economic woes are twenty years old. Then finally, Japan elects a new government; a new political party. It gives the party three years – three years during a time of global economic crisis – notes that the economy isn’t doing any better, and so re-elects the party that held sway for 17 of Japan’s lost 20 years.

The new government has vowed to push down the value of the yen. Well it has already enjoyed some success, just hours after winning the election. At the time of writing, the yen stands at an 18 month low against the dollar.

But the headlines for Japan are as follows.

The new government wants to use QE as the means by which the economy is boosted. So, for the umpteenth time, its central bank will push really hard on string. The Japanese experience tells us two things: firstly that QE does not automatically lead to inflation. Despite Japan’s central bank resorting to the printing press in a way that makes the Fed look positively frugal, deflation remains a bigger threat in Japan than inflation. Secondly, although QE has not led to inflation it has not led to economic recovery either. Maybe without QE, the Japanese economy would have been even worse, but it is clear that QE has not created an economic recovery for the simple reason that there has been no such recovery.

The new government also plans to be far more… how can one put it?… proactive in terms of defence.  As the ‘FT’ pointed out this morning, Mr Abe has been talking about re-writing Japan’s post war pacifist constitution. He is also a critic of Japan’s recent apologies for its conduct in China and South Korea during the first half of the last century.

In the UK we have largely moved on from World War 2. Anti-German sentiment is not like it was in the 1950s and 1960s. But in China and South Korea anti-Japanese feeling is still very strong. The transgressions of 60 years ago have not been forgiven.

So as China asserts its rights over what it calls the islands of Diaoyu and Japan calls Senkaku, Japan moves to becoming more aggressive. So ask yourself this question: How do you think it will pan out when the second and third largest economies in the world are neighbours and one has new found confidence, while the other wants to reassert itself? Last week there was a furore over a Chinese plane flying over Japanese airspace.  These are not exactly ideal conditions.

In China the feeling is that Washington tacitly supports Japan.

As for Japan’s economy, the problem is partly ageing, and partly a lack of willingness to tackle vested interests.

Capital Economics reckons the best way forward for Japan is a consumption tax. The problem is that, as Japan ages, more of its population lives off savings and less off income. So income tax brings in ever less revenue. The outgoing government had put a plan in place to increase consumption tax from 5 to 10 per cent. The IMF thinks it needs to go further and have a 17 per cent consumption tax. Presumably, by emphasising monetary policy, the new government is going to go for the free lunch option, and is likely to support a consumption tax, and hope that the QE magic wand will make Japan’s problems disappear in a cloud of smoke. Let’s hope that clashes between China and Japan do not create any other clouds of smoke.

UBS faces $1 billion fine

Barclays was naughty, but came clean. It was fined $450 million for its role in Libor rigging. But because it owned up and worked with the authorities, the fine was much lower than it could have been.

UBS, it seems, is paying the price for being slower to come forward. The full extent of its fines is due to be revealed this week, but talk is that it will top $1 billion, and may even exceed $1.5 billion.

A fine for RBS is expected to follow.

Of course it’s all very well coming clean, and admitting to wrong-doing.  But if a bank just owns up to its transgressions, in certain territories it risks having its banking licence removed.

It’s a tricky one – not that many will have much sympathy with the banks over this.

Apple scores in China, but is its defence too leaky

It’s hard to reconcile these two pieces of news.

According to ‘China Daily’, Apple was relegated to sixth spot in the Chinese smart phone market in Q3.

Apparently, Chinese companies Lenovo, ZTE Corp and Huawei Technologies Co Ltd occupied second, fourth and fifth spots. See: Apple slips to No 6 smartphone vendor in China

Yet, according to Bloomberg, Apple has sold no less two million units of its new iPhone 5 in just three days in China.

Apple’s CEO Tim Cook said: “Customer response to iPhone 5 in China has been incredible…China is a very important market for us and customers there cannot wait to get their hands on Apple products.”

Apparently the iPhone 5 will be on sale in no less than 100 countries by the end of this year. Yet the share price has fallen to a ten month low.

It’s odd.

The truth is that the iPhone and iPad still have a cache that rival products just don’t have.


US inflation dips below target

And still the cynics say that, thanks to QE, inflation is set to unwind like a giant snake from a long slumber.

But if QE inevitably leads to hyperinflation, explain this.

In November US headline inflation was 1.8 per cent year on year, and minus 0.3 per cent month on month. Core inflation – that’s with food and energy taken out – was 1.9 per cent year on year, and plus 0.1 per cent month on month.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Apple Iphone China, Bank of Japan QE, Diaoyu Senkaku, Japan consumption tax, Japan’s Liberal Democrat party, Shinzo Abe, UBS fine LIBOR RBS Barclays, US inflation, value of the Yen

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