You don’t have to be a genius in chart analysis to work out there is an economic war going on in Japan.
I’ve been writing about Abenomic using the Nikkei 225 chart for nearly two years now. The Nikkei 225 chart represents the Japanese economy and it clearly shows the years of deflation following the 80’s bubble years.
Deflation is the defining economic paradigm of the Japanese economy and its grinding drag has pulled on Japan’s society for a generation.
Japan has become a land of silent despair as the downward spiral of prices and shrinking wages has taken its toll on the morale of young and old alike. Japan is the only country where finance ministers commit suicide.
The below chart is of the key Nikkei index and the trend line is the long term road deflation has taken.
The current political administration is struggling to break Japanese economy out of this death spiral and into growth and inflation. The stock market is a thermometer of this attempt.
Sadly the attempts of Abenomics are being held at bay.
The second chart pretty much encapsulates the hopes and fears of the Japanese economy as the battle between entrenched deflationary interests fights off the policies of growth and inflation.
There is a clear channel to break out and also a terrible cliff-like downside if the battle for growth is lost.
The battle being fought looks like it could go either way.
However time is running out for Abenomics.
Bull markets cannot be hemmed in forever and remain alive. In the end the bullish attempts become exhausted, peaks are made and bear markets return.
Right now as the Nikkei 225 and by extension to Japanese economy is stuck while the markets of the first world are looking stale and imminently the infamous summer slump of development market is close by.
This could create the start of a long bear market that could see the Nikkei collapse.
If Abe had won the argument for growth and inflation the Nikkei would already be 20,000. He hasn’t and a cluster of events out of his control are swirling around his plans.
Global Market momentum has halted, likely as the US Taper takes hold in the minds of investors. Instability in Ukraine throws a bearish wild card of uncertainty into the mix and China looks the most economically shaky it ever has in its recent era of non-stop growth.
Consequentially the risks to the downside grow ever larger as the Abenomic offensive remains pinned to the deflationary trend that institution Japan is strategically wedded to.
Inflation and deflation are never accidental. There is always a political driver behind them. A child can create either environment by either switching on or off the money printing press that drives both inflation and deflation which as Milton Friedman would have said were “purely and everywhere a monetary phenomenon.”
Politics is “always and everywhere” the mother of both.
2014 will show us whether Japan is doomed for another decade of contraction, one that sees its population begin to collapse.
To many such a demographic collapse, which as of 2013 is already underway, will be a very fine ecological result. Who knows with a population halved by 2070 children born today will live their old age in a country with half the population and all the congestion and pollution that goes along with it cleared.
Is that really a vision worth generations of grinding recession?
These are the stakes in play. Growth or decline, so might say right sizing, is at the very core of the economic debate and the Nikkei clearly shows the unfolding economic outcome of that dialogue.
Deflation protects the old which is the responsibility of any society, inflation and growth bring the young and change to the fore.
Which is the right path? Growth or decline?
I myself feel that there are few outcomes that outdo the winnings of the brave, so I’m for Nikkei 20,000 not Nikkei 6500. Sadly the institution power structure of Japan are aligned with decline and they have control beyond the visions of Japan’s democratic layer.