So Abe came out and called the election.
He will win and he will use that victory to push his agenda for economic restructuring.
That restructuring is to U-turn from a strategic deflationary policy to a strategic inflationary policy. It has been a long fight to turn the old institutionalized position around.
Deflation feeds the old but takes from the young while inflation feeds the young by draining the old. As such Abe’s three arrows idea is an aggressive policy about stemming the demographic decline of Japan which is on target to halve the Japanese population this century.
It is valid to embrace a fast shrinking population. This kind of ”sack cloth and ashes” environmentalism is popular in socialized countries. Leave the earth to the flora and fauna, why not? Who needs more people?
However if you believe in growth and prosperity, you need power and as the saying goes there is no such thing as economics, only demographics. From that perspective Japanese demographics are awful.
To turn that around there needs to be a shift from the old to the young, from deflation to inflation.
To add to the mix, Japan’s government has a ton of debt, less than the headline number of well over 200% to GDP, but still big. A bit of inflation and growth would do no end of good to the income line of the state and the liability line could use some depreciation.
So the long term performance of the Nikkei 225 is a good proxy for the Japanese economy. An ever appreciating Yen meant the outcome wasn’t as bad as it looks, in say dollars, but nonetheless it was tough on Japanese industry to say the least.
You can see the deflationary trend clearly.
The Nikkei has clearly broken out. It has broken out because of the devaluation of the Yen.
But where to next?
When Abe wins and he is very likely to do so, he is not going to let up. This political move is to push hard for his vision of expansionary Japan. He says if he doesn’t win he will quit, so he is effectively going all in.
This is where it will go if he pulls of an election victory.
It’s a brain dead chart, but simple stories are of course the best. So its short yen, long Nikkei and hold onto your hat. Banzi.