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Japan s Abenomics New Export By-Product : Deflation !

( From Gonzalo Raffo, Seeking Alpha, FRED )​

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The Situation



​​ Abenomics describes the plans of Japanese Prime Minister Shinzo Abe to revive growth in the world’s third largest economy, which is struggling to find traction under the impact of a strong yen and stubborn deflation.

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Following significant pressure from Abe for bolder action, the Bank of Japan in January doubled its inflation target to 2 percent and made an open-ended commitment to buy assets from 2014. The central bank's new governor Haruhiko Kuroda, has vowed to do "whatever it takes" to achieve the inflation goal in two years.



Japanese ​​are trying it in despair after more than two decades of unsatisfied reforms...



We will show you that Abenomics new by-product for the world is deflation...









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The Detailed Abenomics Plan



​​"BoJ voted to double the monetary base and JGB holdings and more than double the average remaining maturity of JGBs in two years. The Bank is to adopt monetary base control as part of its easing program.



​​The Bank expects to boost the monetary base by Y60 to Y70 trillion a year and plans to raise JGB buying by Y50 trillion a year. It expects to extend the duration of JGB holdings to seven years from the current three years. It plans to end the asset buying fund.



​​It is ending the internal rule on limiting JGB buying temporarily. It expects that Japan's monetary base to be at Y200 trillion and sees its long term JGB holdings at Y140 trillion both by at the end of 2013.



​​It projects that its long term JGB holdings will be Y190 trillion at the end of 2014. The BoJ will try to hit its 2.0 percent CPI inflation target in about two years. "





The First Casualty



As a result, the impact of the Bank of Japan's actions so far mainly has been felt in the currency markets, not the credit markets as shown in the chart below.





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Japan's actions mainly have worked to lower the yen, which in turn raises the exchange rate of the currencies of its export competitors around the globe. In effect, that is a tightening of monetary policy for everybody else—at a time that global growth is slowing. Viewed from that perspective, no wonder gold is being battered.

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Moreover, despite the prospect of heavy, continued purchases of Japanese government bonds by the central banks, JGB yields have been bouncing higher lately ( after their more than manipulated fiscal year end in march 2013 ). Again, precisely the opposite of the planned outcome predicted in the textbooks.

Japan Government Bond 10Y

The Japan s Export Savior Fallacy



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​Given Japan s reliance on exports, even with the fall in value of the yen and insufficient growth in global demand, particurlarly from the US, are unfavorable conditions for Japan s Exports industries. As a result, net exports have not pick up yet...



​​What we must realize is that Japan s economy can t rely only on exports for growth. As we can see on the graph below, even from the past ten years, exports contribution from total gross domestic product climbed from 10% to 15%, it didn t avoid a stagnating economy. So it is pure illusion that Japan s own destiny can be changed only by the export sector...



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Japan s Exports Contribution

on Gross Domestic Product​.

%​

Japan s Coup de Jarnac

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WE IMPORT DEFLATION ( in a falling​ product price sense ). When money leaves our nation, passes through Asian factories, then returns, it is transformed from excess demand in the form of money to excess supply in the form of products. Inflation eventually pressures demand or pressures supply.



​​Over-investment such as is in progress in China and yields excess output and lower prices. So in a sense, China s put a lot of pressure to Japans industrial base.



But now, with the rising value of the Yuan and the tumbling value of the Yen, a huge shift in pricing power already occur...From a disinflation China s to defationary Japan s.​​



​​As you can see on the graph below, each time we saw a huge shift in the Yen within a year, the impact has been direct to US import prices from Japan. Already Import Prices were falling before the Yen debacle... Deflation will be knocking at our doors sooner than later.

Dollar Yen ( Inverted / Blue / Left scale )

US Import Prices from Japan Year-Over-Year ( Red / Right scale )​