Yen 10.3tr Japanese stimulus plan announced

Mr Abe unveiled a Yen 10.3 tr (US$115 bn) supplementary budget, which includes a major stimulus programme. Some Yen 5tr was already earmarked to be spent and, as a result, the size of the additional stimulus programme amounts to around Yen 5 tr.

Mr Abe believes that the stimulus measures will raise GDP by 2.0% and create some 600k jobs. The funds will be spent on rebuilding the region hit by the earthquake and tsunami, help improve Japanese corporate competitiveness and foster innovation and promote certain wealth creation measures, together with about ⅓ rd spent on education and healthcare. A further Yen 2.8tr will be contributed to the national pension scheme, raising the size of the supplementary budget to Yen 13.1tr.

Raising Japan’s GDP by +2.0% and creating 600k jobs – I very much doubt that – more likely that it will increase GDP by between +0.5% to +0.75%, with employment rising by just 1/3rd (possibly ½) of that anticipated. GDP for the fiscal year starting 1st April 2013 could come in around +1.75%. However, these short term measures do not address Japan’s fundamental problem, namely to increase long-term growth. Structural reforms are necessary, but Mr Abe has failed to address this issue.

Alarmingly, the Japanese current account declined to Yen 222.4bn (US$2.5bn) in November, well above estimates of a decline of just Yen17.1bn and a reversal from the surplus of Yen 376.9 bn in October. A continuing current account deficit remains one of my key concerns for the country as, in due course, Japan will need external financing to meet its requirements.

The Yen declined to around 89 to the US$ at present, though declined to Yen 89.35 at one stage, the lowest since mid 2010. Recent comments by the BoJ governor Mr Shirakawa suggest that he may accede to Mr Abe’s proposal to raise the BoJ inflation target to 2.0% Some kind of employment target has also been talked about. The Nikkei, on the other hand rose by +1.4%;

Chinese inflation rose to +2.5% in December, higher than the +2.3% forecast and the +2.0% in November, a 7 month high. The coldest winter in nearly 30 years raised fresh food prices. Inflation is likely to rise further, to perhaps to +3.0%, given the cold winter and price increases during the upcoming Chinese New Year holidays. The Shanghai composite declined by -1.9% on fears that rising inflation will limit the ability of the authorities to ease further. However, these look like 1 off price increases to me and inflation, whilst likely to have bottomed, should decline from a peak of around +3.0% in coming months.

CPI rose by +2.6% last year, though PPI declined by -1.7%;

Indian industrial production declined by -0.1% in November Y/Y (+0.1% expected), from a revised gain of +8.3% in October, though the data was impacted by holidays.

South Africa was downgraded to BBB, from BBB+ by Fitch, the 2nd lowest investment grade rating, though with a stable outlook – stable outlook !!!!. Fitch cited slower growth, a wider budget deficit and increasing unemployment. Fitch also referred to “social and political tensions”, which “have subdued growth” together with corruption and an ineffective government. And they have a stable outlook !!!. S&P and Moody’s downgraded S Africa last year. With a budget deficit likely to come in around -5.0% of GDP, combined with weakish growth (the government’s forecast is +3.0%, which looks optimistic to me), further downgrades are likely. For full disclosure purposes, I remain short the Rand;

Mrs Merkel is in Cyprus to attend a meeting of conservative politicians. She will not meet the communist President, Mr Demetris. Elections are due in February and a new President is expected to be elected. She advised that Cyprus would not receive special treatment. German politicians have balked at a potential bailout of the country and its banks, as there are allegations that Cypriot banks have aided in money laundering and tax evasion, in particular on behalf of Russians. The German opposition (SPD) has advised that they will not vote for a bailout, which means that Mrs Merkel will not be able to get approval from the Bundestag, given opposition from some members of her coalition. Furthermore, the EZ disagrees with the IMF, who want Cypriot banks to be bailed out directly by the EZ and, in addition, that a debt restructuring should be concluded before they consider lending – both issues are opposed by the EZ. Cyprus was downgraded by 3 notches to Caa3 by Moody’s. Watch Cyprus – the EZ may just force a debt restructuring ahead of a bailout, which could well threaten the current calm in the region. It is thought that Cyprus needs some E25bn to bail out its banks and the country, though the government suggested that they would need just E17.5bn – yeah sure. An exit of Cyprus from the EZ is also a possibility;

Spanish Industrial output declined by a massive -7.2% in November Y/Y, much worse than the -4.0% expected and the -3.1% in October. Spain’s problems continue;

UK November manufacturing production declined by -0.3%, much worse than the rise of +0.5% expected, though better than the -1.3% in October.

UK November industrial production rose by +0.3%, lower than the +0.8% expected , though better than the -0.8% in October;

The US November trade deficit declined to -US$48.7bn, far higher than the -US$41.3bn expected and the revised -US$42.1bn in October. The numbers however, suggest that the US economy is improving faster than expected;


Asian markets (ex China, which was -1.9% lower) closed mainly flat to higher (Nikkei was up +1.9%), with European markets flat. US futures suggest a flat open.

The Euro is surging, following the ECB statement that they were unanimous in not wanting to reduce interest rates. GS has also suggested an Euro/US$ target of US$1.37.

Gold is trading around US$1674, with February Brent lower at US$110.26 – finally declining.

The Japanese stimulus package has weakened the Yen, in particular against the Euro – currently E118.73 and Yen88.98 against the US$.

Have a great weekend.

Kiron Sarkar

11th January 2013.

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