Terrie's Take 705 -- Dangers of Japan's Quantitative Easing Plans, e-biz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Sun Apr 7 23:39:24 JST 2013

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, Apr 07, 2013, Issue No. 705


- What's New -- Dangers of Japan's Quantitative Easing
- News -- Fukushima radiation causing sick kids in US?
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Geto Onsen, Iwate and Ueno Park, Tokyo
- News Credits

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On Thursday last week, under the influence of PM Shinzo Abe, the Bank of
Japan declared its new strategy for fighting deflation. The bank said it
would embark on its own version of America's Quantitative Easing (QE)
program, having the bank buy huge amounts of government issued bonds, as
well as buying publicly traded stocks and several other types of

Just how huge is this? Well the bank says it will buy about JPY50trn of
Japanese Government Bonds (JGBs) a year, which is less than the
US$85bn/month that Ben Bernanke is spending in the USA, but not by much.
Given that the US has an economy more than two and half times that of
Japan's, the true scale of the BoJ's action is about 50% per capita more
than the US Fed. Awesome... or foolhardy.

Since his pending re-election last November, Abe has been promising to
re-inflate the economy, giving fair warning to currency traders to "watch
out below". Thus he has been able by degrees to bring down the yen by
almost 20% versus the dollar. Recently, though, he has run the risk of
being the boy who cried "Wolf!" once too often, and sure enough when Cyprus
had a run on its banks in March, the yen shot straight back up again as
traders sought it as safe haven.

So it would have been with some satisfaction to Abe that the BoJ
announcement this week had strong shock value. Currency traders were not
ready for the Thursday announcement by newly appointed BoJ Governor,
Haruhiko Kuroda, that the bank would double its purchases of JGBs, as well
as buying a range of other riskier securities, and they were caught on the
hop. Consequently, the yen fell by more then 3% against the dollar in just
one day, and now pundits are predicting that it will hit 100+ to the dollar
by the end of the year (or more likely by the end of this month?).

So is there any downside to the Japanese government printing more money and
pretending that everything is going to be OK? After all, the Americans have
done it for years and the world is still in one piece.

[Continued below...]

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[...Article continues]

We suppose it depends on your point of view. For the time being Abe is
taking a leaf from Ben Bernanke's book, and is looking to simply stimulate
the economy and overcome the over-cautious nature of Japan's investors and
companies. As Keynes would have it, you sometimes need a government
stimulus to "awaken the animal spirits" of the market, and it's hard to
argue against Japan needing some kind of major kick start, given  two
decades of near-continuous decline... Oh, except, for the inconvenient fact
that it's been tried at least 3-4 times before and each time the main
result was just an increase government debt and more malaise.

So what's different this time?

Firstly, the sheer size of the program. The JPY50trn a year in JGBs will be
about 10% of Japan’s GDP. In contrast, the US Federal Reserve's bond
purchases have run around 6.8% of GDP. Also, they were phased, so that the
Fed could assess how much it was goosing the economy before going in for
more. The Japanese on the other hand are simply jumping in boots and all.

Secondly, Japan seems to have some sympathy and support from other
developed nations about its moves. Indeed, there are some interesting
discussions on Seekingalpha.com about just how coordinated the central
banks in the developed economies are these days. One writer asserts that as
the US economy starts to recover, its QE(3) actions will be curtailed and
it will be Japan's turn to open the fiscal faucets for a while -- then
perhaps Europe's after that, although Europe has all kinds of pesky laws
governing the independence of its central bank. So just how long Japan will
be able to "devalue" its currency is a good question. Will it be long
enough for Abe to undertake structural reforms, which will be necessary to
carry the economy after the QE actions have run their course?

Thirdly, Abe does seem to be ready to undertake those structural reforms.
With the exception of Koizumi, Abe appears to be pushing  his key
constituents harder for change than any LDP politician in living memory. Of
course there are probably lots of backdoor deals being done, but still, the
opposition to government initiatives have been remarkably tame so far. You
have the farmers reluctantly swallowing the TPP discussions, the medical
sector facing up to online drug sales, and education getting a rewrite of
what is expected from teachers (but in a retrograde nationalistic direction
in our opinion).

While bold action by the government has been sorely needed, there is
something about this latest plan that doesn't feel right. Most economists
tell us that apart from rising import costs, the trading of debt between
two arms of the government to monetize that debt is basically a safe way to
get businesses and individuals investing again -- because it costs the
government nothing, and creates inflation and thus an environment where it
is logical for the citizenry to invest rather than watch one's savings
erode. But while Bernanke was able to pull it off in the USA, we wonder if
Japan isn't opening itself up to some major risks?

1. Everyone seems quite sanguine about the idea of increasing the cost of
imports. After all, Japan can do without imports can't it? They do make
everything needed, right here don't they? Well, not quite. For a start,
there is the small issue of food and fuel. More than half of Japan's food
and almost all its fuel is imported, so not only will the consumption tax
increase be hitting the consumer in the next 12 months, but they will also
have to deal with a major decline in the yen. This is bound to cause
pessimism among consumers and as we know: depressed consumers =>
constrained spending => deflation.

2. George Soros, Japan-bear Kyle Bass and a number of other notable
investors have warned that the Japanese QE program is so sudden and huge
that the BoJ may overshoot its targets and cause a run by Japanese "Mrs
Watanabe" investors into foreign currencies. If this was to happen, it
would not only accelerate the sinking yen but also cause a sharp rise in
interest rates, which would be devastating to Small- to Medium-Sized (SME)
companies. It would also force up the amount of debt interest payments the
government would have to make.

3. Adding significant sums to the national debt through QE won't be of any
benefit if inflation isn't created as a result. The Japanese public has
been served up so many false dawns before, that one suspects they no longer
believe in government macro policies. This means it will take time to
change an ingrained psychology, which may sink the whole initiative. Recent
news reports indicate that most Japanese companies (mostly they are SMEs,
not rich exporter multinationals) have no plans to increase wages any time
soon, and instead are looking to continue their head cutting efforts. Thus,
if younger consumers can't get access to funds to spend, they won't
consume, and producers won't be able to raise prices.

4. We read a well-reasoned argument recently that if Japan does see the yen
drop rapidly and significantly, this may destabilize the Korean Won and
cause another financial crash in that country, with possible knock-on
effects for China as well. While Japan may not really care what happens
across the Japan Sea, a financial crash in Korea would affect market
confidence globally -- especially in Europe.

We certainly hope that Abe's big gamble pays off -- Japan's SMEs deserve a
break. However, if you don't see consumer spending and inflation pick up by
the end of the year, probably it will be fair to say that the QE effort
will have failed, and the government will have moved closer to a tipping
point in its own ability to raise future funds and stave off a debt trap.
And that will be an interesting time indeed...

...The information janitors/


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+++ NEWS

- Mitsui buys leading German dental materials co.
- Olympus sells dental unit as well
- 100k NTT Goo user accounts hacked
- Feed-in tariffs fall by 10%
- Fukushima radiation causing sick kids in US?

=> Mitsui buys leading German dental materials co.

Mitsui Chemicals has announced that it will buy the dental materials
business of Heraeus Holdings, of Germany. Heraeus is the second largest
supplier of dental materials globally, and the deal is likely to send shock
waves through the industry. Mitsui is buying Heraeus' 300m Euros of
revenues and sales network in 20 countries for JPY50bn. ***Ed: Pretty
decent price, given that Mitsui now has access to a massive sales network
without all the regulatory challenges it would otherwise have to face.**
(Source: TT commentary from e.nikkei.com, Apr 4, 2013)


=> Olympus sells dental unit as well

We were going to report this one last week, but it matches up well with the
Mitsui deal above... Olympus the week before last announced that it will
sell four medical units to Noritsu Koki for between JPY6bn-JPY7bn. The
units include Feed Corporation, a leading dental supplies catalog company
based in Kanagawa. ***Ed: Interestingly, Olympus bought FEED in 2008 from
the founder for JPY1.8bn. Dental is a flat but profitable business in
Japan, and the Feed and Mitsui deals show that there is a major realignment
going on in the industry.** (Source: TT commentary from e.nikkei.com, Mar
29, 2013)


=> 100k NTT Goo user accounts hacked

NTT's Goo portal has reported that up to 100,000 user accounts were hacked
earlier this week, with user names and financial information such as credit
cards and bank data being stolen. They refer to a "brute force" attack,
which generally refers to intensive password cracking. At the same time,
Yahoo Japan also suffered a breach, with a trojan on one of its servers
busy harvesting information on 1.27m users. Yahoo reckons that it shut down
the trojan before the data could be sent externally. (Source: TT commentary
from csoonline.com, Apr 4, 2013)


=> Feed-in tariffs fall by 10%

The highly incentivizing feed-in tariffs being supplied to alternative
energy suppliers by the Japanese government to wean Japan off nuclear
power, have been cut by 10% as of April 1st. The old rate was JPY42/kWh,
while the new rate is JPY37.8/kWh. Experts are saying that the lower rates
are still 300% higher than incentives offered in Germany and China, thus
ensuring that Japan will become the world's 3rd largest solar panel market
by the end of this year. (Source: TT commentary from seekingalpha.com, Apr
5, 2013)


=> Fukushima radiation causing sick kids in US?

A study by the US-based Radiation and Public Health Project has found that
US children born around the pacific rim shortly after the Fukushima nuclear
accident have a 28% greater chance of having congenital hypothyroidism than
those living elsewhere or born before the disaster. Untreated the disease
can cause body and brain handicaps. The US tests all kids for
hyperthyroidism one month after birth. (Source: TT commentary from yahoo.com,
Apr 6, 2013)


NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.



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Remuneration is JPY3M - JPY5M depending on your experience and skill level.


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- Desktop Engineer, IT services provider, JPY3M - 5M

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Title: "Professional Networking Made E.A.S.Y."

Details: Complete event details at http://www.icajapan.jp/
Date: Thursday, April 25, 2013
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Venue is The Foreign Correspondents' Club of Japan,

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In this section we run comments and corrections submitted by readers. We
encourage you to spot our mistakes and amplify our points, by email, to
editors at terrie.com.

=> No corrections this week.


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=> Ueno Park, Tokyo's first public park

When I first arrived in Tokyo, I spent a lot of time wandering around
trying to get my bearings (often much easier said than done). One
sweltering September afternoon, with sore feet from the previous day’s
hike, I found myself wondering whether there was perhaps a nice, convenient
location that had a bit of everything. Maybe some shrines, a couple of
temples, a large pond (preferably covered in lotus plants), a zoo, several
museums and galleries, a few cafes, a baseball ground, a large concert
hall, and a good chance of seeing some high quality street performers.
You’d never guess, but Ueno Park has got it all!

The park has an upper section and a lower section. In the upper section you
can find the beautiful and very different Gojo and Toshogu Shrines, as well
as the Kiyomizu Kannon Temple and Buddhist stupa. Also on this level are
the zoo, a children’s play area, and four major museums: Tokyo National
Museum, the National Science Museum, the National Museum of Western Art,
and Tokyo Metropolitan Art Museum (reopened as of 1st April 2012).


=> Geto Onsen, A long, hot soak in an old-world Iwate hot spring

Located in the heart of the stunning Kurikoma National Park at the end of a
narrow winding road which snakes through the hills of Iwate is Geto Onsen.
It’s an unusual, slightly quirky and, above all, beautiful place to have a
soak. Geto Onsen is located on the banks of a narrow and shallow river. Its
waters are crystal clear and cool. Rising up from the river is a
magnificent rock face, in some parts bare while in others covered in dense
foliage, which is simply breathtaking, especially in autumn with the leaves
changing to a deep red.

The older part of the onsen (hot spring) is refreshingly basic. There are
only five baths, and they are housed in buildings that are open, to a
greater or lesser extent, to the elements: there are roofs and pillars but
no actual walls, which allows one to enjoy the unparalleled beauty of the
surrounding countryside. With only five baths a way of accommodating males
and females had to be arrived at. This has been achieved by establishing
different opening times for men and women. One of the baths is, however,
mixed, which is now very rare.




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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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