Economic Review: Abenomics

Tue, 03 Sep 2013

Wanna place a “respectable” and fully legal bet? (And this has nothing to do with ‘Honest Abe Lincoln’ who seems to be everywhere these days). Then buy or sell a futures contract or an option! These allow you to bet on the future price of many things. Your home heating oil company most likely buys oil futures contracts for those who participate in the fixed price plan.

 

If you believe a stock is undervalued, you can buy an option that will lock in a purchase price today that will (hopefully) be lower than the price prevailing when the option expires. When the option matures, you can purchase the stock at the price agreed upon earlier and keep it or sell it for a nice profit.

 

If the bet turns out wrong, you have the option not to buy the stock. Your loss will be limited to the amount you had to pay for the option. If you’d bought options on the Japanese stock market in December, by May, you would have made a killing as the Japanese stock market had soared nearly 70-percent in a few months. (Maybe I should have done this instead of buying Powerball tickets.)

 

What’s going on is that the new Prime Minister, Sinzo Abe, has really been shaking things up with huge amounts of fiscal and monetary stimulation, as well as deregulation. Japan has endured more than two decades of slow growth, deflation, and depressed asset prices. The Nikkei average of 225 major stocks, which peaked at 40,000 in 1990, was below 10,000 as recently as December. By mid-May it was hovering around 17,000! GDP growth has accelerated.

 

Abe, whose previous stint as Prime Minister was less than impressive, has moved quickly to pass his fiscal package. He has also replaced leaders of the Bank of Japan with officials willing to go all out with “quantitative easing.” By purchasing large quantities of securities, they hope to increase the inflation rate to 2-percent! Yes, to increase inflation in order to get out of the deflation quicksand. The stock market responded favorably and the resulting increase in wealth and confidence has helped stimulate all kinds of economic activity. As the normally staid Economist magazine pointed out, the prices and demand for certain services in Tokyo’s red light district have been climbing!

 

Furthermore, the monetary stimulation and inflation prospects have weakened the yen – which is just what the Japanese economy needs! A weaker yen means stronger exports. But aren’t these stronger exports at the expense of those areas whose currencies are strengthening vis-à-vis the yen? Yes, but only in a narrow minded view of things. A faster growing Japan will help stimulate world economic activity, starting with China and South Korea, but then pretty much permeating the globe. Moreover, those who don’t like what Japan is doing to them might try emulating Japan! Europe, which is mired in recession, could benefit big time from adopting Abe-like fiscal and monetary stimulation. We wish Mr. Abe and Japan much luck. Here’s hoping that their very big and bold bets pay off. If they win, we’ll all share the prize money!

 

However, before you decide to bet the ranch on the Japanese recovery, you should be aware that stocks in Tokyo lost some ground after the big Abenomics rally. There is concern in Japan and elsewhere that monetary “shock therapy” may be losing its effectiveness. Hopefully, these worries are temporary with respect to Japan and much of the rest of the world. Ka-ching in New England? Just when I was beginning to despair about Connecticut and Rhode Island, both states showed some signs of life in recent labor market reports. Now, it is still far too early to break open the champagne – maybe a Bud Lite or Diet Coke is more appropriate. But both states recorded sizeable job gains in the March-April period after seeming to run out of steam. Problem is, these monthly numbers are quite volatile and very conducive to manic- depressive assessments of the regional economy. We’ll have to watch this very closely, so please keep your fingers and toes crossed and hope that the region is truly on a winning streak!

 

Economic Review is published by Webster Financial Corporation. The opinions and views in this publication are those of Dr. Nicholas Perna, Webster’s economic advisor, and are not intended to provide specific advice or recommendations for any individual. Consult professional advisors with regard to your individual situation. For more information or to submit a story idea to Economic Review, contact Bob Guenther by telephone at 203-578-2391 or by email at rguenther@websterbank.com.

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