Abenomics Wins: Budget And Inflation Both Jump (Over The Cliff)

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It would be ridiculous if it weren’t so sad: Facing exploding budget deficits and an uncircumnavigable mountain of debt over twice the size of the economy – Japan’s two largest economic problems – the government in its blind devotion to the religion of Abenomics screams, “Damn the torpedoes, full speed ahead.”

The new budget requests from government ministries for the next fiscal year, which starts April 2014, total over ¥100 trillion. This includes the special account for reconstruction. The ¥99.2 trillion (over $1 trillion) for all other expenses, the mostest ever, is up a breath-taking 7.1% from the current budget of ¥92.6 trillion. And then there is even more that hasn’t been specified yet.

While Abenomics has promised to stimulate the economy, it is certainly stimulating Japan’s most destructive problem, the deficit. So the ministries added ¥3.5 trillion to be handed out to Japan Inc., on top of the money it’s already getting, to promote growth (of the deficit).

The Ministry of Finance threw its own goodies into the basket: ¥25.3 trillion ($257 billion!) in costs to service Japan’s national debt of over ¥1 quadrillion. A jump of 13.7% from the pile set aside for the current fiscal year.

Alas, budget requests are like to increase even further as some ministries have not yet included spending items that are contingent on the consumption tax hike from 5% to 8% scheduled to take effect at the beginning of the next fiscal year. If it actually takes effect, part of the revenue has already been spoken for, but amounts haven’t been specified yet. That will be done later this year when the government makes the final decision on whether or not to go ahead with the tax hikes.

This monster of budget requests will be examined by the Ministry of Finance which will then cobble together the government’s budget proposal. In theory, it could shave off some items, and it has done so in the past, but that’s unlikely in the era of Abenomics and fattening up Japan Inc.

The solution? Inflation.

The Japanese Statistics Bureau released two consumer price indices today: the preliminary index for Tokyo for August, and the final national index for July. The preliminary Tokyo index is a precursor for what will hit the national index next month.

The Tokyo price index rose 0.3% from July, and is now up 0.5% for the 12-month period. After seven months in a row of price increases (despite the “deflation” talk in the media during much of that time), it has more than caught up with last year. Goods prices are up 1.5% for the 12-month period. And service prices, while still down 0.2% for the 12-month period, jumped a red-hot 0.5% from July.

The nationwide index for July rose 0.2% and is now up 0.7% for the 12-month period. Goods prices jumped 0.3% for the month and 1.4% for the year. Service prices rose 0.2% and are up 0.1% for the year.

At this rate, Abenomics will meet its 2% inflation target sooner than the two-year time frame it had laid out. Abenomics will be very successful in that respect. And it will watch with great satisfaction, dislocate its shoulder padding itself on the back, and receive praise from governments and central banks around the world, as inflation spirals higher. Before long, it might hit 4%, 5%, 6%…..

For the rest of the Japanese, inflation is a general tax on assets and incomes. But it won’t come with a monthly invoice or an annual statement. It will be nicely tucked away under every-day details of life, often hidden in smaller packages and cheaper ingredients – a scourge they have not experienced in years.

The Japanese across the spectrum, even coddled retirees who’ve had such a phenomenal deal over the decades, are now going to pay an increasing portion of what they earn and what they own to their government. And a big bout of inflation will help manage the unmanageable public debt….

The result? A nightmare.

But wait! Inflation would drive up yields – and the cost of servicing that uncircumnavigable mountain of government debt. Already, the MOF expects that cost to jump by 13.7% the next fiscal year. Now if inflation were allowed to drive up yields on government bonds by, say, on average two percentage points, the costs of servicing the national debt would balloon to unimaginable numbers. So that cannot be allowed to happen.

And if inflation isn’t allowed to drive up yields, if in fact, the Bank of Japan were to institute a yield peg and buy whatever bonds it would take in order to hold the yield peg, it would  end in the most brutal financial repression – and more inflation. A perfect nightmare.

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