To All SNS Members:

This week, the world is worrying intensely about whether Japanese PM Shinzo Abe's plan to save the national economy from the doldrums of the last two decades is working or not.  It isn't.  But much worse, I'm now firmly convinced that, in the real world, there is no such thing as "Abenomics."

This week also saw the government's announcement of a second consecutive quarter in negative YTY growth mode, putting the nation firmly into recession - again. 

My view is much simpler than that of the current financial media: since his election, forcing out the prior central banker for his own compliant choice, Mr. Abe has done almost nothing but continue the mercantilist practices of the past - but in spades.  Too much government stimulus spending in the past?  Spend much, much more.  Too much currency manipulation to favor exporters?  How about much, much more?

These practices provided a temporary upward jolt to the metrics, as they always have in the past.  And the breathtaking size of the increases, with the determination not to relent until inflation hit 2% - inspired everyone in Japan, and even among its competitors and partners.

Which brings up the most important part of this re-run: the psychology of thinking that someone actually had a plan to get Japan out of its past low-performance rut was, in itself, uplifting for the economy.  This "secret sauce" of the national psyche's role in any given economy has long been commented upon, and will never be properly measured, but Japan has been living in this Abe-branded bubble for a couple of years now.

Abenomics was always distinguished from past parlor tricks by admitting that the first two "legs of the stool" were indeed copies of the past, writ large, but that there was a third leg based on real domestic reform which would provide long-term lift after the short-term sugar highs of more government infrastructure projects and fake-market yen devaluation ran out.

And here we hit the real problem.  Yesterday, Mr. Abe called for snap elections in Japan.  If the reason for this were to gain a mandate for the tough new plans in further consumer tax increases and other reforms, I wouldn't be writing this Special Alert.  Unfortunately, the real reason appears to be the opposite: seeking a path that will allow postponing, or just dumping, the additional reforms needed for longer-term change, focused upon debt reduction.

Without this third leg, there is no such thing as Abenomics: it's a fiction, nothing more than the original mercantilist practices for favoring Japan's exporters - most of whom, despite adjustments to the earlier, stronger yen - are doing quite well with their 30%+ cheaper currency.

And this brings up the final, and original, problem with the entire Japanese national business model, one which we at SNS have long labeled "Infomercantilist."  It was never designed to help the domestic economy, nor domestic consumers; its sole function, since its inception, has been to make the export community rich, and the domestic community poor.  And it's working perfectly today, just as in the past.

If this is all true, then the main "reform" that Abe got passed, part one of a two-part consumer tax increase, is a cruel hoax on domestic consumers, who were already paying too much for Japanese-made items one can buy more cheaply overseas.  Taxing those already at a disadvantage in this business model sounds like fiscal responsibility, but when one looks more closely, it was destined to increase income inequality between these two opposed sectors.

If the world wants to understand Japan's economic future, it will have to start by understanding its national business model, accepting that Abenomics is a new name for the old asymmetric distribution of government favor and wealth.

Japan's model continues to work perfectly, but only benefits large exporters.  And there is no sign whatsoever that anything is going to change.  In fact, all indications are that it will get much worse.

Sincerely,

Mark Anderson
CEO, Strategic News Service