Liberal Democratic party (LDP) won the election in Japan yesterday. Then Abenomics is going to fight against financial markets. Financial market is tougher than other political parties as it reacts very quickly. If LDP can not convince the financial market that financial condition of Japan can be improved, interest rate of Japanese government bond (JGB) will increase rapidly and price of JGB will be plunged. It means collapse of Japanese fiscal condition as Japanese government might not repay interest rare of debts. This is the race against time.
Moody’s Investors Service downgraded the Government of Japan’s debt rating by one notch to A1 from Aa3 at 1st December 2014. The outlook is stable. This is the beginning of the story. From now on, market participants will focus on how Abenomics work in Japan after LDP won the election. Rise of consumption tax is postponed until April 2017. So only less than two and half years are left for Japan. Can Abenomics turn deflation to inflation during such a short period? Can productivity of Japan be improved strong enough to rise the consumption tax?
Debt to GDP ratio already exceeds 200%. Japan has no experience of such heavy burden except the time after world war 2. Ray Dalio, founder of Bridgewater Associates, explains that we need policy mix below to solve the heavy burden of national debt .
1. Wealth redistribution
2. Spending cut
3. Debt restructuring
4. Debt Monetization
In short, tax rate will be increased to wealthy people, Japanese capital expenditure and social welfare will be cut and Bank of Japan will finance JGB. This plocy mix is needed to avoid JGB default. LDP should convince Japanese people that this policy mix is needed and should be exercised in a timely manner. This is the toughest task for LDP. But it can not be postponed because it allows financial market to trigger the interest hike.
Productivity may increase gradually by Abenomics however it can not offset hike of consumption tax rate. At the digital era, knowledge of software engineering, machine learning and artificial intelligence are critically important. These are key in order to optimize the systems, streamline the processes and improve the productivity. Unfortunately management of Japanese big companies are not familiar with fields of software . So Japanese companies are generally shy and away the innovations to improve productivity by big change. I do see a few managements whose majors are software engineering and compter science in Japan. In my view, it is too late to change this situations because it takes ten years to train new managements within companies. But we cannot wait such a long period anymore.
Anyway, we should listen carefully to what the financial market says. I am not sure whether LDP wins over the financial market or not. All I can say is that Japan should be changed by herself, rather than being forced to change by the market.