Abe Agonistes

These should be good days for Japan’s Prime Minister Abe.  
After being punished in local elections, Abe recovered to push back a challenge
by his former defense minister and now governor of Tokyo.
reappointed Kuroda at the helm of the Bank of Japan, breaking from a 50-year
tradition of one-term BOJ head.  

The Japanese economy is enjoying its longest expansion in a couple of
  The threat of deflation has been arrested, and in February
Japan’s core inflation stood at 1.0%, the same as the ECB’s core measure,
though it is calculated quite differently.  

The US pulled out of the Trans-Pacific Partnership talks.  Abe had
belatedly seen how TPP could further his own domestic agenda. 
Although many thought this ended the Obama Administration’s “pivot to
Asia,” Trump’s stepped-up efforts to confront North Korea and China offers
much for Abe to like.  

Still, there has been divergence.  The US did not step-up its
confrontation until North Korea claimed the ability to strike the US homeland,
even though treaties obligate the US to regard on attack on Japan as the same
as an attack on it.  Japanese officials are concerned that in bilateral
talks the US may sacrifice Japan’s interest to secure a deal.   

Several countries have been given exemptions, some permanent and some
temporary, from US steel and aluminum tariffs.
  Not Japanese
producers.  It may be more of a political insult than an economic injury
for Japan.  While Macron and Merkel, who will visit the US later this
week, will seek an exemption for EU members, Japan may pursue a different set
of tactics, allowing Abe to focus on security issues when he calls on Trump
next week.  

The US is the destination of less than 10% of Japan’s steel exports
Asia is home to 805 of Japan’s 38 mln tons of steel exports.  Rather than
push for a country exemption, Japan may be counting on product
exemptions.  Simply put, more than a third of Japan’s steel exports to the
US are specialty products that have no or few domestic alternatives. 
Without Japan’s steel products, high-grade piping in deep underground oil well
would be disrupted, as would some auto production and rail track.  Note
too that some Japanese steel producers have long-term contracts with customers,
some of which, for example, may be Japanese auto and part makers. 

Some of Abe’s challenges are home grown.  There is a scandal
over the government sale of land to a nationalist school at a deeply discounted
price.  The person who operates the school is a personal acquaintance of
the Prime Minister and his wife.  MOF documents about the sale were
changed to remove their names.  A MOF official testified before parliament
earlier today that an employee had asked the buyers to lie about the reasons
for the heavily discounted price.   

Another scandal is breaking.  The issue is over the log from the
2003 deployment of Japanese troops in Iraq (in support of the US-led campaign).
The log apparently missing, was later found, but failed to inform the defense
minister.  The Air Self-Defense Forces also failed to that its logs had
been found.  The defense minister had testified before parliament that
such logs did not exist a month after they were found.  

This is strikingly like an incident last year.  The log of the
ground self-defense forces engaged in a UN peacekeeping mission in South Sudan
led the resignation of the defense minister (Inada) last July.   The
problem stems from Japan’s constitution that prevents the use of Japanese
troops in combat areas.  While the government defined the deployments as
non-combat missions, a closer look at the areas of their activities may
contradict such claims.  

It is well known that Abe wants to jettison the pacifist parts of the
constitution, and has already promoted a more liberal interpretation. 

Over the past weekend, Japan activated a 2100-person amphibious brigade for the
first time since WWII.  The unit includes helicopter carriers and
amphibious ships and assault vehicles.  It is aimed at countering the
invasion and occupation of islands that are claimed by China too. 

Adding insult to injury, the fruits of the aggressive monetary policy
have begun fading.
  The Nikki rallied 19% last year, culminating a
188% rise since the end of 2011 and the start of Abe’s second time as Prime
Minister.  The gains are being pared. After rising almost 1.5% in January
to reach its best level since 1991, the Nikkei fell in both February and March
(~7.2%).  It is a little more than 1% high so far here in April. 
Small caps are doing only slightly better than the large caps this year, though
the JASDAQ and the Topix REIT Index are posting small gains for the

The dollar fell through JPY105, the last major support ahead of the
psychologically significant JPY100 level in late March, ostensibly as Japanese
accounts stepped up their hedging in front of the fiscal year.  
are a few technical indicators suggesting that the dollar’s leg down that began
in early January near JPY113 has run its course.  A move above JPY108
would target JPY110.  The dollar-yen is often a range-bound currency pair,
and the new range may be JPY105-JPY110.  


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