Asia steadies

China’s Shanghai Composite Index steadied and is again testing resistance at 3100. Breakout would signal a primary up-trend. Rising troughs on Twiggs Money Flow indicate buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index rallied for another test of resistance at 17000. Breakout above 17000 would suggest a primary up-trend. Follow-through above 17600, completing a broad double-bottom, would confirm. Further consolidation, however, is more likely.

Nikkei 225 Index

India’s BSE Sensex broke out of its narrow rectangle at 28000, signaling another advance. Expect a test of the 2015 high at 30000. Bearish divergence on Twiggs Money Flow now appears misleading.


Why Japan Should Rearm by Brahma Chellaney | Project Syndicate

….It is Japan’s security, not its economy, that merits the most concern today – and Japan knows it. After decades of contentedly relying on the US for protection, Japan is being shaken out of its complacency by fast-changing security and power dynamics in Asia, especially the rise of an increasingly muscular and revisionist China vying for regional hegemony.

….China has not hesitated to display its growing might. In the strategically vital South China Sea, the People’s Republic has built artificial islands and military outposts, and it has captured the disputed Scarborough Shoal from the Philippines. In the East China Sea, it has unilaterally declared an air-defense identification zone covering territories that it claims but does not control.

With US President Barack Obama hesitating to impose any costs on China for these aggressive moves…..the reality is that ensuring long-term peace in Asia demands a stronger defense posture for Japan.

….Would Japan need to become a truly independent military power, with formidable deterrent capabilities like those of the UK or France?

The short answer is yes. While Japan should not abandon its security treaty with the US, it can and should rearm, with an exclusive focus on defense…..

Read more at: Why Japan Should Rearm by Brahma Chellaney | Project Syndicate

China: Deja vu all over again

The Shanghai Composite today found support at 3500 today after plunging more than 8% on Monday. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Lost Decade

From Wikipedia:

The Japanese asset price bubble….. was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices had been closely associated with excessive monetary easing policy at the time.

By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ)…..the economy’s decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.

“…uncontrolled money supply and credit expansion….overheated stock market and real estate bubble.” Sound familiar? It should. We are witnessing a re-run but this time in China. Wait, there’s more…..

…..At the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy, but decided to delay the decision in view of economic uncertainty related to Black Monday (October 19, 1987) in the US.

…..BOJ reluctance to tighten the monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the “endaka recession” ….. closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen.

… order to overcome the “endaka” recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through expansion of public investment. Simultaneously, the BOJ declared that curbing the yen’s appreciation was a “national priority”……

Global stock market crash leads to prolonged monetary easing…… aggressive expansion of public investment to stimulate the domestic economy…..central bank efforts to curb appreciation of the currency. We all know how this ends. We’ve seen the movie before.

It’s like deja-vu, all over again. ~ Yogi Berra

How Indonesia and the Philippines Solved Their Maritime Dispute | The Diplomat

Arif Havas Oegroseno is Indonesia’s Ambassador to Belgium, Luxembourg and the EU, and President of the 20th Meeting of the States Parties of United Nations Convention on the Law of the Sea (UNCLOS) 1982:

There are two important lessons arising from the negotiations between Indonesia and the Philippines over their bilateral maritime boundaries. Firstly, whether you like it or not, the current prevailing law to settle maritime boundaries is UNCLOS. This is true regardless of your historical record, even if it is 115 years old. If a rectangular line map from a century-old Treaty had to be aligned with UNCLOS, aligning a dash-line map that was created only in the mid-1940s with UNCLOS should be relatively problem-free. While there is a difference in shape between the rectangular line of the Treaty of Paris that the Philippines previously used with Indonesia, and the nine dash-line map that China currently bases its maritime claims in the South China Sea on, they share one similarity: both are unilateral expressions of claims that are not based on international law. The first Indonesia-Philippines maritime boundary signifies the emergence of a state practice whereby in a maritime boundary dispute a unilateral proclamation of maps will eventually be aligned with prevailing international law. Secondly, the claimants need not look far to see how countries in the region can work together for the larger interest over a large swath of waters devoid of maritime boundaries…..It is my conviction that all claimant states in the South China Sea, especially China, which is also a Permanent Member of the UN Security Council, carry the moral, political, and legal responsibility of creating peace and stability in the world and are able to work together peacefully.

Read more at How Indonesia and the Philippines Solved Their Maritime Dispute | The Diplomat.

China’s Investment-Driven Growth “Miracle”

Worth Wray quotes Michael Pettis from his 2013 book, Avoiding the Fall: China’s Economic Restructuring, about the future path of China’s debt-laden economy:

Every country that has followed a consumption-repressing, investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led to either a debt crisis or a lost decade of very low growth.

I couldn’t agree more. China is no different to Japan or Brazil. Investment-driven growth is only sustainable where investment earns a higher return than the long-term cost of servicing the debt. With diminishing returns on additional investment, returns dwindle and a debt/investment imbalance develops.

Keynesian thinking goes even further, however, suggesting that a fiscal deficit can be used to fund expenditure that does not earn a return, whether public fountains or school libraries. But that is short-term thinking, as Keynes indirectly acknowledged with his response “in the long run we are all dead.” In the long run, as with Japan, the government ends up with a huge pile of public debt and no income from investment assets with which to service the interest, let alone repay the principal.

The effect of a Chinese slow-down is likely to be similar to that of Japan in the early 1990s — just on a larger scale.

Read more at John Mauldin’s Thoughts from the Frontline: Can Central Planners Revive China’s Economic Miracle?

Two cheers for higher Japanese bond yields in the spirit of Milton Friedman | The Market Monetarist

Market monetarist Lars Christensen gives an insight into rising Japanese (JGB) bond yields:

…..the markets do not think that the Japanese government is about to go bankrupt. In fact completely in parallel with the increase in inflation expectations the markets’ perception of the Japanese government’s default risk have decreased significantly. Hence, the 5-year Credit Default Swap on Japan has dropped from around 225bp in October last year just after Mr. Abe was elected Prime Minister to around 70bp today!

Read more at Two cheers for higher Japanese bond yields in the spirit of Milton Friedman | The Market Monetarist.

Carney Warns Europe Faces Decade of Stagnation Without Key Reforms | WSJ

Nirmala Menon at WSJ quotes Mark Carney, incoming governor of the Bank of England:

Mr. Carney, currently Canada’s top central banker, said Europe can draw lessons from Japan on the dangers of taking half measures……..“Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens,” Mr. Carney said in his final public address as governor of the Bank of Canada.

Read more at Carney Warns Europe Faces Decade of Stagnation Without Key Reforms – Real Time Economics – WSJ.

Beware China’s civilian-military relationship | The Japan Times

Masahiro Matsumura, professor of international politics at St. Andrew’s University (Momoyama Gakuin Daigaku) in Osaka, writes

…….the Chinese state apparatus is largely detached from the military, while the party’s top civilian leaders have only a loose grip on the generals.

Worse still, the current fifth generation of civilian leaders is made up of veritable dwarfs in military affairs. By contrast, the PLA’s leaders have become increasingly professionalized, but without the tempering influence of effective civilian control, which might well collapse entirely if China’s leaders continue to accept unauthorized military actions, particularly in the East or South China Sea, as faits accomplis. Line commanders could take advantage of the equivocality of civilian policy, particularly given the military’s growing political clout and the CCP’s dependence on popular nationalist sentiment.

Read more at Beware China’s civilian-military relationship – The Japan Times.

Will the Chinese Be Supreme? | Ian Johnson | The New York Review of Books

Ian Johnson highlights how China’s strategic blunders have painted it into a corner:

Just as [Pre WW I] Wilhelminian Germany should surely have seen that building a blue-water navy would cause Britain to form alliances against it, so too should China understand that demanding control over islands far from its shores but close to its neighbors’ would cause a backlash. (Here one thinks not so much of the Senkaku/Diaoyus but of the shoals, reefs, and islets in the South China Sea.) Even the battle for the Senkaku/Diaoyus seems to have no satisfactory endgame for China except a permanent state of tension with its most important neighbor.

…… the country’s tactics have left it surrounded by suspicious and increasingly hostile countries; indeed, it’s probably no exaggeration to say that China has no real allies.

Read more at Will the Chinese Be Supreme? by Ian Johnson | The New York Review of Books.

Time for U.S. to Disengage from North Korea Crisis | Cato Institute

Doug Bandow suggests:

Washington should begin contemplating, within earshot of Beijing, getting out of the way of its allies if the North continues to develop nuclear weapons. The message to China should be: if your client state continues its present course, you may face a nuclear-armed Japan. If that happens, blame your buddies in Pyongyang.

Read more at Time for U.S. to Disengage from North Korea Crisis | Doug Bandow | Cato Institute.

Nana Rolland: North Korean Pawn in a Chinese Chess Game –


While it steps up its own provocative actions, including recurrent intrusions into Japanese waters and airspace around the disputed islands, China exhorts the U.S. to restrain its “troublemaking” Japanese friends. The implied linkage is clear: As Beijing tries to forestall North Korean brinksmanship, it expects Washington to do the same.

We have seen this gambit before. In 2003, when Beijing feared that Taiwanese president Chen Shui-bian might be inching toward independence, it called on Washington to bring him to heel. In return, it agreed to host multiparty negotiations to persuade Pyongyang to abandon its nuclear-weapons programs.

Beijing got the better end of that deal…..

Read more at Nana Rolland: North Korean Pawn in a Chinese Chess Game –

China is now heading toward Japan-style economic paralysis if it doesnt change course | Quartz

Jack Rodman, president of Global Distressed Solutions LLC, spent 1999 to 2011 living in Japan and China, packaging and disposing of nonperforming loans and distressed assets. He writes on the problems facing China:

At the end of 1989, Japan’s bubble economy burst and its economic miracle came to an abrupt end. The Nikkei exchange fell from nearly 40,000 to its current 10,000 range. Over the course of 20 years, what appeared to be “unstoppable” economic growth proved to be anything but.

Today, China, in some ways, appears to be closer to following Japan than to sustaining its own economic miracle. China’s Shanghai Index (stocks) has fallen from a high of 7,000 in 2007 to a low of 2,000 for the past few years, and Chinese domestic investors have little confidence in their domestic stock market. The Japanese bubble, and its aftermath, was the result of a series of domestic financial and economic imbalances, many of which China faces today—to varying if not greater degrees….

Read more at China is now heading toward Japan-style economic paralysis if it doesnt change course – Quartz.

Japan economy shrinks as China dispute takes toll

Elaine Kurtenbach at USA Today writes:

Japan’s economy contracted in the latest quarter, signaling that like Europe it may already be in recession, further weighing down world growth. On an annualized basis, the world’s No. 3 economy shrank 3.5% in the July-September quarter, the government reported Monday. It was in line with gloomy forecasts after Japan’s territorial dispute with China hammered exports that were already weakened by feeble global demand……

Rajeshni Naidu-Ghelani at CNBC writes that Japan’s recovery depends on global demand:

Izumi Devalier, Japan economist at HSBC in Hong Kong backed that sentiment saying Japan’s economic development over the past decade shows that it’s been extremely dependent on exports and external demand.

“Sad to say, Japan will have to wait for the overseas economies to pick up before it sees its own economy really lifted,” Devalier told CNBC.

Milton Friedman’s Advice

In 1997 Milton Friedman commented on Bank of Japan policy following Japan’s deflationary spiral of the early 1990s:

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

Austerity measures adopted in Europe are failing and central banks are likely to attempt Friedman’s option in a number of guises. Already, as Gary Shilling points out “competitive quantitative easing by central banks is now the order of the day.” The Bank of Japan last year expanded its balance sheet by 11 percent, the Federal Reserve by 19 percent, the European Central Bank by 36 percent and the Swiss National Bank by 33 percent. Even countries with relatively strong balance sheets, like Switzerland, are forced to respond to prevent appreciation of their currencies from harming exports.

Inflation will remain moderate only so long as central bank balance sheet expansion is offset by deflationary pressures from private sector deleveraging. That is the difficult task ahead: to maneuver a soft landing by balancing the two opposing forces. Failure to do so could lead to a bumpy ride.

Yen’s Fall May Benefit Japan Firms –

TOKYO—As the yen finally buckles versus the dollar, Japan’s exporting manufacturers are sitting on potential operating-profit gains that could be worth billions of dollars on paper, likely triggering some higher earnings forecasts if current trends persist.

….Like many of Japan’s biggest companies, the big three auto makers—Toyota Motor Co., Honda Motor Co. and Nissan Motor Co.—are heavily exposed to exchange-rate fluctuations. Estimates by the three show that every ¥1 variation in the dollar exchange rate has an impact of ¥67 billion on their combined operating profit. That means the dollar’s gains since the central bank’s easing could notionally assist the three auto makers’ annual operating profit to the tune of ¥165 billion, or more than $2 billion at recent exchange rates.

via Yen’s Fall May Benefit Japan Firms –