Via the Heisenberg Report:
We’ve been looking for surprises and one thing that can
catch us out is if the Bank of Japan starts tightening. If it actually
follows the Fed and the ECB and announces some sort of tapering.
This could be far more important than the Fed. A lot of major trends
start with Japan. People don’t focus on Japan enough in my view.
That’s what Albert Edwards said earlier this month at SocGen’s annual
strategy conference in London, and it’s notable for a number of
reasons.
For one thing, implicit in the notion that Kuroda might one day soon decide to leave Neverland is
the notion that Japan might just be achieving some measure of “success”
when it comes to escaping the deflationary doldrums. This is something
Edwards explores in his latest client note and happily, he credits our
buddy Kevin Muir (The Macro Tourist) for the inspiration.
“A big hat tip to the excellent Kevin Muir at The Macro Tourist who
got me thinking about Japan,” Edwards writes, in a note dated last
Wednesday. “Could things be going so well in Japan that an unexpected
tightening causes the yen to surge at a time when almost all investors,
including myself, expect neverending yen weakness?” Albert goes on to
ask.
The first chart Edwards presents in the note shows that although
inflation itself is still of course “subdued” in Japan (and we use the
scare quotes because that’s an understatement), the deflationary mindset
may finally be dissipating in what I guess is a testament to Kuroda’s
contention that “what we need is a positive attitude and conviction.”
Say what you will about Kuroda, but one thing you can’t say is that he
lacks “conviction” and it would be hard to argue that he doesn’t harbor a
“positive attitude”.
Edwards goes on to note that while the market is laser-focused on i) what the blockbuster econ numbers coming out of Europe (factories can’t even keep up with demand at this point) might mean in terms of the ECB potentially deciding not to extend APP beyond September and ii)
what Trump’s tax bill may mean for a revival of the stateside reflation
narrative, no one is paying attention to Japan where “a change in the
deflationary mindset may yet be at hand.”
Of course vanquishing the deflationary mindset has the potential to
become a self-fulfilling prophecy by pulling forward consumer spending.
Maybe Kuroda’s “think happy thoughts” approach wasn’t so stupid after
all.
Albert does note that wage growth has yet to pick up despite a
tightening Japanese labor market, but he also reminds you that “rising
hours worked means income growth is growing by 2% yoy in nominal terms
[and] unlike the US and UK, income growth is outstripping consumer
spending by a wide margin and the savings ratio has risen.”
The implication: a sustained increase in consumer confidence could very
well lead to an uptick in consumer spending which could in turn boost
GDP further (and hell, if Nomura is right,
“Mrs. Watanabe” could be emboldened to spend more by virtue of the
~¥3.2trn in unrealized Bitcoin profits “she” is sitting on)....
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