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”.
lol… Kuroda = zero fucks given… pic.twitter.com/hVJU5DEyIf
— Heisenberg Report (@heisenbergrpt) August 28, 2017
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).
What does all of this mean? Well, it suggests that the BoJ could be tempted to at least try to tighten. Conveniently, news that Kuroda is paring back purchases of 10-25Y JGBs hit just two days before Albert’s note. That sent USDJPY lower, underscoring Edwards’ point that an unexpected tightening from Kuroda could trigger a surge in the yen.
Here’s the bottom line (which is ironic because it appears at the very top of Albert’s note):
The ECB has followed the Fed in tapering its massive QE programme, while in Japan the monetary floodgates still remain fully open — but for how much longer? Many clients we meet are fully invested bears, nervously looking over their shoulder for signals of the next ‘Great Unwind’. Most western commentators do not give developments in Japan as much attention as it deserves. Could it be that a surprise monetary tightening in Japan will finally burst the global asset price bubble?
Maybe. Of course the irony there is that were Kuroda to accidentally plunge the world back into crisis with a very un-Kuroda-like hawkish lean, he would almost invariably be forced to, like his fairy tale idol, return to Neverland to rescue the world from a deflationary Captain Hook.
Oh, and as usual, Albert includes a fun anecdote which reads as follows:
I have called the top of this equity rally several times and I have been wrong time and time again, so I am not going to waste your time calling another top for this week at least! The FT’s chief leader writer, Robert Armstrong, participating in a round table outlook for 2018, described me as having “correctly predicted 10 of the last one market crash”. Ouch!
On that note, we’ll leave you with the full slide deck from his presentation at the SocGen conference, a deck which is appropriately titled “HOW TO CORRECTLY PREDICT 10 OF THE LAST 1 MARKET CRASHES” (as an added bonus, Andrew Lapthorne’s deck is in here too and as regular readers know, we’re Andrew fans as well)…