Ever since Nomura decided to try and quantify what the impact of unrealized Bitcoin gains might be on consumption in Japan, we’ve taken an interest in the wealth effect dynamics over there.This is going to become an increasingly important subject as the BoJ weighs whether to take the first steps towards rolling back accommodation.
In his latest note, SocGen’s Albert Edwards reminds you that even as inflation is subdued in Japan, it looks as though the deflationary mindset is breaking and that can become self-fulfilling if it brings forward consumption.
Edwards observes that so far, tightness in the labor market hasn’t translated into a robust acceleration in wages. That said, he goes on to note the following:
Despite the subdued pace of wage inflation, rising hours worked means income growth is growing by 2% yoy in nominal terms. Unlike the US and UK, income growth is outstripping consumer spending by a wide margin and the savings ratio has risen (see chart below). Hence if consumer confidence in Japan remains buoyant, consumer spending should contribute to even stronger GDP growth than the above trend 2% yoy rate recorded in 3Q last year.
As we quipped last week, this dynamic could be supercharged by ‘Mrs. Watanabe’, who according to Nomura, could be emboldened to spend more by virtue of the ~¥3.2trn in unrealized Bitcoin profits “she” is sitting on.
If you missed the Nomura note, you can read some excerpts here, but suffice to say this is the gist of it:
Well, assuming 3.7mn Bitcoin held by Japanese people (multiplying Bitcoin circulating supply of 16.22mn coins in Apr-Jun 2017 by the 22.8% share of yen trading at the time) and taking into consideration that Bitcoin rose by some ¥866,000 between Apr-Jun 2017 and Oct-Dec 2017, Nomura pegs unrealized gains on Bitcoin held by Japanese people at ~¥3.2trn (3.7mn × ¥866,000):
Now cue the “wealth effect.” The assumption here is that an increase of ¥10bn in the value of assets of Japanese people boosts consumption by roughly ¥0.2-0.4bn. That’s based on prior studies. So, if you assume that, then the ¥3.2trn unrealized gain could result in “an increase of around ¥96.0bn in personal consumption [and] given that Japan’s real GDP is around ¥522trn, the y-y boost to GDP from this spending works out at just 0.07ppt,” Nomura calculates:
Well to the extent unrealized Bitcoin gains have the potential to “trickle down” via the fabled “wealth effect”, it’s only logical to ask whether Kuroda’s efforts to inflate the holy hell out of Japanese stocks will similarly encourage Japanese to spend. After all, the Topix has now topped 1,800 for the first time since 2007 – prior to that, it hadn’t seen 1,800 since 1991.
As Goldman writes in a new note, “the correlation coefficients between TOPIX and household consumption after the 2014 consumption tax hike are around 0.4 for real consumption and 0.55 for nominal consumption.”
The bank goes on to estimate the wealth effect on macro consumption in Japan controlling for the impact of disposable income and the value of other financial assets because naturally, household consumption correlates more closely with disposable income (it’s more stable than equity prices). Here’s the result:
The equity elasticity of consumption (the percentage change in consumption for a 1% change in the value of household equity holdings) is shown in Exhibit 3. Our estimate of the equity elasticity of overall consumption is just under 0.03, which means that consumption increases just under 0.03% for every 1% increase in the value of household equity holdings. With TOPIX up roughly 20% during 2017, this can be expected to provide a nearly 0.6% boost to overall macro consumption, all else being equal (and assuming that the rise in TOPIX is equivalent to the rise in the value of household equity holdings). This is a clearly significant impact given that GDP-based real household consumption rose just around 0.7% annually on average in 2010-2016.
We’re not even going to try and roll that up with the Bitcoin math in order to make some kind of grand pronouncement about the Japanese economy.
Rather, what we wanted to point out are the multiple layers of irony here. Ostensibly, Bitcoin serves as an alternative in a world where central bank profligacy is set to devalue traditional currencies. Obviously, a lot of what you’re seeing in cryptocurrencies is pure, unadulterated speculation, but if you assume that at least some part of the thesis has to do with people wanting to diversify away from currencies that are being printed hand over fist, you’re left with the notion that Japanese traders have Kuroda to thank for some of their Bitcoin gains. Well, Japanese also have Kuroda to thank for their gains in the equity market. In fact, there’s a sense in which it’s the same damn thing driving both. Money printing is boosting equities (the BoJ’s ETF buying program) and it’s driving people into Bitcoin both as a way to protect against inflationary dynamics and as a way to speculate in a world where speculating in risk assets is almost infallibly rewarded with massive gains.
Now, analysts are out suggesting that i) unrealized Bitcoin gains could encourage spending, ii) unrealized gains in equities could likewise prompt Japanese households to spend, and iii) a break in the deflationary mindset could bring that spending forward.
The punchline: if all of that plays out, it could prompt the BoJ to start rolling back the accommodation which has the potential to i) deflate stocks and ii) catalyze yen appreciation. If the traditional correlation between Japanese equities and the yen were to reassert itself (it’s broken down recently), well then that dynamic could amount to a double whammy. The end result: falling stock prices as people question the future of the BoJ’s ETF buying program and falling demand for Bitcoin in Japan as the yen rapidly appreciates. Assuming the unrealized gains in equities and Bitcoin that catalyzed the uptick in consumer spending remained unrealized, the unwind could end up derailing the BoJ’s plans to normalize and then we’re right back to where we started.
How fun is that, right?