“Make no mistake, further BoJ QE is taking us to a whole new level of monetary debauchery pioneered in Japan and now known under the Monetary Madness Trademark”, Albert Edwards writes, in a characteristically colorful new note.
“Monetary Madness Trademark” is Albert’s riff on Modern Monetary Theory, or, “MMT”.
In his latest, SocGen’s incorrigible bear implores market participants not to forget about Japan amid the various and sundry “distractions” that have captured everyone’s attention over the past several weeks (e.g., the freezing up of US money markets, Europe sliding closer to a recession and Trump teetering on the edge of impeachment).
As you can probably surmise from the chart header there, Albert thinks the US is losing the global currency war and on Thursday, his message is that the BoJ is bound to ease further, exacerbating the situation.
Edwards juxtaposes Japan’s sales tax hike with global calls for looser fiscal policy, calling the move “rather curious”.
“The timing of this latest Japanese sales tax was set by the previous government in a Canute-like recognition that Japan’s fiscal situation is totally out of control”, he writes, reminding you that “previous efforts to rein in Japan’s gargantuan public sector debt with sales tax hikes have not ended well”. That makes it somewhat strange that Shinzo Abe’s pro-growth government would stick with the idea, Edwards says.
And so, cue the BoJ, which, as you’re probably aware, is leaning in the direction of more policy easing in light of the increasingly fraught external environment, still sluggish inflation and souring global growth outlook.
“News that the BoJ was sharpening its monetary razor ready to slash rates further into negative territory saw 5y JGB yields fall to record lows”, Edwards notes, adding that Japan has lagged the ECB recently in the easing game but seems set to catch up [while] US yields have resumed their downward slide despite the recent stronger than expected economic data”.
As the US economy continues to outperform and with Fed policy still relatively tight despite two consecutive rate cuts, the dollar remains resilient. This is a continual source of consternation for Donald Trump and it presents a risk of imported disinflation at a time when the Fed is struggling to hit its mandate, a series of “hot” inflation prints notwithstanding.
For Japan, realized inflation remains a country mile below target, and as Edwards goes on to write, “Japanese inflation expectations, so buoyed in the aftermath of PM Abe’s aggressive policies in 2013, have slid all the way back to zero”. He goes on to deliver something of a wake up call for anyone who has stopped paying attention to the Land of the Rising Sun:
The weakening Japanese economy might not be attracting as much attention as the recent dire German data, but the slowdown there has been sizable. Japanese consumer confidence has slumped to levels not seen since the 2011 Fukushima nuclear disaster. One wouldn’t have thought raising the sales tax at this moment was great timing! No wonder the BoJ is readying itself to step in once again, and if in the process the yen declines from recent highs – so be it!
Coming full circle to the quote used here at the outset, Albert preemptively characterizes more BoJ easing as “a whole new level of monetary debauchery”.
“The ECB and especially the Fed are real amateurs at this game”, he notes, referencing the following familiar chart and exclaiming that it’s “No wonder the dollar is around 50% too strong versus the yen”.
The implication from all of this, from where Albert is sitting anyway, is that Trump will eventually run out of patience, although if the US president’s recent tweets about the Fed and monetary policy count as “patient”, then one shudders to think what “impatient” looks like.
And indeed, that’s Albert’s point. “I expect President Trump to take matters into his own hands and respond with real aggression imposing tariffs on EU auto exports to the US and authorizing unlimited foreign exchange intervention to drive the dollar lower”, he says.
Notably, the US is set to get the green light from the WTO to impose tariffs on some $8 billion in European goods in conjunction with the Airbus kerfuffle, likely prompting retaliatory measures from Brussels. The auto tariff dispute is still up in the air, and although there were indications on Wednesday that the limited trade deal struck between Trump and Abe forestalls additional car levies, there is still no definitive word on how the US administration plans to approach those duties over the longer-haul.
As far as “unlimited” FX intervention goes, there’s only so much Steve Mnuchin can do on his own – the ESF is woefully short of the kind of firepower Treasury would need to make a sustained splash. If Trump wants to fight a “real” currency war, he needs a captive Fed.