If you had to make the case against investor complacency and you could only use one chart, what would that chart illustrate?

Candidates run the gamut from the simplistic (e.g., a line chart of the S&P’s forward multiple) to the over-complicated to the wholly esoteric.

But if you ask SocGen’s Albert Edwards, the figure below — which shows the Fed’s favorite measure of worker compensation plotted with underlying Japanese wage growth — really stands out.

Recall that the ECI series was a key input in the Fed’s decision calculus over the last two and a half years. Indeed, it was an overshoot on that aggregate (published quarterly) which prompted Jerome Powell to abandon “the good ship ‘Transitory,'” as he jokingly described the most maligned macro bandwagon in living memory while addressing Jackson Hole late last month.

Regular readers — and macro mavens more generally — know the narrative in Japan. Wage growth has some momentum. Enough momentum, the BoJ reckons, to underpin a self-fulfilling prophecy that banishes the deflation demon once and for all. Hence two rate hikes in five months.

“Japan has seen a surge in wage settlements to a 33-year high,” SocGen’s Edwards reminded investors, in a note published Tuesday. The chart above depicts what he described as an epochal “crossover” event.

The concern — and this is on a lot more radars than it was a mere two months ago — is that any additional strides, or even baby steps, down the road to monetary policy normalization in Japan could trigger additional carry trade unwinds.

Although most observers agree that the proximate cause of the early August market panic was a US growth scare, it’s important to remember that hard landing concerns prompted a sharp dovish repricing in US rates, which in turn fanned the yen rally. In other words: It’s not possible to completely disentangle the US growth scare from the carry unwind escalation on August 2 and August 5.

And it’s not only about the short-term impact of suddenly less-viable yen-funded carry. “Any [further] normalization of Japanese interest rates would have a major market impact in the longer-term as higher Japanese interest rates would curtail the exporting of investment flows,” Edwards went on, adding that “no one really has a clue” where this all stands six weeks on from the BoJ’s second rate hike.

Speculative yen positions were closed out rapidly, and indeed CFTC positioning showed the largest net long since March of 2021 in the latest update.

While that’s a good proxy for the unwind, we’re dealing here with an existential shift: You can’t fund in yen for free anymore. As I wrote early last month when markets were briefly ablaze, that “represents an adjustment to the global market infrastructure” and may “necessitate a wholesale rethink.”

T. Rowe’s head of fixed-income, Arif Husain, said something similar in remarks quoted by Bloomberg. “BoJ monetary tightening and its impact on the flow of global capital is far from simple, and it will have a large influence over the next few years,” he cautioned.

Although BoJ deputy governor Shinichi Uchida offered a kind of mea culpa last month following two days of chaotic trading — including the worst single-session decline for the Nikkei since 1987 — the bank still intends to proceed with the normalization process.

In communications prepared for Japan’s Council on Economic and Fiscal Policy, Kazuo Ueda indicated Tuesday that the bank does, in fact, plan to keep raising rates. Assuming, of course, that growth and inflation evolve in line with their forecasts.