Brief Macro: Japan: Upcycle Intact and more

In this briefing:

1. Japan: Upcycle Intact
2. Free Money Has Flown
3. UK Cycle: Bullish Trends Stretch Before Slowing

1. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

2. Free Money Has Flown

The world will soon discover that debt matters.

The announcement of each round of QE increased asset prices, but the effect on Treasury bond prices began to fade when central bank purchases began. This unexpected behaviour revealed a little-known fact: asset prices react more to the expectation of changes in liquidity than to the experience of greater liquidity in financial markets. By contrast, economic growth is subject to the fluctuating standards of commercial bank lending, which follow variations in the demand for credit. Consequently, financial markets lead the economy. Meanwhile, central banks focus on lagging indicators, so they’re followers, not leaders. Bond markets usually predict more accurately than stock markets. To work, central bank easing policies require real risk-adjusted interest rates. However, with those rates below zero in many countries, further reductions would penalise lenders without helping borrowers. Thus, only rising inflation can save stressed debtors.

3. UK Cycle: Bullish Trends Stretch Before Slowing

• UK employment growth increased further in Dec-18 despite GDP’s yearend weakness. Higher participation has bolstered the bullish trend but tends to be temporary.
• Slower employment growth need not prevent further falls in the unemployment rate, which looks to be creating an increasingly tight labour market.
• Wage growth is also likely to ease back in the new year, although the extent should be curtailed by an unwind of the depressed bonus share, in my view.