Japan TMT Analyst

Pelham Smithers

Market Intel on Asian Tech with a Japan focus

Pelham Smithers Associates

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

Research is provided by the following:
Pelham Smithers: Macro, consumer electronics, telecoms & pharma
Joel Scheiman: Electronics materials / components
Julie Boote: Autos
Will Nestuk: Capital goods, machinery & transportation equipment parts
Thao Nguyen: eCommerce, internet content, marketing & advertising

Thematic (Sector/Industry)

United kingdom & united states / Thematic (Sector/Industry)

The fall in both CPI (from 2.9% YoY to 2.6%) and RPI (from 3.7% YoY to 3.5%) in June in the UK has had the markets breathing a sigh of relief on the inflation front. As this point marks 12 months on from the Brexit vote and the subsequent slump in sterling, there's a feeling that the worst is over on the inflation front in the UK, a view that was reflected in the gilts market, with 10yr treasury yields falling from 1.3% in early July to 1.1% now.Meanwhile in the US, CPI, which hit +2.7% YoY in February, has slowed to 1.7% following rate hikes in March and June. As for Japan, where CPI grew just 0.4% in the year to June, inflation has proved so difficult to come by that the BoJ has been forced to set a new date by which Abenomics aims to achieve 2% inflation.As in the UK, this performance has defied expectations, which were for inflation to be higher, and as a consequence these government bond markets have also performed well, with US 10yr yields falling from 2.4% at the start of the year to 2.2% now, whilst in Japan they have gone from a "high" of 0.12% in February to 0.06% now.The absence of inflation is all the more remarkable because of the accompanying trend in unemployment. At 4.5%, unemployment in the UK is at its lowest since 1975. At 4.3% in the US, it is at its lowest since 2001, whilst in Japan, at 2.8%, it is at its lowest since 1994. We not only appear to be in a period of inflation-free growth, but as evidenced by the low level of 10yr government bond yields, this is expected to continue. As equity markets do not suggest any issues on the economic growth front, the conclusion is that markets are forecasting this "Goldilocks" scenario to continue.Critical to the issue of whether it does or doesn't is the issue of why has inflation been so low, particularly given the extensive use of quantitative easing over the past decade. This report, by Andrew Smithers, looks at the role inflation expectations have had and concludes that the low but volatile nature of inflationary expectations is a likely cause. As this is a self-reinforcing factor, it creates an asymmetric risk in policy. Keeping inflation under control requires talking and acting as if you, the central bank / government, expects it to pick up. As this view has proved excessively pessimistic in the past, it leads to expectations that inflation won't be that bad, leading in turn to inflation being kept under wraps.However, we find ourselves, currently, in a situation where for reasons of politics and / or excessive optimism over the trend growth rate of economies, central banks are downplaying the risk of inflation, and more importantly, the risk of sustained inflation. The risk in this scenario is not that inflation appears, but it is allowed to take root and then start to move well above target levels. The difficulty, then, will be in containing the associated rise in inflationary expectations, the standard but unpleasant solution for which is a sharp rise in interest rates which leads to a marked rise in unemployment and a deep recession.

The fall in both CPI (from 2.9% YoY to 2.6%) and RPI (from 3.7% YoY to 3.5%) in June in the UK has had the markets breathing a sigh of relief on the inflation front. As this point marks 12 months on from the Brexit vote and the subsequent slump in sterling, there's a feeling that the worst is over on the inflation front in the UK, a view that was reflected in the gilts market, with 10yr treasury yields falling from 1.3% in early July to 1.1% now.Meanwhile in the US, CPI, which hit +2.7% YoY in February, has slowed to 1.7% following rate hikes in March and June. As for Japan, where CPI grew just 0.4% in the year to June, inflation has proved so difficult to come by that the BoJ has been forced to set a new date by which Abenomics aims to achieve 2% inflation.As in the UK, this performance has defied expectations, which were for inflation to be higher, and as a consequence these government bond markets have also performed well, with US 10yr yields falling from 2.4% at the start of the year to 2.2% now, whilst in Japan they have gone from a "high" of 0.12% in February to 0.06% now.The absence of inflation is all the more remarkable because of the accompanying trend in unemployment. At 4.5%, unemployment in the UK is at its lowest since 1975. At 4.3% in the US, it is at its lowest since 2001, whilst in Japan, at 2.8%, it is at its lowest since 1994. We not only appear to be in a period of inflation-free growth, but as evidenced by the low level of 10yr government bond yields, this is expected to continue. As equity markets do not suggest any issues on the economic growth front, the conclusion is that markets are forecasting this "Goldilocks" scenario to continue.Critical to the issue of whether it does or doesn't is the issue of why has inflation been so low, particularly given the extensive use of quantitative easing over the past decade. This report, by Andrew Smithers, looks at the role inflation expectations have had and concludes that the low but volatile nature of inflationary expectations is a likely cause. As this is a self-reinforcing factor, it creates an asymmetric risk in policy. Keeping inflation under control requires talking and acting as if you, the central bank / government, expects it to pick up. As this view has proved excessively pessimistic in the past, it leads to expectations that inflation won't be that bad, leading in turn to inflation being kept under wraps.However, we find ourselves, currently, in a situation where for reasons of politics and / or excessive optimism over the trend growth rate of economies, central banks are downplaying the risk of inflation, and more importantly, the risk of sustained inflation. The risk in this scenario is not that inflation appears, but it is allowed to take root and then start to move well above target levels. The difficulty, then, will be in containing the associated rise in inflationary expectations, the standard but unpleasant solution for which is a sharp rise in interest rates which leads to a marked rise in unemployment and a deep recession.

Have We Got Too Complacent on the Outlook for Inflation?