The latest from Albert Edwards, a prominent bear employed by Société Générale to provide an alternative strategic perspective on markets, lands with a warning about Japan. Persistent low wage inflation may now be over:
Japan just reported a surprise surge in wage inflation to the fastest pace in two decades! Cash earnings (including overtime payments) surged to 2.1 per cent year-on-year, twice what the market expected and the previous month’s pace of growth. Much of this was acceleration was due to higher overtime payments, but basic wage inflation also picked up noticeably to 1.3 per cent yoy (see chart below).
A very Japanese surge, in which a number 2 per cent higher than the year before counts as drama.
Albert sees Japan as Hermes, messenger of what will come. Its late 1980s mega-boom foreshadowed the bubbles to come elsewhere, as did the drift into deflation and the collapse in government bond yields.
A sharp rise in wages, either in Japan or elsewhere, could be bad for investors. In the US, for instance, unemployment has dropped to levels where competition for staff might be expected to push up prices. There were 6.6m job openings in the US in March, a 21st century record.
The return of inflation would mean faster removal of stimulus and higher interest rates. Bond prices would suffer, and economic growth could stall, which is something that has ended long bull markets for stocks in the past.
Here’s Albert again:
While most economists have been surprised that US wage inflation has not risen more sharply in the face of a tight labour market, it is really Japan that has been the much bigger surprise. Japan’s labour market is far tighter than that in the US and corporate profits have been booming for years. There has been no shortage of corporate cash to splash. Japan has instead responded to the labour shortages with one of the highest concentrations of robots anywhere in the world (except South Korea which also has a rapidly aging population). But it is nice to know the laws of economics have not been totally abolished. And do not be surprised if the US now follows Japan’s lead and US wages also gap higher in the months ahead.
We’ve also highlighted signs of life in Japanese property prices, and an $80 per barrel oil price would add some upward pressure also.
Except, the Bank of Japan was downbeat on the prospects for inflation in its latest quarterly economic outlook, published late in April. The contrast is to draw with 2013, in the early stages of quantitative and qualitative easing, when the BoJ put out very optimistic forecasts, possibly in an attempt to encourage an expectation of higher inflation.
Here’s Citi’s economic team on the shift:
the BoJ’s recent words and deeds indicate that policymakers have effectively stopped “cheerleading” for inflation expectations. It seems unlikely that Japan’s inflation expectations will pick up in a meaningful manner when policymakers are turning much more cautious about the inflation outlook.
They have also rendered the Japanese version of a dot plot, which shows the evolution of the central bankers’ forecasts. Red indicates upside risk, while black suggests they may come in lower. Here’s 2018:
The 2 per cent target for inflation again recedes into the distance.
It is of course possible Wednesday’s wage inflation data marks a change, and the central bank will be surprised. Reputations aren’t made by following the crowd and, as the FT notes, core wage inflation of 1.3 per cent is the highest since 1997. If it is, remember to credit Albert, the hardest-working bear in the forest.
Doom mongers have their day in the sun as markets turn – FT
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Winter is always coming for SocGen’s perma bear – FT Alphaville
SocGen warns of ‘tidal wave of corporate default’ – FT