 ould
it be that we're looking at the best chance of a Japanese turnaround
since the 1980s? Despite the country's history of false starts, the
latest signs are very promising.
Gold and commodity
prices have risen sharply in recent weeks in yen terms, breaking
above their 2-year and 5-year moving averages. If these key prices
are sustained at current levels for several weeks, the change in
the pricing environment, whether or not welcomed by the stubbornly
deflationary Bank of Japan, will spread through the economy and
be enough to break Japan's businesses and consumers out of their
deflationary expectations.
Japan is also
increasingly discussing tax-rate cuts, which is a decidedly welcome
step. And over in the market, Japanese equities have rallied 18%
since their bottom on February 6. (But a warning: this must remain
an indecisive indicator as there were false 20% rallies in March
2001 and March 1999.)
Also, the U.S.
economic recovery looks like it will be strong enough to change
Japan's outlook. While strong U.S. growth in the 1990s wasn't enough
to overcome the effects of Japan's deflationary monetary policy,
it still improves the odds.
So, is this
another false start or the real thing? To answer that, here are
some tell-tale signs to look for in coming weeks:
Yen Stability.
If Japan allows the yen to strengthen (and gold and commodity
prices to fall), it would signal another false start on ending
the deflation.
Higher
Bond Yields. The yield on the 10-year Japanese Government
Bond is now only 1.5% and hasn't started moving up. If Japan is
actually going to stop its deflationary monetary policy and start
growing, yields will move up substantially.
A Responsible
BOJ? Not likely, but we can hope. For many years now, Japan's
central bank has not taken responsibility for the country's deflation.
And last week, the BOJ again stated that deflation is not a monetary
phenomenon, reinforcing the deflationary expectations in the economy.
Size and
Speed. The monetary base will need to start shrinking
as the velocity of money — the rate that it turns over in
the economy — goes up. The monetary base is now a whopping
15% of GDP, probably an all-time, all-nation record for liquidity
hoarding. The turnaround key is for the Bank of Japan to use a
price-rule monetary policy to smoothly take the excess yen out
of the economy, keeping the value of the yen stable, as growth
prospects improve.
If Japan is
experiencing a true turnaround, it will have far-reaching implications
for global growth, global equity allocations, and Japanese equities.
But be watchful. We've seen these surges stall before.
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