Japanese stocks have a much better outlook than U.S. equities as the Bank of Japan looks prepared to outdo the Federal Reserve with even more monetary stimulus, said Albert Edwards, global strategist at Societe Generale.
“Japan has no option other than to monetize its public-sector deficit because the government is insolvent,” Edwards said in an Oct. 7 report
obtained by Newsmax Finance. “That is also the same reason why I remain bullish on the Nikkei.”
Japan’s industrial production unexpectedly fell in August from the prior month, possibly indicating its economy slipped into recession in the third quarter after contracting by 1.2 percent from April to June. Idled factories are expected to ease inflationary pressures from the 2 percent target set by Bank of Japan Governor Haruhiko Kuroda.
This week, the central bank's policy board voted to maintain its pledge to boost the monetary base by 80 trillion yen ($60 billion) a year by buying government bonds and risky assets such as exchange-traded funds. At its next meeting on Oct. 30, the central bank may increase its quantitative and qualitative easing program, it's called in Japan.
“With the BoJ failure to meet its target and a weak economy, more QE is heading down the pipeline,” Edwards said. “That is why we like Japanese equities in stark contrast to the U.S. It is the very bankruptcy of Japan that makes us bullish.”
The Nikkei index of Japanese stocks has risen 4 percent this year through Oct. 8, compared with a 2.2 percent decline for the S&P 500 index.
Deflation Hitting U.S.
Edwards established his reputation as a perma-bear in 1996 with his Ice Age thesis that
argued that stocks will collapse and bond values will climb because of deflation. Those deflationary forces are coming to U.S. shores, Edwards said.
The U.S. bond market indicates that investors have lowered their estimates of 10-year inflation to less than 1.5 percent from 2 percent a year ago.
“Bond investors are signaling to us that they don’t believe the Fed is in control anymore,” Edwards said. “The Fed by contrast is brushing aside the market’s deflation concerns. It all feels very much like Japan circa 1995 in the wake of the yen’s then surge.”
Japan's currency hit a peak of less than 80 yen per dollar in 1995 after surging alongside the country's export growth. The currency's appreciation has been partly blamed for the country's following "Lost Decade" of recession.
The Fed’s target interest rate has remained near zero percent
since 2008, when the global economy shrank the most in 80 years, in an attempt to encourage a recovery. The central bank doesn’t have an official inflation target, but its preferred measure of price trends
is less than 2 percent.
“The actual poverty of pricing power in the U.S. and globally means that corporate revenues remain very weak, particularly in the U.S.,” Edwards said. “Consequently the economic cycle remains very fragile indeed.”
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