By Jasper Koll, WisdomTree Investments
Special to the Financial Independence Hub
2019 is likely to be a good year for Japan. While worries about U.S. and China recessions create global headwinds and uncertainty, domestic Japan is well placed to decouple from the global cycle and deliver rising employment and increased purchasing power for its people. However, there are bound to be surprises: that is, scenarios not captured by experts’ current quantitative models or the crowd’s consensus opinion. For Japan in 2019, here are the outlier scenarios that I personally worry about. Improbable as they may seem, any movement toward their far-out direction will force a true about-face in the current consensus. That’s why surprises are so powerful. Enjoy, and best wishes for a prosperous and happy new year 2019.
1.) The 2019 shunto wage negotiations result in a 4% pay raise, up from the 2% delivered last year
Japan’s economy needs a more powerful engine to drive domestic consumer spending. After years of wage restraint and company unions preferring long-term job stability over short-term wage gains, the labor market is now so tight that wage growth should start to accelerate. If I am right and the 2019 shunto results in a de facto doubling of the pay base, consumption-led growth could become a reality. The higher the shunto, the greater the chances of Japan decoupling in a positive way from a global downturn.
2.) Prime Minister Abe convinces China to join the new Trans-Pacific Partnership (TPP)
2019 is likely to see a turning point in Japan-China relations. After their successful summit in October 2018, Prime Minister Shinzo Abe and President Xi Jinping are committed to not just improved bilateral relations but also to assert a more credible joint leadership role in Asia. For China, nothing would demonstrate a true commitment to accountable Asian leadership better than joining the new multilateral TPP free trade agreement. For Japan, bringing China into the new TPP would irrevocably elevate its status as global leader and protector of multilateral rulemaking. Moreover, Abe would go down in history as the statesman who built a positive buffer for all Pacific nations against their fears of the unilateral rise of China: cooperative engagement, not unilateral submission.
3.) The United States moves from trade war to currency war as the Federal Reserve (Fed) is forced to cut U.S. interest rates
As U.S. recession risks rise, the probability of a U-turn in U.S. interest rate policy goes up: after four rate hikes in 2018, the Fed could actually start cutting rates by next summer. In turn, U.S. rate cuts will forcefully push down the dollar. Unfortunately, neither China nor Europe is in a position to tolerate this. China in particular is already very outspoken in its opposition to a new Plaza Accord (where Europe and Japan agreed to a U.S.-imposed weak-dollar policy in 1985). Make no mistake: the next U.S. recession is likely to trigger a global currency war (i.e., competitive devaluations). Importantly, it is no longer the U.S.-Japan but the U.S.-China exchange rate that will dictate global fortunes in 2019 and beyond.
4.) A Japanese mega-bank buys a major U.S. bank
Some good news for Japan: The fall in the U.S. stock market has lowered the price to buy American companies. Japanese banks have been eager to expand in the U.S. but were put off by the high prices and valuations of U.S. banks in the past couple of years. Now that the U.S. cycle has turned, Japanese bank CEOs may finally get their chance to act out their strong global ambitions and buy a “cheap” U.S. bank in 2019.
5.) The Bank of Japan (BOJ) and the Finance Ministry cooperate to sell the BOJ’s exchange-traded fund (ETF) equity holdings to Japanese savers
The BOJ owns almost 6% of the Japanese equity market through its buying program for ETFs. While justifiable as an emergency measure to help overcome deflation, the central bank’s de facto nationalization of equity capital has become counterproductive for many reasons. Continue Reading…











