Japan has been an outlier in a world of tighter monetary policy over the last year. It is now amplifying its relative economic policy exceptionalism as the government urges companies to hike wages well above rising inflation and, a high-profile company does so aggressively.  Fast Retailing, Asia’s largest clothing retailer and owner of the Uniqlo fashion brand, will increase employee wages in Japan by as much as 40% as inflation in the country rises at its fastest pace in decades. The sharp jump in pay follows Prime Minister Fumio Kishida’s calls on Japanese businesses to raise wages that have remained stagnant for decades, with companies struggling to transfer higher costs to consumers. Economists expect other companies to follow suit but at a far smaller scale, raising questions about whether Japan can create a virtuous cycle of rising wages, consumption and prices. In a statement on Wednesday, Fast Retailing said the pay rise, set to take effect from March, was aimed at making the group’s remuneration system globally competitive. While many Japanese companies rely on a seniority-based pay structure, the retailer will evaluate employees based on their performance and ability to contribute to the business, it added. Fast Retailing had already raised wages by an average 20% for most of its part-time employees in September. Combined with the latest increase for full-time employees, total personnel costs will rise about 15% from a year earlier, which the company said would be absorbed by boosting productivity. Japan’s core inflation, which does not include volatile fresh food prices, rose by 3.7% in November, its fastest pace in nearly 41 years. That has increased expectations for the traditional shunto wage negotiations in the spring, with the government calling on businesses to increase pay to compensate for higher prices. In a sign of changing times, the Japanese Trade Union Confederation is seeking a 5% year-on-year increase in wages this year, or 3% in terms of base pay, the highest rise since 1995. Goldman Sachs expects a wage bump of about 2.5% for the spring negotiations, the highest since the late 1990s but short of the 3% wage growth the Bank of Japan has called for to sustain its 2% inflation target.

U.S. CPI came in at 6.5% which was in line with expectations, with a decline in the energy component which supported the idea of the Fed moderating its hawkish path. Former Fed member, Tim Duy, suggested that two more CPI reports between now and the March FOMC would allow the Fed to seriously consider pausing the tighter policy and lower dots in the updated Summary of Economic Projections. In fact, the market is pricing in less than 50bp of tightening at both the February and March FOMC meetings combined. The second theme relates to the rally in JPY as the BoJ’s Yield Curve Control policy is coming under renewed scrutiny as Japanese Government Bond (JGB) futures traded down to the lowest level since 2014. There is hope that the policy could be abolished under Governor Kuroda and before PM Kishida announces the new governor, which is expected in early February. The third theme of 2023 is the rally in European fixed income and equities. European gas prices have continued to trade down with a milder winter and inflation expectations have collapsed markedly. This has given way to a strong rally in government bonds. European stocks are now trading at a seventh-month high, just as copper sits at a six-month high with a 10% gain during the past week alone. However, the trend is never uniform. After moderating inflation in Australia, the Reserve Bank of Australia (RBA) was back under pressure with retail sales rising 1.4% and CPI coming in at 7.3%, which were both comfortably ahead of prior readings and expectations. Yet, global growth is still weakening. The World Bank downgraded global growth once again to 1.7% from 3.0% last summer and the WEF released its Global Risks Report citing concern around “asset bubbles” as it labelled cryptocurrencies a “polycrisis”.

Card spending data and investment intentions remain resilient. Stronger demand could keep up pressure on BOE to hike!  Britain is weathering the worst cost-of-living squeeze in memory better than indicated by dire projections for a catastrophic recession. Real-time indicators and surveys point to the health of consumer spending and business investment. They suggest a deep recession is unlikely following official figures that showed surprisingly strength in both October and November. For months, the central bank has projected that the economy had already tipped into a recession in the second half of last year. It expects no growth until 2024, when Sunak is likely to fight another election. Friday’s figures from the Office for National Statistics showed the economy grew slightly in two of the final three months of 2022, meaning a recession probably won’t start until this year at the earliest. While the UK still is projected to have the worst and longest slump of any Group of Seven nation, there’s signs the downturn may be less protracted than feared. Data due out next week are likely to show that companies kept hiring in December, bidding up wages for workers at a historic pace. Economists surveyed by Bloomberg also expect inflation will tick down further from 10.7% in November and that retail sales are likely to have rebounded in December. Industry groups led by Make UK and the Institute of Directors say British factories and small businesses still plan to plow investment into the economy this year. That’s despite recession warnings and dismal confidence readings. Credit and debit card data showed the strength of demand in recent weeks along with an easing of financial conditions, according to Panmure Gordon. Stock prices have risen while market interest rates and mortgage costs have fallen in the past quarter with Panmure’s own financial conditions index easing back to +0.4 after soaring from -0.5 to +0.7 in the first 10 months of 2022. Retailers including Marks & Spencer Group Plc and Tesco Plc, have reported strong Christmas sales, an indication that households are still opening their wallets. Consumer confidence has also begun to climb away from record lows. Card spending in late 2022 outperformed 2021 levels, said Simon French, chief economist at Panmure Gordon. Households are enjoying a tax break and support for natural gas and electricity bills that’s among the most generous in Europe.

America is leading a dangerous global slide towards subsidies, export controls and protectionism.  Since 1945 the world economy has run according to a system of rules and norms underwritten by America. This brought about unprecedented economic integration that boosted growth, lifted hundreds of millions of people out of poverty and helped the West prevail over Soviet Russia in the cold war. Today the system is in peril. Countries are racing to subsidise green industry, lure manufacturing away from friend and foe alike and restrict the flow of goods and capital. Mutual benefit is out and national gain is in. An era of zero-sum thinking has begun. The old system was already under strain, as America’s interest in maintaining it waned after the global financial crisis of 2007-09. But President Joe Biden’s abandonment of free-market rules for an aggressive industrial policy has dealt it a fresh blow. America has unleashed vast subsidies, amounting to 465 billion USD, for green energy, electric cars and semiconductors. These are laced with requirements that production should be local. Bureaucrats tasked with scrutinising inward investments to prevent undue foreign influence over the economy now themselves hold sway over sectors making up 60% of the stock market. And officials are banning the flow of ever more exports—notably of high-end chips and chipmaking equipment to China. Economic conflict with China looks increasingly inevitable. As China became more deeply integrated into the global economy at the turn of this century, many in the West predicted that it would become more democratic. The death of that hope—combined with the migration of a million manufacturing jobs to Chinese factories—caused America to fall out of love with globalisation. Today Mr Biden’s administration frets about the danger of depending on China for batteries the way Europe relied on Russia for gas before the invasion of Ukraine. Democrats and Republicans alike worry that the loss of America’s lead in advanced chipmaking to Taiwan will undermine its ability to develop artificial intelligence on which, they predict, armies of the future will rely to plan strategy and guide missiles. Reindustrialisation will raise prices, hurting the poor most. Duplicating green supply chains will make it costlier for America and the world to wean themselves off carbon. History suggests that vast amounts of public money could go to waste. Another problem is the fury of friends and potential allies. America’s genius after the second world war was to realise that its interests lay in supporting openness in global commerce. As a result, it pursued globalisation despite, by 1960, making up nearly 40% of global dollar GDP. Today its share of output has fallen to 25% and America needs friends more than ever. Its ban on exports to China’s chipmakers will work only if the Dutch firm asml and Japan’s Tokyo Electron also refuse to supply them with equipment. Battery supply chains will likewise be more secure if the democratic world operates as one bloc. Yet America’s protectionism is irking allies in Europe and Asia.

Last Sunday, supporters of Brazil’s former right-wing President, Jair Bolsonaro, stormed and briefly invaded Congress, the Supreme Court and the Presidential Palace in the capital Brasilia. Newly elected left-wing President Luiz Inacio Lula da Silva was not in the palace at the time the riots broke out. These events, closely reminiscent of the January 6th invasion of the U.S. Capitol by supporters of former U.S. President Donald Trump, marked the culmination of protests by Bolsonaro supporters who refuse to accept the outcome of the Presidential Elections from last October. However, federal security forces were able to restore order quickly, the riots received widespread condemnation from most corners of Brazil’s society and attempts for follow-up protests later in the week attracted small attendances. We believe the near-term risk of social/political crisis in Brazil stemming from these events to be extremely limited. The days since the invasion of Brazil’s key political institutions by Bolsonaro supporters angered by the outcome of the recent Presidential Election showed that no appetite exists within the broader society and the political class for actions that could jeopardize Brazil’s constitutional order. Ironically, President Lula appears to have emerged politically stronger from the unrest in Brasilia, at least in the near-term, given the unified rejection of the violence from all three branches of government and the political class in general. However, this boost is likely to fade and concerns over social and political dynamics may increase over time in a highly polarized political context in the country. Meanwhile, Finance Minister Fernando Haddad unveiled a package of fiscal measures this week focused on raising additional budget revenues to offset higher expenditures planned by the Lula Administration. While it is still unclear to what extent the Haddad plan will translate into actual policy action, it should help further ease market concerns about the economic policy outlook under the Lula Administration.