In Canada, when we look to Asia and its markets, the usual source of our concern is China. Will the rate of expansion in the world's fastest-growing major economy be enough to power commodity demand?
Our worries are understandable, given the composition of our economy, and the importance of mining and energy to our resource-dominated markets.
But there's a good argument that we should be paying more attention to Japan.
I ran into a pretty big-name New York-based trader the other day (sorry, I can't reveal his name), so I asked him what is the one thing he really watches on the global macro front.
The answer surprised me: Shinzo Abe's popularity.
In the trader's view, Japan's prime minister and his so-called Abenomics – a program of fiscal reform to drag the country out of its decade-plus years of economic malaise, punctuated by bouts of deflation – are prime drivers of global asset prices.
Abenomics has a few strands, but the key one here is the aggressive monetary easing undertaken by the central bank, in hopes of pushing inflation to 2 per cent.
The lower rates are basically a form of financial repression, accepted in the service of pushing down the yen. That's supposed to improve Japan's competitiveness and spur inflation. (A weaker currency makes imports more expensive.)
Let's just say it's a work in progress. The yen is weaker. Rates are low, punishing those holding onto their money in the world's biggest nation of savers.
Artificially low interest rates in Japan are pushing the savers (and their proxies at asset management companies) into yielding assets beyond the country's borders. Those fund flows are driving asset prices up, and interest rates down, elsewhere. And that's fuelling equity valuations. It's not easy to see in any official figures, given the way the flows work, but Japanese buying, particularly of long-dated debt, is a big influence, the trader believes. He has seen the flows from his seat on Wall Street.
But inflation in Japan is still well short of the target, economic growth is up and down in recent quarters and low rates are very hard on everyday Japanese. And the jury is still out on the tough part of Abenomics – even though structural reforms such as the recent raising of the consumption tax from 5 per cent to 8 per cent are meant to be offset by corporate tax reform, consumers have still radically pulled back spending. So Mr. Abe's popularity swoon may have further to go. And if it does, markets may follow. If Mr. Abe cannot hold his popularity and Abenomics doesn't stick, rising interest rates in Japan could cause a repatriation of assets, to the detriment of global markets.
This is not a new theory, but in Canada, as I said, we may be guilty of not paying enough attention. With Mr. Abe's popularity now below 50 per cent and at the lowest ebb in his term, it might be time to start watching a little more carefully.