Japan and China: Shelter from Tightening Liquidity

Global liquidity has tightened dramatically this year, which may be a headwind to global equity markets. However, not all central banks are tightening because not all countries have an inflation problem. There might be opportunities in countries with accommodative, counter-cyclical monetary policies. Japan and China, two countries investors are largely ignoring, are two markets that might warrant a closer look.

High inflation still coming in hotter than expected, less so in Japan and China

Inflation that remains higher than expected for longer than anticipated has been one of the themes we have been most vocal about over the past year. In fact, inflation around much of the world is the highest it’s been in the last several decades and continues to come in higher than forecasts despite strategists and economists revising their estimates higher.

Charts 1 and 2 show Citi Inflation Surprise Indices for a set of major economies. Positive values (shown in orange) indicate actual inflation above expectations, and higher values correspond to larger magnitude of those surprises. Inflation surprises currently sit in their 99th or 100th percentile for the Eurozone, United Kingdom, Canada, and Emerging Markets.

However, there are two major countries that appear more sheltered from this higher inflation dynamic – Japan and China. Although inflation surprises there are rising, they are nowhere as extreme (see Chart 2). Current inflation also remains more subdued in Japan and China.