Japan’s Snap Decision

Japan’s Snap Decision

Prime Minister Abe called a snap election as Japan’s economy improves; the disconnect between jobs and inflation continues to vex central bankers on both sides of the Atlantic.

“Forecasts are not facts”
Federal Reserve Vice-Chair Stanley Fischer, on the Fed’s widely-followed “dot plot” forecast.

Japan: Snap decision With the country’s economy showing new signs of life in inflation (2%) and manufacturing (PMI rising to a 4-month high of 52.6), Prime Minister Shinzo Abe called for a snap election in Japan’s lower house for October and proposed a massive 2 trillion-yen ($18 billion) stimulus package to be drawn up by the end of the year. In response, Japan’s opposition Democratic Party struck an alliance with Tokyo Governor Yuriko Koike’s newly-formed Party of Hope.

Eurozone: No relief for ECB Figures released Friday showed no uptick in the inflation rate, which came in slightly below expectations at 1.5%. As in the U.S., wage growth has remained anemic despite increased hiring, failing to prod inflation higher or provide a rationale for the European Central Bank to begin scaling back its bond-buying program, as the Federal Reserve intends to do in October.

U.S. jobs: Labor gap How much slack is left in the U.S. job market remains a dominant issue in the Federal Reserve’s calculus for future rate hikes. A new academic study1 concludes there may be substantially less slack than thought, because a large and growing percentage of prime-working-year men (ages 25 to 54) have effectively withdrawn from the labor market. If true, this would make the labor pool much shallower, and imply the U.S. economy is much closer to full employment.

For insight into the impact of the Fed's rate and balance sheet, read Brandywine Global's white paper on Normalization.

EU: Hello neighbor  French President Macron called for increased policy integration within the European Union (EU) at its conference in Tallinn, Estonia; a major question is German Chancellor Merkel’s support given changes to her own political landscape. While Merkel praised Macron‘s proposals as “a good basis...to work in an intensive way between Germany and France”, some question how much backing she can deliver given her need to form a new coalition government after losing support in Germany’s recent election.


1 From economist Scott Winship of George Mason University.

Sources: Bloomberg, Wall Street Journal, Deutsche Welle, Nikkei Asian Review (Tokyo)



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.