GM. This is Milk Road Macro, the newsletter that sees global market shifts coming like your dog hears the treat bag crinkle.
Here’s what we got for you today:
- ✍️ Japan joins the world in “running it hot”
- 🎙️ The Milk Road Macro Show: Why The Market Is Exploding While The Economy Crashes w/ Henrik Zeberg
- 🍪 China imposed new rare earth export curbs
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JAPAN JOINS THE WORLD IN “RUNNING IT HOT”
A shock leadership vote in Japan is a big signal for global markets.
Outsider Sanae Takaichi is now expected to become the next Prime Minister after an unexpected victory.
And her message is simple: spend big.
This means Japan joins the US, Europe and China in the “fiscal stimulus crew”.
The whole world is seemingly turning to “run it hot” policy measures all at once.
Frantically attempting to outgrow increasingly gigantic debt levels.
It’s a “run it hot” party globally - and everybody is invited.
So, what happened?
Why is this important on a global scale?
And what does it mean for asset markets?
Let’s take a look…
Shock result
Takaichi is expected to become Japan’s first ever female Prime Minister after a party election earlier this week.
And it really was a shock result - with Takaichi’s victory widely unexpected.
Polls, political analysts and general opinion placed her as a considerable underdog.
Right up to the last minute, speculators on Polymarket were pricing in a less than 20% chance that Takaichi would win.
Prediction markets like Polymarket have become a reliable source of accurate real-time probabilities for big events.
Most famously, they successfully pointed to a Trump US election victory in 2024, at odds with official polls.
But even the Polymarket hive mind was wrong-footed here.
We’ve seen a real political surprise in Japan.
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JAPAN JOINS THE WORLD IN “RUNNING IT HOT” (P2)
Spend, spend, spend
There have been some comparisons between Takaichi and Donald Trump.
She leans strongly right, with nationalist, security-oriented, and economically interventionist tendencies.
But the most important thing for markets is: she is firmly in the “run it hot” camp.
If you thought the US Government’s debt problems (around 120% debt-to-GDP) were bad - you ain’t seen nothin’.
Japan is the OG debt hoarder - with a debt-to-GDP ratio of roughly 250%.
But who cares - Takaichi is expected to dramatically expand fiscal spending and pressure the Bank of Japan to keep interest rates low.
She’s expected to unleash massive stimulus, new tech subsidies and bigger defense spending.
As well as billions of dollars for infrastructure upgrades - and even cash handouts for households.
Takaichi argues that “growth comes before fiscal health”.
But Japan’s demographic headwinds are relentless.
Its population is aging faster than any major economy.
More retirees, fewer workers, and flat productivity make it nearly impossible to sustain growth, no matter how much stimulus is poured in.
Can Takaichi do the impossible?
(Probably not, but it looks like she’s going to try)
What happened to markets?
Anticipation of the coming fiscal avalanche sent Japanese stocks soaring.
Investors pushed Japan’s Nikkei stock index 5% higher in minutes when trading opened after the leadership vote.
But to generate the funds to spend, the Japanese Government will need to sell more bonds.
Every new Government bond issue pushes investors closer to questioning whether Japan can sustain its massive debt load.
All else being equal, that should lower their prices.
And that explains why the country’s longer-dated bonds tumbled after the election news.
Specifically, Japan’s benchmark 10-year bond saw its yield - which moves inversely to price - hit the highest levels since 2008.
Why is this important on a global scale?
Japan is a big economy.
It’s arguably the fourth most important economy globally - behind the US, China and Europe.
And Japan now joins the other three in “running it hot”.
Put simply: big spending, big deficits and loose monetary policy in an attempt to “outgrow” increasingly large debt piles.
Globally, we see:
- US austerity policies ditched after just a few weeks under the Trump administration, with new “run it hot” policies and central bank easing returning
- China battling a serious economic downturn - with the People’s Bank of China pushing through more than $1 trillion in liquidity injections this year amid big efforts to increase consumption
- Europe leaning heavily on big fiscal policies, after being bullied by Trump into adding hundreds of billions of dollars to defence spending
And now, Japan joins the crew.
Wrapping up
This is just another sign that nominal assets are likely to continue to generally do well.
And specifically, “debasement hedges” (like gold and bitcoin) will probably do even better.
The world of 2010-2020 is behind us.
Governments across the globe are frantically racing to outpace ever-increasing debt loads.
Attempting to boost growth with more spending.
But, if I’m being honest - I think it’s unlikely they’ll be fast enough to outrun the debt monster.
Still, while the race is ongoing - it’s probably good news for the price of basically any kind of scarce asset.
And it’s probably bad news for Government bonds , and potentially inflation levels too.
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The minutes from the Federal Reserve’s September meeting were released and shows that policymakers anticipate further interest rate cuts this year. However, they also outlined that “participants emphasized upside risks to their outlooks for inflation”.
China unveiled new curbs on vital rare earth exports, as Beijing moves to shore up its trade war leverage ahead of a meeting this month between Donald Trump and Xi Jinping. Items that use even traces of certain rare earths sourced from China will now need an export license.
TSMC, the world's largest contract chipmaker, reported third-quarter revenue rose 30% year-on-year, beating market forecasts. Demand for the company’s products leapt on surging interest in AI applications.
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