Japan: fast recovery means global nightmare

The world is all perversity. The worst that could happen to investors is stronger global growth, producing weak financial markets. That will happen if Japan picks up this year at the same time as core Europe, and there is a continued boom in the US.

I think synchronized global growth is only 40% likely this year. It's more likely the Japanese authorities will have to use their last policy option, a massive and continued yen depreciation, to kick-start their economy, so Japan's recovery will be delayed until next year. But if I'm wrong, stronger global growth will hit world financial markets, particularly US treasuries and emerging market debt and equity.

My view of Japan is that a combination of tax increases and policy contradictions will stop Japanese growth in the second half of the year. Once that happens, having exhausted monetary policy options, the authorities will have only one policy...