For years, SocGen’s permabear Albert Edwards was best known for preaching the gospel of terminal deflation, having introduced the “Ice Age” concept some three decades ago to describe a world trending toward monetary paralysis and the failure of conventional economic policies as central banks fail to stimulate “just the right amount” of inflation to kickstart growth, instead losing the war to deflation as attempts to boost wage growth fail time and again.

Which is surprising, because in his latest letter to clients from last week, the prominent SocGen strategist proposes that not deflation, but rather a unexpected episode of monetary tightening will be the catalyst that will trigger the next “Great Unwind”, bringing the record-setting global stock market to a screeching halt.

What is even more interesting is the country that according to Edwards, will launch this great monetary shock: Japan, also known as ground zero for every failed reflation experiment conducted in the past 30 years.

This time may be different and, far now, most investors fail to see it, according to Edwards.

As he explains, “with so much investor attention focused on the improving US economic outlook and the Trump corporate tax cuts, and with the eurozone having seen a rapid improvement in growth prospects over the past year, the other big developed economy/market has been somewhat overlooked”, that of Japan.

“Japan’s economic situation has been improving too although likely in a more durable fashion. Indeed the front-page chart shows a consistent improvement in consumer expectations that the great deflation in Japan has finally ended – despite headline inflation remaining close to zero. A change in the deflationary mindset may yet be at hand, and that in itself would stimulate the economy by reducing the incentive to delay purchases.”

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