Kaizen!

The investing worry du jour is the arrival of global inflation. We've tackled this issue as it pertains to interest rates on several recent occasions. (See our past commentaries "Yield Mandala" and "Talk is Cheap" for more.)

In seemingly clear and resounding evidence that we were wrong, China's inflation rate for the month of May surpassed expectations of 3.3% with a whopping 3.4% rise. This reading will apparently prove to be the catalyst for higher long term rates and rising global inflation.

China's Inflation Accelerates, Adding Rates Pressure
By Nipa Piboontanasawat, Bloomberg
https://www.bloomberg.com/apps/news?pid=20601080&sid=aRP4y9nOhd30&refer=asia

We hate it when we're not in on the joke…because they are kidding, aren't they? We're not really supposed to believe a 3.4% inflation rate (very mild for an emerging market) in one country is really the cause of global inflation fears and pervasive higher rates, are we?

The MarketMinder often highlights the strange investor propensity to believe China is driving the world economy and all its mechanisms—from trade to global liquidity. The story goes that if Chinese inflation rises along with Chinese labor costs, then prices of their exported goods will also rise…and that means rampant inflation all over the globe!

If Chinese goods are so expensive, we've got to ask ourselves why Chinese exports are still surging. So long as trade is generally free, regions will tend to import goods that they can't make as efficiently or cheaply as someone else can. The world still loves the low-cost products of China, and that trend is showing no sign of abating. China's exports in May jumped 29% from a year earlier to $94 billion.

Compare that to the eurozone's sluggish recent industrial production numbers. Germany reported a surprise 2.3% monthly drop in industrial production—the sharpest decline in seven years.

European Production Decline Raises Questions About Growth
By the Editorial Staff, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118161849567932282.html?mod=todays_us_page_one

The result: EU regulators are taking a "hard line" with Beijing on trade policy—demanding China import more European goods in exchange for all that Chinese stuff Europeans are importing. We'd humbly suggest the eurozone work on getting its own competitive juices flowing instead of blaming China for producing highly demanded goods more efficiently. But, no. Instead, we get more inane bantering about trade deficits, and threats of harmful mercantilist tactics—nothing much new from the EU camp.

China's Hottest Export: Tension
By Andrew Batson and John W. Miller, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118154797577930986.html?mod=todays_us_page_one

Instead of so myopically focusing on China, why not expand the view—just a little—to take in a fuller scope of Asia? Recall that the world's second largest economy, Japan, is also one of the world's largest exporters.

Japan is undergoing a renaissance of capital expenditure, not just abroad but on its own soil, as various factors like labor, land, and corporate restructurings have made Japan once again a very affordable place to build and operate factories. Japanese companies registered to build 1,782 new factories last year—the highest number in 14 years (according to the Japanese government).

Japan Adds Factories at Home
By Yuka Hayashi, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118158711463431505.html?mod=todays_us_page_one

Japanese manufacturers have a motto: "Kaizen." It means to seek continued improvements in efficiency by eliminating waste. Kaizen is alive and well in Asia—and a huge force acting against inflation. Japanese labor has become cheaper, yes, but factory automation and the use of manufacturing robots have reduced reliance on human workers. That Japan is lowering its costs of production is a great sign for a benign global inflation outlook.

Kaizen is really just a neat way to think about productivity. MarketMinder readers know we believe the powerful forces of high productivity gains in today's world are a major factor keeping prices down globally.

How about a little Korean Kaizen? Global trade demand is so strong that the special docks needed to build big new shipping vessels are booked for years! But Korean shipbuilders innovated new ways to build their ships on land, allowing them to better meet the needs of their customers. This is a spectacular engineering feat.

Korean Shipbuilders Take Novel Construction Tack
By Evan Ramstad, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118160018541531771.html?mod=todays_us_page_one

Kaizen is happening all over the world, and particularly in Asia. Globalization doesn't mean simply "China"—it's the whole world. On balance, productivity gains and technological innovation are contributing to a tame inflation outlook and a continued positive environment for stocks.