December monetary data released today suggest that the Japanese economy will disappoint in the spring, while Chinese news will improve at the margin.

Six-month growth of Chinese real M1 and M2 weakened last summer and autumn, signalling a likely industrial slowdown around end-2013 – December output will be released next week. Real money expansion, however, recovered in December, warranting less concern about economic prospects – see first chart. The risk, of course, is that the December improvement proves temporary; January / February data, unfortunately, will be difficult to interpret because of the Chinese New Year.

Japanese real money growth, by contrast, continued to slow in December, with an earlier drag from higher inflation now compounded by lower nominal expansion – second chart. Monetary trends, therefore, look set to reinforce rather than offset the economic impact of fiscal tightening this spring. As previously discussed, QE has had a disappointing monetary impact partly because increased selling of JGBs by banks initially offset higher Bank of Japan purchases, although these sales have slowed recently.

The latest monetary signals question the consensus view that Japanese equities will perform well this year, while China-related plays will continue to languish. According to the December Merrill Lynch survey, the percentage of global fund managers with a positive view of Japanese equities is more than one standard deviation above its long-run average; the popularity of emerging market equities and commodities, by contrast, is about two standard deviations below normal.