CONTRIBUTORS
Michael Browne
Global Investment Strategist,
Franklin Templeton Institute
Economics
Big news has come from Japan, where the new government of Prime Minister Takaichi has signed off on a US$135 billion stimulus plan. The bulk of the measures are for price relief, as consumers will see their domestic energy bills cut with subsidies, and families will benefit from a one-off cash handout of ¥20,000 per child. On top of this, the government abolished the gasoline tax and raised the income tax threshold. These measures are expected to reduce inflation by 0.7% in the first quarter of 2026.1 European governments should take note!
In front of the crucial budget next week, UK Purchasing Manager Index data is showing resilience. While the Bank of England will be pleased that price increases continue to slow, it is at the expense of profit margins. The chancellor of the exchequer should be worried that those margins are being restored through job losses, and the continued contraction in orders is a concern. It is a remarkably similar picture in Germany, except the optimism about 2026 is growing, not shrinking. Meanwhile, in France some stabilisation in services has coincided with weakness in manufacturing and employers shedding labour.2
The simple conclusion is that the United Kingdom and France are slowing Europe. Germany and the rest of Europe are improving, while inflation continues to abate, and hiring is flat. The risk for 2026 remains that inflation expectations are too high, leading to a steeper yield curve as markets sense further rate cuts. A steepening curve is a key plank of our 2026 outlook.
Bonds
Globally, a remarkable spread compression has been occurring in Asia between Chinese and Japanese 10-year government bond yields. The increased fiscal spending in Japan has driven this spread to new lows, and in the past week China’s yields dipped below Japan’s for the first time. This represents a spread compression of 250 basis points over two years—a period when China’s budget deficit ranged between 8% and 9% per annum. Can this continue? It depends on the progress of deflation in China, and there are no signs of that abating—so far.
Equities
The way the equity market waited for NVIDIA’s earnings numbers this past week reminded me of the halcyon days of Nokia in the noughties (2000-2009). But elsewhere, the problem that artificial intelligence (AI) has created for incumbents is writ large: Rightmove, a property advertising website/portal, saw its shares drop on the announcement it was having to aggressively raise its AI spending. It is purely defensive capital expenditure, a hit to margins. This is not a new fear, and the European portals of Autotrader, Vend Marketplaces, Scout and Baltic Classifieds have all fallen more than 10% since Rightmove’s figures. The fear is that AI assistants will bypass all of them. As further evidence, the US property portal Zillow has already partnered with ChatGPT. Does anyone remember the yellow pages?
Parting shot
While markets worry about AI capital expenditures and valuations, spare a thought for crypto. There are potential opportunities for crypto to redefine the means of exchange away from the costs of the banking system in a significant way. In the view of some people, the excessively loose use of monetary policy by authorities since 2008 was undermining fiat currencies. Cryptocurrencies are a store of value out of the grasp of policymakers, and that crypto has become established among many investors alongside gold and the Swiss franc is remarkable. So, excuse the wry smile as margin calls drive the current selloff: In other words, old-world debt is at work, in the form of US dollar lending, to those who leverage up to buy it.
Endnotes
- Source: “Japan Approves $135 Billion Stimulus to Mitigate Inflation Pain.” Bloomberg. 20 November 2025.
- Sources: S&P Global Flash UK PMI, HCOB Flash Eurozone PMI, HCOB Flash Germany PMI, HCOB Flash France PMI. S&P Global. 21 November 2025.
Terms
Purchasing Manager Index (PMI) track economic activity and can be specific to the manufacturing and services sectors, or composite, tracking information across multiple sectors.
Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. ‘Narrow’ in reference to spreads indicates small differences in yields.
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