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Speaker 1: Good morning, and welcome to the Bloomberg Daybreak Asia podcast.

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Speaker 1: I'm Doug Prisoner. Here are the stories we're following today.

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Speaker 2: I'm Charlie Pelotin for Doug Crisner this week, and Japan

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Speaker 2: is facing a period of political instability after the ruling

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Speaker 2: coalition failed to win a majority in parliament for the

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Speaker 2: first time since two thousand and nine. It sets up

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Speaker 2: a race among the country's two main blocks to form

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Speaker 2: a government. For more, Bloomberg Shrryon spoke with Alistair Gail

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Speaker 2: Bloomberg japan Eco Gov reporter. Let's listen in.

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Speaker 3: Will the Prime Minister be able to hold.

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Speaker 2: Onto his job right?

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Speaker 4: As you say, it's been a long night for the

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Speaker 4: Prime Minister. It's going to feel particularly cold and wet

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Speaker 4: for him this morning. So everything is up into the

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Speaker 4: air at the moment. The LDP has fullen a long

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Speaker 4: way short of the goal that Prime Minister issue a

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Speaker 4: set of securing a majority with its coalition part of Cometo.

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Speaker 4: So now they have to try and form some kind

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Speaker 4: of government, either working with one of the smaller opposition

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Speaker 4: parties formerly bringing them into the coalition, or trying to

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Speaker 4: find a way to work with them on individual policy issues,

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Speaker 4: and the Prime Minister has said that he's willing to

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Speaker 4: do that. But we'll find out, hopefully today, you know,

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Speaker 4: how they're going to think about trying to form some

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Speaker 4: kind of government.

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Speaker 3: What are the policies that could be most impacted.

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Speaker 4: Well, anybody who has been invited into the coalition is

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Speaker 4: likely to have requests. There'll be policy things that some

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Speaker 4: of these smaller parties will want. Specifically, the parties that

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Speaker 4: are most likely to join the coalition want a cut

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Speaker 4: in the sales tax, perhaps an increase in the tax

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Speaker 4: free allowance on income. So those will be the things

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Speaker 4: that the LdB will have to think about whether they

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Speaker 4: can stomach those to bring these parties into the coalition.

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Speaker 3: At least, when it comes to the different parties, it

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Speaker 3: seems the biggest winner was a Constitutional Democratic Party. What

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Speaker 3: does that mean for the future of Japan.

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Speaker 4: Well, yes, as you say, the Constitution Democratic Party did

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Speaker 4: extremely well. They are now the second large well they

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Speaker 4: are still the second largest party, but they have many

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Speaker 4: more seats and their leader has said that he actually

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Speaker 4: wants to try and form a government with other opposition parties.

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Speaker 4: That seems like an outside possibility right now, but at

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Speaker 4: least what we do have is more of a two

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Speaker 4: party system here in Japan. The LDP has been so dominant,

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Speaker 4: but with the CDP now gaining more seats, they will

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Speaker 4: feel that they have momentum, feel that they'll be able

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Speaker 4: to impose their requests more on the government, and Japan

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Speaker 4: will be back to a sort of you know, perhaps

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Speaker 4: a stronger opposition and that will hold the LDP to account.

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Speaker 3: A weekend government, though, does mean that we might not

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Speaker 3: see a clear path when it comes to the Japanese economy.

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Speaker 3: We have the Bank of Japan policy decision on Thursday.

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Speaker 3: How consequential could this be?

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Speaker 4: That's right, I mean, it's you know, all of these

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Speaker 4: issues now become very murky because what Isshuba has to

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Speaker 4: do in the next thirty days is to try and form

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Speaker 4: a government, which means that, you know, when it's things

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Speaker 4: like policy issues, when his priority is doing things like

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Speaker 4: raising the tax rates to pay for defense, that becomes

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Speaker 4: a lot harder. And then maybe people inside the ruling

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Speaker 4: party who feel that they now have you know, the momentum,

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Speaker 4: they may be able to kind of raise their voices

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Speaker 4: on things like BOJ policies. So it does become harder

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Speaker 4: for the boj particularly if the markets are in turmoil,

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Speaker 4: to think about when it could next raise interest rates.

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Speaker 3: Oh Japan Economy and Government reporter Alisair Gil thank you

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Speaker 3: so much for coming out here in the Rain as

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Speaker 3: we dissect, of course, a parliamentary election right now and

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Speaker 3: the result.

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Speaker 2: Markets in the APAC region are coming online against the

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Speaker 2: backdrop of elections from Japan to the United States. For more,

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Speaker 2: we heard from Naomi Fink, chief Global strategistic Nico Asset Management.

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Speaker 2: She spoke earlier with Bloomberg Sherryon in Tokyo.

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Speaker 3: Already we're seeing the Japanese yen under pressure. What are

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Speaker 3: your expectations of how the session will go?

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Speaker 5: Yes, thanks very much. I think that this probably does

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Speaker 5: look like maybe a larger than expected laws for the

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Speaker 5: LDP when we look at the markets, but I think

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Speaker 5: that the short term moves in the markets may not last,

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Speaker 5: even if we do see some pressure on stocks. Of course,

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Speaker 5: at least short term traders are probably going to make

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Speaker 5: short term moves, but there are plenty of longer term

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Speaker 5: investors wanting to capitalize on those volatile moves and buy

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Speaker 5: on the dips. And the earnings are there, the valuation

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Speaker 5: doesn't look too stretched and the economy is turning toward

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Speaker 5: more domestic demand growth.

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Speaker 3: I do wonder what happens if Prime Minister issue Ba

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Speaker 3: actually resigns. We are getting his press conference at two pm.

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Speaker 3: Barclets was saying we could see a two percent spike

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Speaker 3: on the end on risk of moves.

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Speaker 5: Well, I mean, if we do see risk off, it

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Speaker 5: probably has to be a little bit more globalized than

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Speaker 5: just the end, because of course, with currencies, you have

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Speaker 5: at least two currencies at play, and the end doesn't

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Speaker 5: yield as much as the dollar, and that's kind of

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Speaker 5: a fact, and so it would I would find it

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Speaker 5: hard to see that move really last, even if it

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Speaker 5: does happen.

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Speaker 3: We continue to see a weakening of the Japanese yend,

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Speaker 3: which is already the worst G ten performer this year.

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Speaker 3: What does that mean for the markets, especially for equities

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Speaker 3: exporters that are reliant on selling products overseas well.

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Speaker 5: I mean, if we see weakening in the end, of

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Speaker 5: course for the exporters it's it's really positive. But I

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Speaker 5: think counterbalancing that, we do have a Bank of Japan

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Speaker 5: meeting coming up. I don't really expect them to do

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Speaker 5: anything right now, but we have had quite a lot

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Speaker 5: of price tikes in food and beverage for example, that's

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Speaker 5: hitting households. So the BOJ can't totally back off from

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Speaker 5: its tightening regime. It may avoid volatility, as we have

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Speaker 5: heard them say this, but I think that if we

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Speaker 5: do see any weakening in the end, JA gets more

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Speaker 5: vigilant and perhaps more all else equel bias to eventually hike.

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Speaker 3: Do you see a virtuous cycle finally setting in here

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Speaker 3: in Japan with inflationary pressures beans sustainable?

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Speaker 6: Now?

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Speaker 5: I do see some signals of a virtuous circle, but

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Speaker 5: it's not something that's created overnight. I mean we are

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Speaker 5: seeing things like wage rises and some months we've seen

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Speaker 5: real wage rises. We've seen some positive signals for next

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Speaker 5: year shunto, we have seen domestic demands start to pick up.

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Speaker 5: But it's not just one and done. It's a process

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Speaker 5: that has to continue. So I think we have a

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Speaker 5: lot of the pieces in place, and it will take time,

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Speaker 5: and so long as we don't have some sort of

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Speaker 5: market collapse, which I don't foresee, then I think the

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Speaker 5: process will continue.

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Speaker 3: What do you expect from the Bank of Japan this week?

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Speaker 5: Well, I think the Bank of Japan is going to

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Speaker 5: give us some messaging, and that messaging probably is that

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Speaker 5: it remains on its hiking path. The Bank of Japan

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Speaker 5: has over this whole regime pledged to remain behind the curve,

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Speaker 5: and that's consistent with allowing prices to pick up first

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Speaker 5: and then acting prices are picking up. So I would

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Speaker 5: imagine that they're not going to abandon their their hike regime.

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Speaker 3: There's a weekend government less than clear mandate for Prime

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Speaker 3: Minister Shiget to issueva affect that calculation for the BOJ.

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Speaker 5: Well, I think the BOJ will avoid short term volatility,

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Speaker 5: but that's probably it. I mean, one of the beauties

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Speaker 5: of having an autonomous central bank is that they respond

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Speaker 5: to inflation and growth. So if inflation expectations suddenly start

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Speaker 5: falling through, okay, they'll rethink. But I don't think that

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Speaker 5: the Bank of Japan is going to change everything just

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Speaker 5: because of the political developments. I think they will look

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Speaker 5: through this and take a look at what's going on

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Speaker 5: with inflation and growth.

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Speaker 3: When do you expect the next great hike to come

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Speaker 3: from the Bank of Japan and what could that mean

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Speaker 3: for the yen and stock markets?

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Speaker 5: Well, I mean, we have seen some price hikes this

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Speaker 5: month even and if we actually see those come through

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Speaker 5: a bit stronger in November, it's possible we might have

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Speaker 5: a hike before the end of the year. Of course,

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Speaker 5: we also have the US elections, and if we have

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Speaker 5: volatility around that, that can also affect the boj's calculation.

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Speaker 3: As you said, I mean, in order for the yen

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Speaker 3: to move, you have the US dollar on the other side,

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Speaker 3: and we continue to see strength there.

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Speaker 5: Well, I think that this is if we take a

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Speaker 5: look at the Japanese elections versus the US elections, probably

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Speaker 5: markets are kind of gearing more for volatility around the

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Speaker 5: US elections rather than the Japanese elections. Maybe that's why

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Speaker 5: it was more of a surprise that we had an

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Speaker 5: unexpected outcome. But we still have that ahead of us,

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Speaker 5: so I think that, you know, we can't really make

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Speaker 5: any foregone conclusions before some of these big events are over.

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Speaker 2: I'm Charlie Pellett. Doug Chrisner has the week off. We

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Speaker 2: heard earlier from Diana Mossini, deputy chief economist at AMP,

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Speaker 2: and she shared her outlook for global markets with Bloomberg's

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Speaker 2: Heidi Stroud Watts in Hong Kong.

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Speaker 7: Kind of a resounding theme that we've been dealing with

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Speaker 7: when it comes to the US economy has been so

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Speaker 7: much strength and momentum for the consumer. So to that end,

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Speaker 7: do you think that PC number is one that we

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Speaker 7: need to look more closely at this week?

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Speaker 6: Well, the PC number tends to move around a bit

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Speaker 6: slower than the headline inflation figures, and I doubt that

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Speaker 6: this week's figures will actually tell us anything new. Basically,

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Speaker 6: inflation's moving in the right direction. The FED can keep

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Speaker 6: cutting rates, but probably at a softer pace than where

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Speaker 6: we assumed a few months ago. We were always with

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Speaker 6: the view that market pricing for the FED went a

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Speaker 6: bit too hard. Into the end of this year, market

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Speaker 6: was pricing in about one hundred and twenty five basis

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Speaker 6: points at one point worth of cuts we had the fifty.

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Speaker 6: I think it's likely that we'll see two more twenty

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Speaker 6: five bases point rate cuts. But the economic data is

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Speaker 6: just holding up so strongly in the US that there

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Speaker 6: is real no need for the FED to go harder

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Speaker 6: right now, and especially at the time when bond yields arising,

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Speaker 6: which sort of threatens the outlook for equity markets. I

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Speaker 6: think that will play into the mind of the Federal

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Speaker 6: Reserve as well.

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Speaker 7: Is it difficult to sort of assign the significance when

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Speaker 7: it comes to the jobs numbers on Friday, given we

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Speaker 7: know there's a number of hurricane as well as labor

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Speaker 7: strike for lated factors that play there.

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Speaker 6: Absolutely. I think the volatility in the figures last month

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Speaker 6: with the unemployment rate falling and then with some of

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Speaker 6: those natural disasters for this month's figures, we'll really complicate

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Speaker 6: the analysis. So if we take into account what some

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Speaker 6: of the other labor market indicators are telling us, things

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Speaker 6: like initial jobless claims, continuing jobless claim some of the

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Speaker 6: jobs leading indicators like job advertisements, job vacancies. I mean,

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Speaker 6: they're still pointing to the labor market basically softening but

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Speaker 6: not falling off the cliff, and that I think is

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Speaker 6: really what's key. The unemployment rate doesn't look like it's

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Speaker 6: going to keep urging like you know it often does

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Speaker 6: in periods where the US economy is going to slow,

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Speaker 6: and that's likely for next year that US economic growth

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Speaker 6: is going to be softer. But it is hard to

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Speaker 6: see the unemployment rate rising significantly above five percent in

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Speaker 6: the US, or even really above four point six percent

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Speaker 6: or so. So I think that the outlook for the

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Speaker 6: labor market from the federal reserves point of view is

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Speaker 6: basically one where we see further weakening and employment growth,

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Speaker 6: but we don't see a big increase to the unemployment rate,

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Speaker 6: which is really good news for consumers and allows that

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Speaker 6: normalization of interest rates to go quite slowly rather than

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Speaker 6: to see fast rate cuts. And I think that that's

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Speaker 6: a good outcome for share markets as well, because if

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Speaker 6: we got a big increase to the unemployment rate, that

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Speaker 6: would really lead to concerns that the US is in

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Speaker 6: a recession or at least potentially headed into one.

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Speaker 7: Govn Aweta has said that, you know, there's obviously clear focus,

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Speaker 7: a careful focus on where the US economy heads as

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Speaker 7: to the decision making for the BOJ as well. I

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Speaker 7: do wonder with the kind of political uncertainty now, the

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Speaker 7: failure to win that coalition majority, do you think that

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Speaker 7: has an impact on monetary policy going forward, certainly on

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Speaker 7: fiscal policy settings.

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Speaker 6: Yeah, the short term, I think it will impact or

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Speaker 6: limit the Bank of Japan's ability to potentially raise interest rates.

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Speaker 6: I mean, it already looked like the Bank of Japan

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Speaker 6: was hoping that they didn't need to raise rates as

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Speaker 6: aggressively as potentially what we thought a few months ago.

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Speaker 6: So I still think that the outlook for Japan is

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Speaker 6: one where there is a normalization to interest rates, where

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Speaker 6: the Bank of Japan does have to raise rates, but

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Speaker 6: that process can probably occur a bit slower because we

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Speaker 6: know that a key concern for households in Japan has

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Speaker 6: also been the cost of living, like it has in

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Speaker 6: a lot of the Western world and a lot of

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Speaker 6: the advanced economies. But at the current difficult point in

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Speaker 6: their in their political cycle, it will be hard for

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Speaker 6: the Bank of Japan to raise rates because it will

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Speaker 6: again lead to concerns further concerns of cost of living issues.

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Speaker 6: And also, if you look at the core inflation data

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Speaker 6: for Japan, it doesn't really scream at you that the

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Speaker 6: Bank of Japan needs to hype rates.

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Speaker 7: Right now.

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Speaker 6: Core inflation is still sub two percent in Japan, so

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Speaker 6: it's not like the same situation that we dealt with

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Speaker 6: in some of the advanced economies where core inflation was

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Speaker 6: running at four percent and above in annual terms. It

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Speaker 6: is a lot slower in Japan.

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Speaker 7: And finally, Diana, of course, we're just under two weeks

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Speaker 7: now from the US election, And it was interesting we

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Speaker 7: heard from the Vice Finance Minister of China of the

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Speaker 7: weekend talking about how the dedication in terms of these

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Speaker 7: new policies for stimulus to try and lift demand and

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Speaker 7: lift the consumer. How much harder does that job get

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Speaker 7: if we do see further tariffs and the very hawkish

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Speaker 7: trade policy reenacted after that election.

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Speaker 6: Well, the difficulty is some of those trade policies that

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Speaker 6: we may get if we get a Republican president or

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Speaker 6: or a red sweep which to make it easier for

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Speaker 6: the tariffs to be passed, we will not get any

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Speaker 6: signs of what that looks like until next year when

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Speaker 6: if Trump is actually re elected. So in the short

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Speaker 6: term markets will worry about what that means. But I

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Speaker 6: think that Marcus will probably focus more on the potential

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Speaker 6: tax cut that are likely to come under a red

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Speaker 6: sweep or a Republican victory, and then that problem of

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Speaker 6: tariff's will probably be something that markets focus on next year.

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Speaker 6: And the same goes for the implications for China. It's

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Speaker 6: hard to know what actually happens until we get concrete

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Speaker 6: policies out of the Republicans. We don't know what percentage tariffs,

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Speaker 6: they'll actually impose whether there'll be some deals that go

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Speaker 6: with that. This training issue will extend over multiple years.

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Speaker 7: Yeah, Jan I always go to chat with you. Jennerousen,

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Speaker 7: a deputy Chief Economists at AMP.

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