WEBVTT - BOJ’s Ueda Signals Little Concern Over Highest Yields Since 2008

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Bloomberg

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<v Speaker 1>Daybreak Asia podcast. I'm Doug Krisner. Let's begin in Tokyo today,

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<v Speaker 1>where BOJ Governor Kazuo Owedo was making some hawkish comments

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<v Speaker 1>earlier during an address to parliament. He seemed to use

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<v Speaker 1>unusually clear language in defending the recent rise that we

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<v Speaker 1>have seen lately in Japanese government bond yields. Joining me

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<v Speaker 1>now for a closer look is Paul Jackson. He is

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<v Speaker 1>Bloomberg News Economy editor, joining us from Tokyo. Paul, it's

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<v Speaker 1>always a pleasure to benefit from your perspective. Talk to

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<v Speaker 1>me a little bit about any concern that may be

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<v Speaker 1>there in the market right now in Japan, given this

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<v Speaker 1>move up that we have seen in JGB yields.

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<v Speaker 2>Well, I think the market concerns largely reflect the reality

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<v Speaker 2>that the BOJ has now pulled away a year ago

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<v Speaker 2>from protecting these yields, keeping up lid on them so

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<v Speaker 2>they can kind of go up and up and up.

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<v Speaker 2>Now there has been an uptick to the highest levels

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<v Speaker 2>in the benchmark yield, to the levels that we last

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<v Speaker 2>saw during the global financial crisis. Before then, Even so,

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<v Speaker 2>these our levels that are are much higher than they

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<v Speaker 2>have been for a long time. That's causing some concern

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<v Speaker 2>amongst market players and also for policymakers. Don't forget that

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<v Speaker 2>Japan has the biggest debt load amongst advanced economies in

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<v Speaker 2>the world, so rising yields on benchmark bonds is a

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<v Speaker 2>problem for long term financing of the debt. And I

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<v Speaker 2>think what we're seeing here from policymakers, not only from

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<v Speaker 2>the Central Bank governor Uda, but also from the fireman

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<v Speaker 2>Finance Minister Kato the day before, is that policymakers are

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<v Speaker 2>trying to just reassure, just say, hey, look, this is

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<v Speaker 2>kind of natural. We're back towards a kind of more

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<v Speaker 2>market focused determination of yield pricing, and there's no need

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<v Speaker 2>to get too overly concerned here. These market movements are normal, and.

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<v Speaker 1>It seems logical that it would also would reflect expectations

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<v Speaker 1>that the boj is going to begin raising interest rates soon.

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<v Speaker 2>Right, Yeah, I think we're going to continue seeing interest

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<v Speaker 2>rate rises in Japan. We've still got inflation. Inflation is

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<v Speaker 2>going to be above or in line with the boj's target.

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<v Speaker 2>We're getting close to three years now, so those interest

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<v Speaker 2>rates are going to keep going up. Now, they're not

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<v Speaker 2>going to go nuts. It's not like every meeting. It's

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<v Speaker 2>not back to back at rate hikes. We're not expecting

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<v Speaker 2>anything at the March meeting. But I think we are seeing,

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<v Speaker 2>you know, pretty hard baked team expectations that the Bank

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<v Speaker 2>of Japan is going to be raising rates every six months.

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<v Speaker 1>Also, so earlier today we had the February reading on

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<v Speaker 1>producer prices. You and I were talking a moment ago.

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<v Speaker 1>This is pretty much in line with what the market

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<v Speaker 1>was expecting, right, that four percent year on year increase

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<v Speaker 1>in PPI.

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<v Speaker 2>Yeah, I think so. I think that the main takeaway

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<v Speaker 2>from this is we've got high input prices coming in

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<v Speaker 2>that means it's going to feed into inflation going forward.

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<v Speaker 2>So inflation isn't going to disappear anytime soon, and so

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<v Speaker 2>that feeds into the idea that the Bank of Japan

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<v Speaker 2>will keep raising interest rates. Now, is inflation like six

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<v Speaker 2>or seven percent requiring urgent attention? No, So I think

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<v Speaker 2>we're going to see a continuation of gradual rate hikes.

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<v Speaker 1>So, how are consumers in Japan feeling these days about inflation?

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<v Speaker 1>And maybe you can help me understand how that's showing

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<v Speaker 1>up in politics.

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<v Speaker 2>Well, I think the average consumer on the street is

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<v Speaker 2>thoroughly unhappy with all these rising prices. It's kind of

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<v Speaker 2>an alien concept in Japan, the idea of prices are

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<v Speaker 2>going up. It's only something that a generation has seen

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<v Speaker 2>in the last you know, two or three years, so

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<v Speaker 2>you know, they're seeing this cost of living crunch as

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<v Speaker 2>even though wages are going up much faster than they

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<v Speaker 2>have been, it's still those gains are lagging increases in prices.

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<v Speaker 2>So in terms of people's real living standards, they are

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<v Speaker 2>going down.

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<v Speaker 3>Now.

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<v Speaker 2>Is anyone in the world going to be happy with that?

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<v Speaker 3>Well?

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<v Speaker 2>No, And we do have an election coming up in

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<v Speaker 2>the summer, so Prime Minister Ishiba kind of needs to

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<v Speaker 2>do something to show that they are on top of

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<v Speaker 2>the inflation story if he's going to perform well in

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<v Speaker 2>that election. And the signs aren't great.

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<v Speaker 1>So much of the conversation here Stateside has been around

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<v Speaker 1>and tariffs that are going to be imposed in a

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<v Speaker 1>few hours from now on imported steel and aluminum. Now,

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<v Speaker 1>Japan at one point was a big steel producer. How

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<v Speaker 1>are Japanese people feeling about this talk of increased tariffs?

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<v Speaker 2>Well, I think it is it is a concern for

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<v Speaker 2>the economy going forward. Obviously, Japan relies a lot on

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<v Speaker 2>its trade. The we have a whole raft of tariffs

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<v Speaker 2>in the Trump universe, so we're starting off with steel

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<v Speaker 2>and aluminum, but there's also these reciprocal tariffs that is

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<v Speaker 2>also talking about, and potentially tariffs on cars. Now, I

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<v Speaker 2>think that the tariffs on cars is probably Japan's number

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<v Speaker 2>one concern because seventeen percent of this exports our cars,

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<v Speaker 2>so and a third of those go to the US.

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<v Speaker 2>So if those tariffs are slapped on cars, that's going

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<v Speaker 2>to really hits the economy. Now, looking at the economy,

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<v Speaker 2>we saw recent growth figures showing that the economy expanded

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<v Speaker 2>two point two percent in the fourth quarter. That's a

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<v Speaker 2>pretty good clip. You know, they could keep that going

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<v Speaker 2>every quarter. I'm sure Japan will be very happy. But

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<v Speaker 2>looking at the figures, most of that growth is based

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<v Speaker 2>on trade and a business investment. Now, if you've got

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<v Speaker 2>a whole load of tariffs being unfiled across the world, well,

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<v Speaker 2>is that going to be good for trade? No? And

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<v Speaker 2>our business is going to feel like this is a

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<v Speaker 2>great time to invest. Well, I don't think so. So

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<v Speaker 2>what does that leave you to drive the economy consumption well,

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<v Speaker 2>as I told you, consumers are not happy with inflation.

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<v Speaker 2>So all of these are dark clouds for the economy

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<v Speaker 2>moving forward.

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<v Speaker 1>So our leaders in Japan attempting to get some exemptions,

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<v Speaker 1>do you think, Oh?

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<v Speaker 2>Yes, like many of US trading partners, especially those with

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<v Speaker 2>surpluses on trade, We've seen a delegation go over to DC.

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<v Speaker 2>We had our trade minister there just in recent days

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<v Speaker 2>talking with COMMA Sectary Secretary Howard Lutnik, trying to find

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<v Speaker 2>a way for some kind of win win result. As

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<v Speaker 2>you can imagine in Trump's world, those are difficult to

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<v Speaker 2>come by.

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<v Speaker 1>Mentioned a moment ago that we have the BOJ meeting

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<v Speaker 1>in the week ahead, do you think that we're likely

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<v Speaker 1>to get a hawkish hold? Is that the logical way

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<v Speaker 1>of framing this.

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<v Speaker 2>I think that's a logical way of thinking how the

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<v Speaker 2>outcome would would be. I think it will be a

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<v Speaker 2>bit more neutral, it will be a hold. I think

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<v Speaker 2>there's so many uncertainties about what's going to happen with

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<v Speaker 2>these tariffs. Don't forget we've seen you know, garis imposed,

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<v Speaker 2>than delayed and postponed, then resort. Who knows what's going

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<v Speaker 2>to happen. Is there's so many tariffs being talked about

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<v Speaker 2>in the coming weeks. Is that a scenario, a situation

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<v Speaker 2>when you want to be very hawkish with your messaging

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<v Speaker 2>after holding I think it's more likely that they'll stick

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<v Speaker 2>to a neutral take no change. That's what all fifty

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<v Speaker 2>two of our economists surveyed recently expect at this meeting,

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<v Speaker 2>and I think they'll keep the language fairly neutral going ahead,

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<v Speaker 2>just staying with this idea that if their forecasts are realized,

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<v Speaker 2>they will continue with gradual increases in interest rates.

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<v Speaker 1>You and I have talked in the past about the

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<v Speaker 1>proposed acquisition of US Steel on the part of Nipon steal.

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<v Speaker 1>It was certainly a hot button issue going into the

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<v Speaker 1>presidential election. I haven't heard much and there really hasn't

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<v Speaker 1>been a resolution yet. What are we hearing about this?

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<v Speaker 2>Well, if you remember when Prime Minister Ishiba met with

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<v Speaker 2>President Trump recently in DC, you know they discussed this.

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<v Speaker 2>This came out at their press conference and they tried

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<v Speaker 2>to re imagine the takeover as instead a direct investment

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<v Speaker 2>of of course less than half so now trying to

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<v Speaker 2>realize that reimagining the deal as instead a direct investment.

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<v Speaker 2>That's quite a leap of the characterization of what's going on.

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<v Speaker 2>So I think both sides are still trying to work

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<v Speaker 2>through that. My understanding is Nipon Steele's the case, insisting

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<v Speaker 2>that it should go ahead and fighting against the block

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<v Speaker 2>that former President Biden put on the deal that is

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<v Speaker 2>still in process, still going ahead, So a lot of

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<v Speaker 2>questions still to be answered on that deal.

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<v Speaker 1>Paul will leave it there. It's always a pleasure. Thank

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<v Speaker 1>you for joining us. Paul Jackson there, Bloomberg News Economy

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<v Speaker 1>editor joining us from Tokyo. Here on the Daybreak Asia podcast.

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<v Speaker 1>Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner.

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<v Speaker 1>It certainly was another volatile day in the equity market,

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<v Speaker 1>and the cross currents were many. We had the trade

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<v Speaker 1>tension between the US and Canada. We also had Ukraine

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<v Speaker 1>saying it's ready to accept a US proposal for a

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<v Speaker 1>thirty day truce with Russia, and here in the States,

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<v Speaker 1>heightened concern over economic growth. Let's get to it now

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<v Speaker 1>with Michelle Martin. She's our guest. Michelle is president of Prosperity,

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<v Speaker 1>the wealth management arm of Eisner Amper and Michelle joining

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<v Speaker 1>us from just outside Minneapolis. Good of you to make

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<v Speaker 1>time to chat with us. Can we begin with the

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<v Speaker 1>tariff story, because tonight at twelve oh one am, the

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<v Speaker 1>US tariffs of twenty five percent on imported steel and

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<v Speaker 1>aluminum will take effect. Obviously, in terms of equity market action,

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<v Speaker 1>we've seen some heavy selling recently on concern over the

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<v Speaker 1>impact of these tariffs. To what extent do you think

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<v Speaker 1>the market is now fully embraced the risk or is

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<v Speaker 1>there still potentially some more downside as it relates to

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<v Speaker 1>these tariffs biting.

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<v Speaker 3>Well, that's an interesting question, Doug, and I think that

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<v Speaker 3>that question is going to remain out there until we

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<v Speaker 3>actually start to see this communication in the back and

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<v Speaker 3>forth settle down a little bit. I think that tariffs

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<v Speaker 3>are absolutely having an impact on the markets right now,

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<v Speaker 3>and I think that the fact that the markets were

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<v Speaker 3>so the valuations were so high, this is kind of

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<v Speaker 3>the pen that's bursting the air out of the bubble

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<v Speaker 3>here a bit. We're seeing Nasdaq in correction territory, and

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<v Speaker 3>you know, it's really difficult at this point to even

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<v Speaker 3>keep track of on a day to day basis what

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<v Speaker 3>is happening with the tariffs. I'm as you said, I'm

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<v Speaker 3>here in Minneapolis, and the premiere of Ontario just removed

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<v Speaker 3>the threat to our electric grid here in northern Minnesota,

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<v Speaker 3>in Michigan and New York. So there's a lot of

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<v Speaker 3>bargaining going on, and I think it's important that we

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<v Speaker 3>follow that. But I think it's creating a lot of

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<v Speaker 3>uncertainty and fear, which is affecting the markets, absolutely.

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<v Speaker 1>No doubt. It's kind of curious. Today President Trump seemed

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<v Speaker 1>to downplay the recent sell off that we have seen

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<v Speaker 1>in the equity market. At one point when he was

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<v Speaker 1>talking with reporters, he said, and I'm quoting him, it

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<v Speaker 1>doesn't concern me. So if you look at the concerns,

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<v Speaker 1>I'm sure there are many, and I'm sure that you're

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<v Speaker 1>hearing a lot of concerns coming from your clients. What

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<v Speaker 1>are they asking you when the phone rings.

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<v Speaker 3>Clients are definitely concerned, and I think that just the

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<v Speaker 3>lack of certainty is really on settling to them. I

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<v Speaker 3>think that people are feeling like perhaps it was time

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<v Speaker 3>for a pullback. And one of the things that we

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<v Speaker 3>talk about a lot with our clients is just having

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<v Speaker 3>a diversified strategy and being diversified in your portfolio. You know,

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<v Speaker 3>they're calling and asking where their equity exposures are and

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<v Speaker 3>if if their portfolio is rebalanced appropriately. Those are all

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<v Speaker 3>things that are top of mind for people. And I

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<v Speaker 3>think the other thing is they're just concerned about, you know,

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<v Speaker 3>if they have some short term investment needs, you know,

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<v Speaker 3>need for cash, need for income. They're they're more apt

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<v Speaker 3>to be putting more in cash and fixed income at

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<v Speaker 3>this point, just thinking that there's gonna be a short

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<v Speaker 3>term correction.

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<v Speaker 1>Trump said today he does not foresee the US going

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<v Speaker 1>into recession. I don't know how you get your economic reporting,

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<v Speaker 1>whether or not you outsource that, or whether it's something

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<v Speaker 1>that happens internally at Eisner Amper that you have access to.

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<v Speaker 1>Is the house view right now that we are at

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<v Speaker 1>risk of a recession?

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<v Speaker 3>I think I think our view, and and you know

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<v Speaker 3>this is from from several several investment houses, is really

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<v Speaker 3>where we draw our information. I think we think it's

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<v Speaker 3>a little bit early to say that a recession is

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<v Speaker 3>absolutely on the horizon. I think that it is going

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<v Speaker 3>to really depend largely on what we're seeing with consumer

0:14:33.160 --> 0:14:37.040
<v Speaker 3>spending and jobs. Those are the key drivers here. And

0:14:37.400 --> 0:14:41.160
<v Speaker 3>we've got some some reports, you know, coming out shortly,

0:14:41.640 --> 0:14:45.520
<v Speaker 3>but I think monitoring that and really understanding consumer confidence

0:14:46.200 --> 0:14:49.160
<v Speaker 3>is going to play largely into that.

0:14:49.920 --> 0:14:51.480
<v Speaker 1>Do you think this is going to move the needle

0:14:51.640 --> 0:14:53.920
<v Speaker 1>where the FED is concerned? I mean, there were many

0:14:54.320 --> 0:14:56.840
<v Speaker 1>folks who watch market action saying that the FED is

0:14:56.880 --> 0:14:59.560
<v Speaker 1>probably going to be on hold for the foreseeable future,

0:14:59.600 --> 0:15:01.920
<v Speaker 1>and I'm one wondering whether what we've been seeing in

0:15:02.000 --> 0:15:06.280
<v Speaker 1>terms of volatility and uncertainty changes that outlook slightly.

0:15:06.880 --> 0:15:11.560
<v Speaker 3>I'm a former banker, Doug, and I think that we're

0:15:11.560 --> 0:15:14.120
<v Speaker 3>in this. I think the FED, you know, it did

0:15:14.160 --> 0:15:16.880
<v Speaker 3>some easying and last fall. I think that, you know,

0:15:16.920 --> 0:15:19.480
<v Speaker 3>there was talk that perhaps they got ahead of themselves

0:15:19.560 --> 0:15:23.640
<v Speaker 3>in September, but it actually has has has worked quite well,

0:15:23.680 --> 0:15:26.000
<v Speaker 3>and we were, you know, heading for what appeared to

0:15:26.080 --> 0:15:28.600
<v Speaker 3>be a soft landing. I think that the FED is

0:15:28.600 --> 0:15:30.400
<v Speaker 3>going to hold steady for a while. I think they've

0:15:30.440 --> 0:15:32.800
<v Speaker 3>signaled that, and I think one of the things that's

0:15:32.840 --> 0:15:35.400
<v Speaker 3>important is that we listened to the messaging of the FED.

0:15:36.440 --> 0:15:42.120
<v Speaker 3>The market tends to lean towards what the market thinks,

0:15:42.560 --> 0:15:45.360
<v Speaker 3>not necessarily always what the FED is seeing, and so

0:15:46.480 --> 0:15:49.280
<v Speaker 3>I think the FED would absolutely adjust if there's true

0:15:49.320 --> 0:15:52.440
<v Speaker 3>signs of recession coming into play, but I think it's

0:15:52.440 --> 0:15:53.360
<v Speaker 3>a little early for that.

0:15:53.880 --> 0:15:56.200
<v Speaker 1>Where are you in terms of the opportunities that may

0:15:56.240 --> 0:15:58.160
<v Speaker 1>exist in the bond market right now? Is that the

0:15:58.200 --> 0:15:58.720
<v Speaker 1>place to be?

0:15:58.800 --> 0:15:59.280
<v Speaker 2>Do you think?

0:16:00.160 --> 0:16:04.840
<v Speaker 3>Yeah, it is. We've increased our allocations in fixed income.

0:16:05.000 --> 0:16:07.880
<v Speaker 3>I think bonds are actually for the first time in

0:16:08.240 --> 0:16:12.720
<v Speaker 3>in you know, a decade, really putting that ballast, that

0:16:13.000 --> 0:16:17.760
<v Speaker 3>foundation into a portfolio when you're picking up a yield

0:16:17.960 --> 0:16:21.440
<v Speaker 3>of four and a half to five percent. We extended

0:16:21.520 --> 0:16:26.480
<v Speaker 3>duration last winter on our portfolio, and so you know,

0:16:26.680 --> 0:16:30.960
<v Speaker 3>I think by locking in and holding individual bonds, clipping

0:16:31.040 --> 0:16:35.360
<v Speaker 3>coupen's at five percent sounds pretty boring, but it actually

0:16:35.400 --> 0:16:37.680
<v Speaker 3>works really well in a volatile market like this.

0:16:37.960 --> 0:16:40.440
<v Speaker 1>So what type of credit risk are you taking? Where

0:16:40.440 --> 0:16:42.440
<v Speaker 1>are you going in terms of credit quality?

0:16:42.960 --> 0:16:45.880
<v Speaker 3>So we're we're taking We're not taking a lot of

0:16:45.920 --> 0:16:50.840
<v Speaker 3>credit risk on our core bond portfolio. We're in high

0:16:50.920 --> 0:16:54.080
<v Speaker 3>quality bonds, but we are taking some credit risk dug

0:16:55.120 --> 0:16:59.000
<v Speaker 3>in private credit and high yield. That has served us

0:16:59.120 --> 0:17:02.800
<v Speaker 3>very well over the last twelve to eighteen months. And

0:17:03.000 --> 0:17:06.080
<v Speaker 3>as you've talked about with you know, a change here

0:17:06.480 --> 0:17:09.359
<v Speaker 3>and a shift, I think we were watching that very carefully.

0:17:09.800 --> 0:17:13.480
<v Speaker 3>That's an area where obviously it can be affected if

0:17:13.520 --> 0:17:17.159
<v Speaker 3>we see a real downturn in the economy, but for now,

0:17:17.520 --> 0:17:19.320
<v Speaker 3>those yields are working quite well.

0:17:19.720 --> 0:17:23.240
<v Speaker 1>Are there opportunities offshore something outside the United States that

0:17:23.320 --> 0:17:25.159
<v Speaker 1>maybe has peaked your interest a little?

0:17:25.480 --> 0:17:28.800
<v Speaker 3>Oh well, it's so interesting right now because there's clearly

0:17:28.840 --> 0:17:32.879
<v Speaker 3>a rotation going on. And you mentioned this earlier with

0:17:33.000 --> 0:17:36.000
<v Speaker 3>the talks with Russia and Ukraine. But you know, just

0:17:36.200 --> 0:17:41.240
<v Speaker 3>in general, the equity markets in Europe are the valuations

0:17:41.280 --> 0:17:43.840
<v Speaker 3>are much lower than they are here in the United States,

0:17:44.600 --> 0:17:48.199
<v Speaker 3>and we're actually seeing that rotate where you know, the

0:17:48.280 --> 0:17:51.359
<v Speaker 3>IFA is actually up almost eight percent year to date

0:17:52.400 --> 0:17:55.040
<v Speaker 3>and when we've seen a pullback in the US markets.

0:17:55.480 --> 0:17:59.879
<v Speaker 3>So that is an opportunity we have an allocation to

0:18:00.080 --> 0:18:06.520
<v Speaker 3>international We're watching and not necessarily jumping in on emerging

0:18:06.560 --> 0:18:09.800
<v Speaker 3>markets or China at this point, I think that that

0:18:09.920 --> 0:18:14.000
<v Speaker 3>economy still has some issues, but just really when you

0:18:14.000 --> 0:18:19.080
<v Speaker 3>look at Western Europe, it's just riding along pretty steadily

0:18:19.160 --> 0:18:19.600
<v Speaker 3>right now.

0:18:19.880 --> 0:18:22.160
<v Speaker 1>Michelle will leave it there. It's always a pleasure. Thank

0:18:22.160 --> 0:18:24.560
<v Speaker 1>you so much for joining us. Michelle Martin there. She

0:18:24.640 --> 0:18:28.560
<v Speaker 1>is president of Prosperity, that is the wealth management arm

0:18:28.720 --> 0:18:32.119
<v Speaker 1>of Eisner Amper, joining us from Minneapolis here on the

0:18:32.200 --> 0:18:38.720
<v Speaker 1>Daybreak Asia Podcast. Thanks for listening to today's episode of

0:18:38.760 --> 0:18:42.880
<v Speaker 1>the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look

0:18:42.880 --> 0:18:46.720
<v Speaker 1>at the story shaping markets, finance, and geopolitics in the

0:18:46.720 --> 0:18:50.000
<v Speaker 1>Asia Pacific. You can find us on Apple, Spotify, the

0:18:50.000 --> 0:18:54.040
<v Speaker 1>Bloomberg Podcast YouTube channel, or anywhere else you listen. Join

0:18:54.119 --> 0:18:57.119
<v Speaker 1>us again tomorrow for insight on the market moves from

0:18:57.160 --> 0:19:01.560
<v Speaker 1>Hong Kong to Singapore and Australia. I'm Doug Prisoner and

0:19:01.760 --> 0:19:02.879
<v Speaker 1>this is Bloomberg