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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. We're

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Speaker 2: getting some details on the investments Japan will be making

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Speaker 2: in the US. Today, President Trump announced the first trash

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Speaker 2: worth thirty six billion dollars. Now. This will cover a

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Speaker 2: gas power plant in Ohio, as well as a critical

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Speaker 2: mineral site in Georgia and a liquefied natural gas facility

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Speaker 2: in Texas. This funding is part of the trade agreement

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Speaker 2: between the US and Japan, and as a part of

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Speaker 2: that deal, Japan committed to a total of five hundred

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Speaker 2: and fifty billion dollars for investments in the States. For

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Speaker 2: a closer look, I'm joined by Bloomberg's Isabelle Reynolds. Isabel

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Speaker 2: is our Tokyo bureau chief, Isabelle. Thank you for being here.

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Speaker 2: Today was interesting. In a post on social media, President

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Speaker 2: Trump said this could not have been done without one

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Speaker 2: very special word, tariffs. Can we agree that tariffs apply

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Speaker 2: the necessary leverage to get Japan to commit to these

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Speaker 2: investment dollars.

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Speaker 3: It's a little bit difficult to say because we don't

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Speaker 3: know the details yet. We're just waiting actually right now

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Speaker 3: to hear from the government about exactly what is going on,

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Speaker 3: who's investing, where, what's happening. One thing we're always wary

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Speaker 3: of with these government announcements is you know, how much

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Speaker 3: of this is actually new, So we really need to

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Speaker 3: know that before we can sort of definitively say, okay,

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Speaker 3: tariffs really force Japan with the leverage that forced Japan

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Speaker 3: into doing this.

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Speaker 2: Do you have a sense of the balance between let's say,

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Speaker 2: private sector funding versus anything that the government may offer.

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Speaker 3: Well, what we've heard from the government all along is

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Speaker 3: basically most of the vast majority of what they'll be

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Speaker 3: offering is basically loan guarantees and things like that, So

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Speaker 3: it won't actually be government money as far as I know.

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Speaker 3: It's all coming from the private sector. And that is

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Speaker 3: you know, it's a huge amount of money to come

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Speaker 3: from private sector. So that's one of the things we'll

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Speaker 3: be chasing today to find out which of the financial

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Speaker 3: institutions in Tokyo are involved in this, how exactly they're

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Speaker 3: going to find this thirty six billion dollars, which is

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Speaker 3: a small proportion of what Japan has promised, but it's

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Speaker 3: still a very large sum of money.

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Speaker 2: So this deal was put together prior to Prime Minister

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Speaker 2: Takeiichi becoming the first female prime minister in Japan. Is

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Speaker 2: there the expectation that she is going to kind of

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Speaker 2: continue with this agreement, or is there perhaps a small

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Speaker 2: risk that things get modified slightly.

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Speaker 3: I think Japan is certainly very anxious to make a

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Speaker 3: good impression on Donald Trump. There was a report in

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Speaker 3: a Japanese media a few weeks ago that he was

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Speaker 3: angry that these investment deals hadn't yet come to fruition,

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Speaker 3: So I think the pressure is certainly still on there,

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Speaker 3: and I think this is very important to Donald Trump.

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Speaker 3: He wants to be seen to have brought in this

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Speaker 3: investment into the US, so I think it will be

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Speaker 3: difficult for Japan to riggle out of it.

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Speaker 2: Do you have a sense of how the publican Japan

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Speaker 2: views this program.

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Speaker 3: I think take She's seen as basically handling Donald Trump

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Speaker 3: pretty well. What Japanese people tend to be concerned about

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Speaker 3: is the tariffs, and obviously this deal was intended to

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Speaker 3: protect Japan from the twenty five percent tariffs that could

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Speaker 3: have been imposed if they hadn't done this, So I

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Speaker 3: think largely they're thinking, well, they may not be in

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Speaker 3: favor of doing it, but they may think it's inevitable

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Speaker 3: if they want to get away with doing trade with

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Speaker 3: the US.

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Speaker 2: What is your sense of the relationship between Prime Minister

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Speaker 2: Takeichi and President Trump.

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Speaker 3: I think in some ways they're on the same wavelength,

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Speaker 3: and certainly on social media, Donald Trump has expressed his

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Speaker 3: sort of praise and compliments for her several times. She's

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Speaker 3: certainly achieved something that no one else has ever done

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Speaker 3: in Japan before in becoming the first female prime minister.

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Speaker 3: She's come from nowhere rather than coming from a political dynasty.

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Speaker 3: So I think he must certainly have a degree of

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Speaker 3: respect for her. What she thinks of him as is

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Speaker 3: possibly a little bit less obvious. I mean, she's very

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Speaker 3: good at conveying a sense of friendliness towards him, and

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Speaker 3: I think that's what counts. You know, what she really

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Speaker 3: feels doesn't necessarily matter.

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Speaker 2: So the US is getting investment dollars from Japan, and

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Speaker 2: at the same time, Japan is getting greater access, perhaps

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Speaker 2: to American markets. But when I think about what Prime

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Speaker 2: Minister Takeiichi is doing in terms of the increase on

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Speaker 2: defense spending, do you think it's likely that the Japanese

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Speaker 2: government will look to the United States for armaments or

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Speaker 2: any type of military hardware to help the Prime Minister

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Speaker 2: reach her goal.

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Speaker 3: Certainly, I mean Japan has long, long been reliant almost

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Speaker 3: entirely on the US. Apart from its own armaments, It's

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Speaker 3: reliant almost entirely on the US for any arms imports.

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Speaker 3: So certainly Japan will be looking to probably buy more.

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Speaker 3: We already had a huge expansion in defense spending in

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Speaker 3: the pipeline when she came to office. She's promised to

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Speaker 3: bring that forward, wants to spend it faster. What exactly

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Speaker 3: she's going to spend it on, that's still a little

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Speaker 3: bit unclear. She's giving her first policy speech after her

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Speaker 3: huge election victory that's coming on Friday, so we may

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Speaker 3: hear some more details there. But one of the problems

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Speaker 3: that's come up over the years is that Japan can

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Speaker 3: buy these things. It it pays for this equipment on

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Speaker 3: once to have it. The US has been very slow

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Speaker 3: at producing it, so a lot of things that they've

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Speaker 3: ordered and paid for maybe haven't arrived yet. I think

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Speaker 3: that's more of the issue that we've been facing recently.

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Speaker 2: So can we take a step back, help me understand

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Speaker 2: a little bit about what's going on in Japan right

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Speaker 2: now economically. Are things beginning to turn a corner here?

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Speaker 2: I mean, I know we are dealing with persistently high inflation.

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Speaker 2: There's been some concern over growth, but how are things

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Speaker 2: functioning in the economy.

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Speaker 3: Yes, well, the inflation issue hasn't gone anywhere. We're still

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Speaker 3: seeing a huge price increases, well, relatively huge by Japanese standards,

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Speaker 3: price increases that means the standard of living for people

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Speaker 3: who's wages are not going up so fast is definitely

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Speaker 3: not it's falling, so people are still unhappy. Has promised

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Speaker 3: to do something about that in the short run, in

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Speaker 3: terms of suspending the sales tax on food, so these

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Speaker 3: people would have the basics at a lower price point,

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Speaker 3: And she's promised to look in the longer term at

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Speaker 3: ways of cutting the amount that people have to spend

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Speaker 3: on social security, each amount that's taken out of their

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Speaker 3: salary each month. So she's looking at ways to deal

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Speaker 3: with that, but at this point that hasn't happened yet.

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Speaker 3: She's a very forceful personality, so I imagine that Japanese people

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Speaker 3: kind of trust her to think that she's going to

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Speaker 3: push through with this, but it hasn't happened yet, and

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Speaker 3: so people are still suffering.

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Speaker 2: So if she has promised an increase in fiscal spending,

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Speaker 2: I'm just wondering about the possibility of a little bit

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Speaker 2: of resentment creeping into the story when you consider the

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Speaker 2: fact that Japan has committed a total of five hundred

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Speaker 2: and fifty billion dollars for investments in the US.

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Speaker 3: Oh well, I mean, Japan has a long history of

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Speaker 3: various resentments again the US, but ultimately, Japan relies on

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Speaker 3: the US for its defense. It has this huge and

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Speaker 3: threatening neighbor, or at least one neighbor, probably two neighbors

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Speaker 3: that it's pretty scared of, and it feels that it

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Speaker 3: needs this ally to help it, to help it and

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Speaker 3: secure its secure its territory. So, you know, whatever resentments

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Speaker 3: may build up, I don't think they will ever be

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Speaker 3: enough for Japan to sort of reject the relationship with

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Speaker 3: the US.

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Speaker 2: Prime Minister Takichi is said to be in Washington to

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Speaker 2: meet with President Trump mid March. Can we speculate on

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Speaker 2: her agenda.

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Speaker 3: I think they'll wants to sort of make the most

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Speaker 3: of this huge investment. That will be something that they'll

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Speaker 3: both want to sort of underscore. So she'll be hoping,

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Speaker 3: I think basically to keep Donald Trump on side. That

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Speaker 3: that is the that is the worst kind of motivating

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Speaker 3: factor behind Japan's relations with the US.

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Speaker 2: Isabelle will leave it there. Thank you so much. Bloomberg's

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Speaker 2: Isabelle Reynolds. She is our Tokyo bureau chief, joining from

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Speaker 2: the Japanese capital here on the Daybreak Asia podcast. Welcome

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Speaker 2: back to the Daybreak Asia Podcast. I'm Deck Chrisner. There

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Speaker 2: is simply no mistaking the disruptive power of artificial intelligence.

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Speaker 2: Today Anthropic released a new AI model aimed at using

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Speaker 2: PCs in increasingly complicated ways. Claude Sonnet four point six

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Speaker 2: can carry out actions that require multiple steps, such as

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Speaker 2: filling out web forms and then coordinating information across a

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Speaker 2: number of browser tabs. Now, it's clear the equity market

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Speaker 2: remains anxious over the ability of AI to disrupt many businesses.

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Speaker 2: For a closer look, let's bring in Jed Ellbrook. He

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Speaker 2: is portfolio manager at Argent Capital. Jed is on the

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Speaker 2: line from Saint Louis. Thank you for being here. Jed.

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Speaker 2: Give me your take on this wave of worry that

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Speaker 2: we have seen related to AI disruption.

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Speaker 4: Yeah, I think it's both. I do think the market

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Speaker 4: is shooting first in and asking questions later. The H

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Speaker 4: Robinson example from last week isn't a special extreme case

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Speaker 4: where like a little Penny Stock puts out of press

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Speaker 4: release and move H Robinson stock by fifteen percent. But

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Speaker 4: there are software businesses that will be disrupted. Their growth

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Speaker 4: will stop, their margins will shrink because the AI tools

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Speaker 4: are amazing and it's going to make that software less

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Speaker 4: valuable for businesses. So I think it's both.

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Speaker 2: So today we had a number of software companies releasing

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Speaker 2: earnings ahead of scheduled just to demonstrate their resilience. Obviously,

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Speaker 2: this wouldn't happen overnight. Is there a timeline in your

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Speaker 2: mind where AI really begins to hit these software companies?

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Speaker 3: Yeah?

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Speaker 4: I mean that's great. Releasing your results early is great.

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Speaker 4: Showing you at a good quarter, that's great. But that

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Speaker 4: will not satisfy investors' concerns because the concerns lie like

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Speaker 4: you're implying a couple of years out. There's nothing these

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Speaker 4: companies can showing their financials this quarter or next quarter

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Speaker 4: that's going to ease people's fears. People fear that a

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Speaker 4: couple of years from now, the AA tools are going

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Speaker 4: to keep getting better and better at this incredible rate,

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Speaker 4: and these software companies growth will stop. Also, the software

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Speaker 4: businesses have traded at exceptionally high values valuations for years

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Speaker 4: and years, and so they were especially susceptible to a

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Speaker 4: new technology like this that threatens that you know, kind

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Speaker 4: of competitive advantage, that really long duration that investors believe

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Speaker 4: they would have pricing power, and so valuations have just

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Speaker 4: cascaded down. The other sectors that have been hit by

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Speaker 4: AI fears, some of the brokers, the commercial real estate brokers,

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Speaker 4: insurance brokers, et cetera. Those stocks didn't start at such

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Speaker 4: an expensive point as software, and so while they've been hit,

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Speaker 4: they haven't been hit as severely.

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Speaker 2: I'm wondering though, whether or not at this AI trade

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Speaker 2: so to speak, is still durable that the place to

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Speaker 2: be is on the hardware side, a name like Nvidia,

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Speaker 2: let's say.

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Speaker 4: Yeah, I mean obviously exceptionally strong demands for AI infrastructure

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Speaker 4: right now in Nvidia and the semiconductors, you know, prime example,

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Speaker 4: but also all the contractors that help build data centers,

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Speaker 4: you know, and on down the line, the Eatons of

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Speaker 4: the world supplying electrical gear that that's installed in these

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Speaker 4: data centers. Those stocks are doing really well, but they

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Speaker 4: cannot do well in isolation. The hyperscalers, the cloud computing

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Speaker 4: businesses that are paying for all this they need to

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Speaker 4: do well too, or else they will not spend two

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Speaker 4: hundred billion dollars in twenty twenty six in the case

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Speaker 4: of Amazon, or one hundred ninety billion dollars next year

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Speaker 4: in the case of Google, and then on down the line.

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Speaker 2: To what extent are you skeptical that the hundreds of

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Speaker 2: billions of dollars you just referred to in terms of

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Speaker 2: capex will deliver big payoffs anytime soon.

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Speaker 4: I I think that the big tech companies, so Microsoft, Meta, Amazon, Google,

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Speaker 4: the four biggest spenders on new data centers, they are

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Speaker 4: exceptionally smart, exceptionally well informed, very well capitalized, very confident

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Speaker 4: that this AI spending, this data center capex is going

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Speaker 4: to produce good returns for their shareholders. They have very

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Speaker 4: high confidence in that. Otherwise they wouldn't be spending all

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Speaker 4: of their free cash flow for next year on building

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Speaker 4: new data centers, or in some cases even more than

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Speaker 4: all of their cash flow. So I think they have

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Speaker 4: an exceptionally high degree of confidence. They are well positioned

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Speaker 4: to know. They have experience in this industry for decades

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Speaker 4: in Amazon's case, so very confident. When I run the math,

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Speaker 4: I put some numbers on paper. I think that they're

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Speaker 4: earning high returns on invested capital as well, and you

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Speaker 4: see it in several kind of metrics on their financial

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Speaker 4: statements in Meta. With Meta, you see very high revenue growth,

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Speaker 4: accelerating revenue growth. Google is showing accelerating revenue growth, also

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Speaker 4: strong margins in the case of Google, strong margins in

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Speaker 4: the case of Amazon as well. I think you see

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Speaker 4: return on investing capital high. Aws's revenue growth is accelerating,

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Speaker 4: but the capax exceeds those revenue increases right now, and

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Speaker 4: that's oftentimes the case when you have these really heavy

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Speaker 4: investment periods. I think that's going to be the case

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Speaker 4: for years, but eventually that revenue overtakes the capex and

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Speaker 4: then you you kind of have full demonstration of that

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Speaker 4: that high ROI on down to the net income line

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Speaker 4: of their income statements. So I think we'll see it,

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Speaker 4: but nobody knows for sure, and there are lots of

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Speaker 4: doubts in the investment community. Investment community today investors just

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Speaker 4: aren't comfortable with Amazon and Google and Metas spending virtually

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Speaker 4: all of their free cash flow next year building new

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Speaker 4: data centers.

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Speaker 2: So are you bothered at all by the fact that

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Speaker 2: some of these hyperscalers have been going to the corporate

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Speaker 2: bond market to raise funds.

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Speaker 4: No, that doesn't bother me. They have exceptionally low cost

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Speaker 4: of funds, they are able to borrow very cheaply. Their

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Speaker 4: balance sheets in all those cases have more cash than

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Speaker 4: they do debts. So these are except well finance businesses.

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Speaker 4: They have very high capacity to borrow, even well beyond

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Speaker 4: what they've just borrowed in the last month or two.

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Speaker 4: So that doesn't bother me at all. I think that's

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Speaker 4: reasonable balance sheet management. I'm comfortable that they are going

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Speaker 4: to get a good return on that investment.

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Speaker 2: So we talked a moment ago about the extent to

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Speaker 2: which this AI craze, if you can call it, that

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Speaker 2: has been impacting some of the software companies. But I'm

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Speaker 2: wondering about other industries that may not be obvious. And

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Speaker 2: I say that because today we heard from the head

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Speaker 2: of the San Francisco Fed, Mary Daily, and she was

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Speaker 2: saying the FED must be open to science, that AI

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Speaker 2: will impact other pockets of the American economy. So away

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Speaker 2: from software, you mentioned real estate, I think as well

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Speaker 2: a moment ago. Give me a sense of the other

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Speaker 2: industries that could face major disruption.

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Speaker 4: Yeah, yeah, you say that word disruption, I think implying

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Speaker 4: kind of like a negative a negative net impact for

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Speaker 4: the shareholders of these public companies, and there are I

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Speaker 4: think examples of those. Obviously, software is the primary casualty

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Speaker 4: right now, call center customer service focused businesses are going

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Speaker 4: to look very different five or ten years from now.

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Speaker 4: Many of those stocks have performed very poorly over the

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Speaker 4: last couple of years. A couple of them, though, have

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Speaker 4: have adapted and are using AI tools to deliver even

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Speaker 4: better services than before and are thriving. So I think

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Speaker 4: there will be winners and losers as you look industry

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Speaker 4: by industry. Finance is another industry that is going to

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Speaker 4: see exceptional change in business processes because of AI, banks,

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Speaker 4: insurance companies, investment management firms like the one I work for.

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Speaker 4: Wealth management firms. There are going to be huge savings

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Speaker 4: in terms of the efficiency of their employees doing the

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Speaker 4: task that they complete, and will that be net positive

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Speaker 4: or net negative for their companies depends on how their

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Speaker 4: pricing power is impacted from those changes. Law firms around

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Speaker 4: the country, none of them are publicly traded. But you know,

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Speaker 4: all of these kind of like labor based professions where

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Speaker 4: where you know, white collar workers are working on a

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Speaker 4: computer all day, they're going to be huge changes to

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Speaker 4: workflows and how the businesses operate and also their profits.

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Speaker 2: What about huge changes in terms of employment. I mean,

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Speaker 2: I understand the argument in favor of increased productivity, but

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Speaker 2: I mean if you're displacing workers, that seems to be

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Speaker 2: a bit of a risk as well.

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Speaker 4: It is, and I think the data is very inconclusive

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Speaker 4: so far. You know, over the last nine months, the

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Speaker 4: amount of job postings for software development people has been rising.

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Speaker 4: All intuition tells you otherwise, you know, would expect otherwise,

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Speaker 4: but no, there's more software development going on today. The

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Speaker 4: cost of that software development, the ease of it has

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Speaker 4: become much my much greater, and so you have businesses

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Speaker 4: willing to invest in more people to do that. So

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Speaker 4: that's counterintuitive, and I think it's just too soon to say.

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Speaker 4: If you listen to Dario Amide, for example, the head

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Speaker 4: of Anthropic, he's worried about humongous job loss, but the

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Speaker 4: data hasn't borne that out yet.

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Speaker 2: What about some of the other industries that are connected

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Speaker 2: to AI, And I'm thinking in particular of energy, given

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Speaker 2: the fact that some of these data centers just require

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Speaker 2: so much power for those servers to kind of function

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Speaker 2: in a way that is basically the way in which

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Speaker 2: these systems are designed, sucking up enormous amounts of electricity.

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Speaker 2: Is that something that you think has been fully recognized

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Speaker 2: by the market. I mean, are there other opportunities here

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Speaker 2: if you're playing the energy space?

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Speaker 4: Yeah, power prices arising. Demand is exceeding supply in many

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Speaker 4: parts of the country, and obviously they're there's great demand

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Speaker 4: for additional data centers to be built all over the country.

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Speaker 4: So yeah, I think that you know, companies that can

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Speaker 4: grow their power generation over the next five or ten

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Speaker 4: years stand to do well, stand to earn good, good

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Speaker 4: prices for that for that new power brought to broad

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Speaker 4: to the grid. So a company like next Era I

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Speaker 4: think as a compelling investment today they're supplying both renewable

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Speaker 4: energy and also you know, gas fired power to the grid.

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Speaker 4: The unregulated or less regulated independent power producers like Talent

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Speaker 4: and and RG are well positioned too. So yeah, I

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Speaker 4: think that. I think, you know, energy generation is more

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Speaker 4: valuable today than it was five or ten years ago,

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Speaker 4: and it's it's exceptionally important five or ten years down

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Speaker 4: the road, and there are handful of companies that are

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Speaker 4: going to take advantage of that.

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Speaker 2: So at the end of the day, Jed, are you

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Speaker 2: still reasonably constructive on the equity market given everything that

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Speaker 2: we're talking about. I mean, if this major shock wave

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Speaker 2: as it relates to AI is still kind of permeating

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Speaker 2: through the equity space, do you remain constructive?

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Speaker 4: Yeah? When asked that question over the last year or so,

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Speaker 4: I've said, yes, I feel good about the forward outlook

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Speaker 4: for equity markets. And the main reasons for that are

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Speaker 4: there are a lot of things that are contributing to

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Speaker 4: higher stock prices here today, double digit corporate earnings growth,

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Speaker 4: tax benefits from Trump's tax bill passed over a year ago.

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Speaker 4: The Fed is reducing interest rates, Unemployment is fairly low,

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Speaker 4: M and A and IPO activity is strong, Interest rates

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Speaker 4: are low, credits breads are tight. All that is very constructive,

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Speaker 4: But the market feels a little wobbly right now, doesn't it.

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Speaker 4: There are as many companies seemingly negatively impacted by AI

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Speaker 4: as there are positively impacted the market. Investors over the

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Speaker 4: last month have decided that they want to go sell

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Speaker 4: AI stocks and hide out in utilities, in energy companies,

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Speaker 4: in consumer staples that have really modest growth prospects. So

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Speaker 4: that fear in the market makes me think twice before

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Speaker 4: answering your question, and I feel a little bit less

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Speaker 4: confident in the a really strong outlook for the stock

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Speaker 4: market today than I did probably two or three months ago.

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Speaker 2: All Right, we'll leave it there, Jed, thank you so much.

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Speaker 2: Jed Elbrook is portfolio manager at arch And Capital Management,

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Speaker 2: joining from Saint Louis here on the Daybreak Asia podcast.

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Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg