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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 deg Chrisner. The

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Speaker 2: Cell America trade was back in full force across US

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Speaker 2: financial markets on Tuesday. President Trump's demand for US control

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Speaker 2: over Greenland seemed to stoke anxiety about potential worst case

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Speaker 2: scenarios now that would include a rupture in the NATO

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Speaker 2: alliance or perhaps a full blown trade war between the

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Speaker 2: US and Europe. At the same time, markets were rattled

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Speaker 2: by a selloff in Japanese bawns during the Tokyo session

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Speaker 2: on Tuesday. Long term JGB yield spiked on concern over

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Speaker 2: Japan's fiscal sustainability. Let's take a closer look now at

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Speaker 2: the impact of these forces on markets in the Asia Pacific.

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Speaker 2: I'm joined by Bloomberg's Paul Dobson. Paul is executive editor

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Speaker 2: for Markets in Asia and he joins from our studios

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Speaker 2: in Singapore. Thank you so much for making time help

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Speaker 2: me understand what's going on in Japan first, before we

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Speaker 2: get into some of the things related to the Cell

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Speaker 2: America trade and what Trump has had to say in

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Speaker 2: terms of Greenland.

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Speaker 3: Yeah, Hi, there's a so much to unpack, but I

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Speaker 3: think for Japanese government bonds, there's sort of a long

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Speaker 3: term story and then a more near term story. The

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Speaker 3: long term story, you know, if we go back over

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Speaker 3: the last two decades, Japan has had incredibly low government

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Speaker 3: bond yields for most of that time, no inflation, interest

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Speaker 3: rates rooted to the floor, yield curve control from the

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Speaker 3: central bank preventing yields from rising as well, and we're

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Speaker 3: coming out of that era. Finally, Japan has inflation back.

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Speaker 3: Central bank has started to raise interest rates, and as

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Speaker 3: a result, bond yields have been rising. But actually bond

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Speaker 3: yields have been rising increasingly and more aggressively, particularly at

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Speaker 3: the back end of the yield curve. So for those

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Speaker 3: twenty thirty forty year bonds, not just because the central

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Speaker 3: bank is raising interest rates, also because of those inflation fears.

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Speaker 3: But there's a second story to it as well, which

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Speaker 3: is that Japan has an incredibly large debt pile on.

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Speaker 3: Although it's that to GDP ratio has been falling in

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Speaker 3: recent years, it's still way bigger than most other countries.

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Speaker 3: Investors are concerned about that, they're worried about government spending plans,

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Speaker 3: and so right now we're coming into a potential snap election,

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Speaker 3: and not only the ruling party at the moment, and Takeichi.

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Speaker 3: The current leader wants to reduce taxes on food, which

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Speaker 3: would be a large extra cost for the budget, but

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Speaker 3: the opposition has similar plans. So it seems that whoever

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Speaker 3: were to win this election, there would be these plans

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Speaker 3: which are kind of like unfunded spending. And that reminds

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Speaker 3: us a little bit of when we had the Liz

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Speaker 3: Trust moment in the UK, where UK guilt yields jumped

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Speaker 3: because people were worried that the government was fanning to

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Speaker 3: spend without really thinking about how it was going to

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Speaker 3: raise that money. So what we had, yes, they was

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Speaker 3: a sort of boyding over of all of those tensions

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Speaker 3: and risks and caution and wariness, which led to a

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Speaker 3: really big sell off, particularly in the longer term bonds,

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Speaker 3: twenty five basis point jump in yields, which is a

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Speaker 3: very rare event and a very worrying one as well.

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Speaker 2: You mentioned the liz Trust moment for the UK bond market.

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Speaker 2: I think that's an apt analogy for what's been happening

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Speaker 2: right now in the Japanese bond market. We caught up

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Speaker 2: with Japanese Finance Minister Satsuki Katayama on the sidelines of

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Speaker 2: the World Economic Forum in Davos, and she told us

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Speaker 2: she essentially asked market participants to calm down. But Paul,

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Speaker 2: I'm wondering about the extent to which this move up

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Speaker 2: in JGB yields has threatened to unravel the so called

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Speaker 2: carry trade, which is to say that people have been

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Speaker 2: borrowing at the low rates in Japan and then buying

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Speaker 2: global assets. Is this movement in Japan, these yields threatening

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Speaker 2: to unravel the carry trade.

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Speaker 3: It's definitely something that people have been talking about a

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Speaker 3: fair amount. I think let's just go back to Katayama

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Speaker 3: for one second, because I do feel that the market

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Speaker 3: may take some comfort from what she said. She was

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Speaker 3: talking about the need to calm down, that the government's

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Speaker 3: paying attention. There are measures as well that the Japanese

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Speaker 3: authorities can do, including the Bank of Japan doing more

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Speaker 3: buying operations if yields do really get out of control here.

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Speaker 3: But I think that yes, the rest of the world

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Speaker 3: is paying attention to this because of the fact that

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Speaker 3: for so long Japanese interest rates were so low that

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Speaker 3: people from Japan were putting their money into investments all

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Speaker 3: around the rest of the world to earn a higher

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Speaker 3: rate of return on their assets. And the risk is

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Speaker 3: that as they get the opportunity to make that same

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Speaker 3: amount of interest by leaving things at home, that they

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Speaker 3: lose interest in sending money out to the rest of

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Speaker 3: the world. And so as you said, that sort of

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Speaker 3: globe carry trade starts to unravel. I think you know,

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Speaker 3: one thing to consider is that the rise in yields

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Speaker 3: is really for those very long term government bonds, which

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Speaker 3: isn't typically the sort of area where carry trading activity

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Speaker 3: takes place. And if you look at the very short

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Speaker 3: term interest rates, the borrowing costs there are still very low,

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Speaker 3: even though the banker Japan is raising rates slowly. So

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Speaker 3: the evidence that we've seen over the last few months

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Speaker 3: is that the Japanese have still been prepared to put

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Speaker 3: their money into overseas assets all around the world for

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Speaker 3: chasing that that sort of carry return. And you know,

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Speaker 3: that's why the yen has continued to weaken and it's

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Speaker 3: still hovering around the one hundred and sixty level to

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Speaker 3: the dollar at the moment. So at some point that

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Speaker 3: will reverse if interest rates continue to rise, and we

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Speaker 3: will get moments like this where we have a little

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Speaker 3: bit of a fractious kind of blow up and worry

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Speaker 3: about it. But it feels like, you know, until those

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Speaker 3: Japanese ret investors are convinced that they really just want

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Speaker 3: to leave their money at home in a bank account

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Speaker 3: where they can earn interest, then the carry trade will

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Speaker 3: continue to sort of flow cash through the global economy.

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Speaker 2: So I'm glad that you brought up the BOJ because

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Speaker 2: we have a policy decision at the end of the week.

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Speaker 4: Now.

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Speaker 2: Given the turbulence that we have been describing right now,

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Speaker 2: it probably only reinforces the notion that the BOJ is

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Speaker 2: not going to take any action this month. I mean,

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Speaker 2: in addition to kind of dealing with the inflation story

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Speaker 2: in Japan, there's been so much turbulence. Maybe the BOJ

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Speaker 2: were just, like in the words of Katayama, for things

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Speaker 2: to kind of calm down a bit.

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Speaker 3: Yeah, they've got a difficult task here, because one thing

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Speaker 3: they could do is raise interest rates sooner in order

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Speaker 3: to show that their mindful of inflation and want to

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Speaker 3: get that under control and to help the back end

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Speaker 3: of the yield curve. But if they raise rates too aggressively,

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Speaker 3: that risk causing its own problems as well, of course,

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Speaker 3: so the market will be very attuned to what sort

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Speaker 3: of a tone they take, how many rate hikes there

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Speaker 3: are lightly to sort of telegraph. We heard from I

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Speaker 3: think of a city group this week talking about the

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Speaker 3: idea they could do three hikes this year because they

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Speaker 3: need to support the yen and so you know, those

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Speaker 3: are the kind of considerations that the BOJA has to

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Speaker 3: keep under control. Domestically. You know, people don't really like

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Speaker 3: higher interest rates, particularly they but they also don't like

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Speaker 3: high inflation all that much. So there's there's one sort

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Speaker 3: of like domestic crowd that needs to be one over.

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Speaker 3: And then in the global markets, if they do hide

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Speaker 3: too aggressively, then that really does put that carry trade

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Speaker 3: dynamic we've just been talking about into into play.

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Speaker 2: So I mentioned the Cell America trade that was back

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Speaker 2: in full force, tied to President Trump's demand for US

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Speaker 2: control over Greenland. We heard today at Davos, Switzerland from

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Speaker 2: Canadian Prime Minister Mark Karney, and he was saying recent

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Speaker 2: events have shown the rules based international order is effectively dead.

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Speaker 2: He did not mention President Trump by name. I guess

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Speaker 2: the implication was there. How, how is this being taken

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Speaker 2: right now, everything that we're dealing with with the Trump administration,

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Speaker 2: the Greenland stuff, the stuff with Venezuela. How is this

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Speaker 2: being read right now across the Asia Pacific.

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Speaker 3: Yeah, so definitely that carnal speech caught a lot of attention.

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Speaker 3: That was all over the social media when I arrived

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Speaker 3: at the office this morning. Think people getting that taking

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Speaker 3: that as a real wake up call. And I think

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Speaker 3: that you know, if you look at global holdings of

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Speaker 3: US treasuries over the long term, it has been coming

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Speaker 3: down in most nations. Japan might be one exception, but

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Speaker 3: most of Asia has been reducing their treasury holdings, putting

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Speaker 3: more money into gold looking for you know, the fact

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Speaker 3: that there are more viable alternatives at this moment in time,

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Speaker 3: higher yields on European government bonds and well, okay, notwithstanding

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Speaker 3: the current set off, higher yields on Japanese government bonds

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Speaker 3: as well, And so that diversification trade has been a

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Speaker 3: long term trend, but it does have extra urgency at

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Speaker 3: the moment because of the dynamics that we're seeing from

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Speaker 3: the US government. And I think, you know, it's that

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Speaker 3: sort of sense of mistrust of you know, the control

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Speaker 3: checks and controls that there are in the US economy

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Speaker 3: at the moment. The idea that the President wants to

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Speaker 3: control the FED and have them keep interest rates lower

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Speaker 3: in order to juce the US economy is one thing

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Speaker 3: that investors in US government bonds don't like US spending plans,

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Speaker 3: they don't like very much US inflation, they don't like

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Speaker 3: very much on the teriffs, and just generally, you know,

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Speaker 3: the unilateral controls is sort of turning long term investors'

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Speaker 3: attention to think about alternatives to the US. So I

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Speaker 3: don't think it were necessarily in a full on, you know,

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Speaker 3: kind of like sell America dynamics so much as US

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Speaker 3: can continue to underperform the rest of the world, because

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Speaker 3: even a small amount of money taken out of US

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Speaker 3: assets and put into say emerging markets, or into Asian

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Speaker 3: assets or even in Europe can have a much bigger

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Speaker 3: difference in terms of the returns that people are getting

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Speaker 3: as the indexes gain.

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Speaker 2: So we're talking about repatriation. I'm curious about the weakness

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Speaker 2: that we're seeing right now in Japanese equities. You and

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Speaker 2: I are talking now, and I'm seeing the Nike down

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Speaker 2: by more than one percent. What is this a reflection

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Speaker 2: of in terms of the sentiment right now in Japan?

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Speaker 2: Do you think so?

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Speaker 3: Japanese equities have been on you know, a really massive

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Speaker 3: tear for the last couple of years, and particularly the

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Speaker 3: tech names within that have been supporting the move higher.

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Speaker 3: So the fact that they're suffering a little bit under

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Speaker 3: the current volatility wouldn't necessarily be too much of a surprise. Yeah,

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Speaker 3: the equities are very much tied to the yen as well.

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Speaker 3: That's quite an important barometer. A cheap n tends to

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Speaker 3: boost Japanese stocks up because it helps exporters. So when

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Speaker 3: the yen strengthens, it causes the equity market to have

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Speaker 3: a little bit of a setback as well. And I

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Speaker 3: think then, you know, we have this this element, this

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Speaker 3: dimension of the takaichi traders people are calling it, where yes,

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Speaker 3: she wants to increase spending, which the government bond market

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Speaker 3: obviously doesn't like. That's what we've been talking about, But

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Speaker 3: equities markets will like that if it helps the economy

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Speaker 3: to grow and to grow, and it helps companies to

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Speaker 3: you know, increase their bottom line and to improve profitability

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Speaker 3: as well. So for the stock market, there's a few

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Speaker 3: you know, kind of different competing dynamics right now in

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Speaker 3: this particularly tense situation.

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Speaker 2: No doubt about that. Paul, Thank you so much for

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Speaker 2: being with us. That is Bloomberg's Paul Dobson. He is

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Speaker 2: executive editor for Asia Markets. Joining us here on the

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Speaker 2: Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.

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Speaker 2: I'm deg Krisner. The worldwide sell off on Tuesday sent

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Speaker 2: the S and P five hundred down by two percent.

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Speaker 2: Centem had cratered when President Trump threatened tariffs on various

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Speaker 2: European countries before some high level meetings in Davos, switch

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Speaker 2: Zerland on the sidelines of the World Economic Forum, and

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Speaker 2: that's where we started our conversation with Christopher Smart, managing

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Speaker 2: partner at our Growth Group. Chris spoke with Bloomberg TV

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Speaker 2: host Cherry On and April Holm.

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Speaker 1: Chris, always good to have you with us, especially in

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Speaker 1: the daylight today where we're seeing a lot of excitement

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Speaker 1: anxiety over the markets, perhaps a global economy as well.

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Speaker 1: Why all of a sudden so far when it came

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Speaker 1: to geopolitical friction, investors seemed to brush it off and

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Speaker 1: even the global economy is standing quite strong.

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Speaker 5: Well. Good to be with you both. I think it

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Speaker 5: is a busy news cycle, obviously, and there are a

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Speaker 5: lot of moving parts that I think investors are trying

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Speaker 5: to track and then help price into what's going on.

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Speaker 5: And I think you're probably seeing a reaction to both

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Speaker 5: that as well as you know what we've all seen

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Speaker 5: and worried about as slightly rich valuations, and so there

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Speaker 5: has been a time and a moment for some of

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Speaker 5: this adjustment. To be honest, I'm not sure that this

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Speaker 5: sell off, even if it continues for a few days,

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Speaker 5: is the big story. I think we're going into what

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Speaker 5: is likely to be a fairly optimistic earning season. We're

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Speaker 5: moving into a US economy that's likely to grow maybe

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Speaker 5: two and a half percent this year, maybe a little more.

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Speaker 5: Of the IMF is just upgraded global growth projections for

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Speaker 5: this year, and you've got inflation coming down as well

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Speaker 5: as a lot of tax benefits flowing through to the

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Speaker 5: US consumer. So I'm not sure this selloff is as

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Speaker 5: big a story as the underlying geopolitical tensions that you're

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Speaker 5: asking about. And to me, what the big news is

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Speaker 5: around Greenland is that the President has essentially said he

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Speaker 5: doesn't trust NATO to defend the United States anymore. And

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Speaker 5: that is something that is even bigger than he has

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Speaker 5: been talking about in terms of Europeans need to spend

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Speaker 5: more money or we need to settle something between the

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Speaker 5: Russians and the Ukrainians. This is really fundamentally saying that

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Speaker 5: the US doesn't really trust its allies and however it

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Speaker 5: works out a deal around access to Greenland. That I

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Speaker 5: think is the underlying rift that investors are going to

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Speaker 5: have to start pricing in over a longer term. What

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Speaker 5: is going to happen to investment flows back and forth

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Speaker 5: across the Atlantic, What is going to happen to trade flows?

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Speaker 5: And in a crisis, who is going to be there

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Speaker 5: to backstop markets if you can't really count on the

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Speaker 5: US to do that.

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Speaker 1: You actually see this going past three years of the

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Speaker 1: remaining Trump administration, because you're talking about a fundamental shift

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Speaker 1: in the way that America views its allies in Europe.

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Speaker 5: Well, it's not so much how America views allies in

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Speaker 5: Europe anymore, as much as how Europeans view America. I

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Speaker 5: don't think it's going to be difficult. I don't think

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Speaker 5: it's going to be easy for any president after President

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Speaker 5: Trump to come back to Europeans and say no, no, no,

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Speaker 5: trust us, we're with you or with you, because they

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Speaker 5: know we've elected a candidate like this twice and they're

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Speaker 5: not going to be sure who's going to follow. And

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Speaker 5: they're going to see that this alliance, this relationship that's

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Speaker 5: built up and been quite success full for seventy five years,

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Speaker 5: we have to remember, is facing some real trust issues

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Speaker 5: that you know, Europeans are going to wonder the American

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Speaker 5: is going to be there to defend us. Europe's adversaries

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Speaker 5: are going to look and say, well, maybe we don't

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Speaker 5: really have to worry about Europe and the US standing

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Speaker 5: together anymore, because we can there's daylight between them, and

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Speaker 5: we can separate them again, not just on military issues,

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Speaker 5: although those are the important fundamental ones, but on issues

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Speaker 5: of trade. For example. You know, if we're trying to

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Speaker 5: present a common front to China on its trade surplus,

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Speaker 5: that's going to be a much harder negotiation than it

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Speaker 5: was even a week or two ago.

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Speaker 4: Christopher, you were formerly a special assistant at the NEC

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Speaker 4: in the Obama administration, I believe, talk to us about

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Speaker 4: how much more difficult this all perhaps makes telegraphing or

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Speaker 4: projecting what Trump's plan is for the NEC how the

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Speaker 4: uncertainty of a policy has evolved.

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Speaker 5: Well, I think you know, this is a very different

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Speaker 5: White House from the Obama White House or any previous

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Speaker 5: White House in the sense of how advisors influenced the president,

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Speaker 5: how he makes his decisions, how the different interests of

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Speaker 5: different parts of the government are brought to bear for

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Speaker 5: a decision at the presidential level. I think what you're

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Speaker 5: seeing right now, as your reporter mentioned earlier, you know,

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Speaker 5: the President is going off ahead on this with his

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Speaker 5: opening outrageous bid with the Europeans, and it's up to

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Speaker 5: his advisors right now to try and dial back some

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Speaker 5: of the emotion in the room without contradicting him. But

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Speaker 5: the one decision maker who makes any difference at all

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Speaker 5: in this White House is the President himself. And it's

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Speaker 5: not really clear how much his advisors can help shape

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Speaker 5: what is going to be the final deal that he's

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Speaker 5: ready to accept with regard to Greenland. He may not

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Speaker 5: know him so what that looks like until he sees

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Speaker 5: what room for maneuver he has, what the market reaction is,

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Speaker 5: whether he thinks the US economy can withstand that market reaction,

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Speaker 5: and where the conversation.

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Speaker 4: Heads Christopher, just quickly, if we can on the market reaction,

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Speaker 4: do you perhaps see a chance that, given how yields

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Speaker 4: have trended higher, that affects borrowing costs in a year

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Speaker 4: where off fraudability such a big issue off midterm elections.

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Speaker 5: I think so. But I think you know, again, the

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Speaker 5: borrowing costs that you're seeing today are going to turn

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Speaker 5: back to the fundamentals of the economy. And as inflation

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Speaker 5: comes down and we expect fed to cut rates at

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Speaker 5: least a little bit more, maybe not as much as

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Speaker 5: the President wants, but a little bit more, I think

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Speaker 5: those will come come come back into realignment. I think

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Speaker 5: the issue with these geopolitical tensions we're talking about is

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Speaker 5: they build up over time and start amping up the

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Speaker 5: risk premium over series of months and years rather than

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Speaker 5: weeks and days.

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Speaker 2: That was Christopher Smart, managing partner at the OAR Growth Group,

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Speaker 2: speaking with Bloomberg TV host Cherry On and April honng

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Speaker 2: Here on the Daybreak Asia podcast. Thanks for listening to

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Speaker 2: today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 2: we look at the story shaping markets, finance, and geopolitics

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Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,

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Speaker 2: and this is Bloomberg