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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 Krisner. We

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Speaker 2: are well aware of how markets reacted to Beijing's move

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Speaker 2: on export controls for rare earth minerals. Well, political leaders

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Speaker 2: are taking notice as well. Today, on the sidelines of

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Speaker 2: the meetings of the IMF and World Bank, Japan's finance

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Speaker 2: minister voiced serious concern and he stressed the importance of

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Speaker 2: coordinated action from G seven nations to avert a negative

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Speaker 2: impact on global supply chains. For a look now at

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Speaker 2: Japan and how it's being impacted by the US China

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Speaker 2: trade war. I'm joined by Shintaro Takauchi, who is portfolio

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Speaker 2: manager at Matthews Asia. Shintaro joins us from San Francisco.

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Speaker 2: Thank you for making time to chat with me. Let's

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Speaker 2: begin with a little bit of exploration here as to

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Speaker 2: how Japan is being caught up in the US China

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Speaker 2: trade war. Can you give me some perspective?

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Speaker 3: Sure so, with regards to the tensions between US and China. Unfortunately,

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Speaker 3: the new reality is that the one way of globalization

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Speaker 3: is at least slowing, if not reversing, meaning that the

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Speaker 3: capital expenditure of manufacturing activity across the world would be

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Speaker 3: inefficient than before. You can no longer make everything at

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Speaker 3: one area and export it globally. In that way, I

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Speaker 3: think we believe that Japanese manufacturers will actually benefit from

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Speaker 3: that increase of capital expenditure coming from I would say

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Speaker 3: less efficient cap ex spending.

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Speaker 2: So I want to change gears because we're hearing that

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Speaker 2: the Trump administration is poised to ease some tariffs on

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Speaker 2: the US auto industry. We are being told that the

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Speaker 2: Commerce Department is set to announce a five year extension.

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Speaker 2: This would allow automakers to reduce what they pay in

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Speaker 2: tariffs on imported car parts. Now, we both know that

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Speaker 2: the Trump administration has been in the process of redefining

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Speaker 2: US trade relations, largely through the use of tariffs, and

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Speaker 2: Japan has clearly been impacted a great deal steal, Yes,

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Speaker 2: but particularly autos. Give me your sense of what's going

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Speaker 2: on on the ground in Japan as it relates to

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Speaker 2: US trade policy, especially for the car makers.

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Speaker 3: Yes, I think regarding US and Japan, the single most

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Speaker 3: important industry for the Japanese exports sector is in autos.

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Speaker 3: Given that how many people are actually employed in Japan

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Speaker 3: and encouragingly that Japan and the US has reached a

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Speaker 3: deal with regards to the tariff rates. And also another

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Speaker 3: thing that is benefiting from for the Japanese automakers is

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Speaker 3: they are actually increasing market share as a result of

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Speaker 3: that given their efficiency in.

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Speaker 4: Their hybrid technologies.

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Speaker 2: Let's pivot to monetary policy in Japan. Governor Uweita has

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Speaker 2: indicated that the BOJ will continue to tighten if the

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Speaker 2: BOJ has confidence in achieving its economic outlook. Now we

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Speaker 2: know that inflation is obviously a big problem now, and

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Speaker 2: I'm curious to get the house view at Matthew's Asia

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Speaker 2: when it comes to predicting the next step for the BOJ.

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Speaker 3: Yes, so our base scenario is a twenty five basis

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Speaker 3: point race sometime late this year or early next year

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Speaker 3: and then put on hold for at seventy five basis

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Speaker 3: points for a while.

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Speaker 4: The reason why I say this is there are.

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Speaker 3: Shoots of real waste growth happening in the larger corporate space.

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Speaker 3: Hopefully that will trickle down to the SME, which is

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Speaker 3: ninety nine percent of all the corporates in Japan, and

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Speaker 3: Governor da is really looking at the real wage growth

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Speaker 3: to happen to have a sustained pace of raising rates.

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Speaker 3: But basically our case is a twenty five basis points

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Speaker 3: and put on hold for the time being.

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Speaker 2: So how do you expect the market to continue performing?

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Speaker 2: I mean, the equity market in Japan is very close

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Speaker 2: to record heis, We're not quite there. We're seeing a

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Speaker 2: little bit of weakness actually in the Friday morning session.

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Speaker 2: What is your outlook for Japanese equities?

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Speaker 3: Yes, in the very short term, japan market is trading

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Speaker 3: at sixteen times for twelve month price to earnings, which

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Speaker 3: is in the high end of a ten year range.

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Speaker 3: It is the fact that some thematic fields such as

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Speaker 3: defense and AI related names are trading at all time

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Speaker 3: high valuations. However, mid to long term, we see opportun

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Speaker 3: communities for japan equities as an asset class, mainly because

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Speaker 3: one nominal GDP growth, which we view as a proxy

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Speaker 3: to domestic top line growth, is starting to gain tractions.

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Speaker 3: So Japan lacked meaningful nominal GDP growth for nearly thirty years,

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Speaker 3: and additionally, an adjustment of overly conservative tariff impact of

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Speaker 3: Japanese corporate profit guidance for this year, earning's revisions are

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Speaker 3: starting to improve and secondly, lower return on equities compared

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Speaker 3: to US and Europe, which have capped Japan valuations levels

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Speaker 3: is starting to see improvement via a margin improvement as

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Speaker 3: well as better capital allocation policies. Unwinding crosshair holdings have

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Speaker 3: been happening, but still ten percent of outstanding is held

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Speaker 3: by the corporates, and by bringing that down towards zero

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Speaker 3: will have meaningful upward pressure in the return on equities,

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Speaker 3: hopefully leading to the evaluation expansion. And third, but not least,

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Speaker 3: it is not a crowded trade Japan. Despite its relatively

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Speaker 3: stronger performance, it's still common underweight among global investors and

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Speaker 3: it's very far from a crowded trade. We don't expect

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Speaker 3: that US excepersonalism to reverse overnight, but we still see

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Speaker 3: a meaningful gap between opportunities that the Japan equities have

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Speaker 3: and investors real positioning.

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Speaker 2: Speaking of positioning, maybe we can move into the political

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Speaker 2: environment right now in Japan. There's been a lot of volatility.

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Speaker 2: I think we can agree on that much. Sana A

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Speaker 2: Takaichi appeared as though a couple of weeks ago she

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Speaker 2: was set to become the first female prime minister of Japan.

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Speaker 2: Is that very much in doubt. Now, can you give

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Speaker 2: me a sense of what Matthews Asia is expecting on

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Speaker 2: the political front.

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Speaker 4: Sure, So this.

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Speaker 3: Past few weeks was full of surprising outcomes, even like

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Speaker 3: when Takaichi got elected. Koizumi was initially the most favored

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Speaker 3: to win the LDP leader race, but in the end

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Speaker 3: Takaichu on the runoff in the end, and then Kome

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Speaker 3: has suddenly withdrew from the twenty six year outstanding coalition,

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Speaker 3: and this past week has been a scramble of all

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Speaker 3: party leaders meeting each other to secure the majority. And

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Speaker 3: as of today October seventeenth morning, in Asia, LDP and

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Speaker 3: Japan Innovation Party ISSHIN, the second largest opposition party, is

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Speaker 3: currently in talksbury possible coalition alliance. So the possibility of

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Speaker 3: Takaichi becoming prime minister came down after the breakup of

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Speaker 3: LDP Kome coalition, but came back up given that if

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Speaker 3: LDP issing coalitions happen, it will bring the maximum total

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Speaker 3: seats in the Lower House to two hundred and thirty one,

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Speaker 3: which is only too short of majority, and Lower House

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Speaker 3: of one hundred and twenty, which is only about five

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Speaker 3: shy of majority.

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Speaker 4: But again nothing is certain.

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Speaker 3: Until the Diet vote to elect the next Prime Minister,

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Speaker 3: which is scheduled to be held on twenty first of October.

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Speaker 3: So our current view is that LdB issuing coalition if

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Speaker 3: that happens, along with a possible collaboration with other parties

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Speaker 3: for selected legistration. Legislation will likely involve fiscal expansionary policies,

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Speaker 3: which we view positively.

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Speaker 4: From a domestic demand perspective.

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Speaker 3: Ishan has been calling for lower social insurance premium for

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Speaker 3: working generations to boost household income. Other parties, some parties

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Speaker 3: are advocating for raising income tax threshold, abolishing provisional gasoline

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Speaker 3: and diesel taxes.

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Speaker 4: So these areas and other areas of possible change.

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Speaker 3: But again, you know, real wage growth is really critical

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Speaker 3: for domestic consumption as well as a normalization of botiate

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Speaker 3: rate policies.

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Speaker 2: Okay, so that's what your expectations would be for a

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Speaker 2: Prime Minister taka Ichi in terms of the domestic economy

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Speaker 2: in Japan. Do you expect should she become Prime minister,

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Speaker 2: that the relationship with the United States would shift in

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Speaker 2: a meaningful way.

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Speaker 3: Yes, So I think the base case is that US

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Speaker 3: in Japan continues to be an important ally and they're

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Speaker 3: working together. Takaichi was very close to Prime Minister Abi,

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Speaker 3: whom Abi was very close to President Trump.

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Speaker 4: So I think on a relative basis.

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Speaker 3: I think Japan is in a good situation between the

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Speaker 3: two countries of US and Japan.

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Speaker 2: Shintara will leave it there. Thank you so very much

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Speaker 2: for joining us. Shintaro Takauchi, who is portfolio manager at

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Speaker 2: Matthews Asia, joining from San Francisco here on the Daybreak

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

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Speaker 2: Doug Chrisner. The equity market in the US retreated today

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Speaker 2: on worries over credit quality. We had two regional banks

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Speaker 2: disclosing sizeable charge offs related to alleged fraud. Zion's Bank Corp.

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Speaker 2: And Western Alliance Bank Corp. Both said they were victims

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Speaker 2: of fraud on loans made to fund investments in distressed

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Speaker 2: commercial mortgages. Now, analysts were saying, this seems to be

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Speaker 2: kind of an isolated case. Nothing here to suggest systemic risk.

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Speaker 2: For a closer look. Now, I'm joined by Jeff Palmer.

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Speaker 2: He is head of Multi Asset at Cohen and Steers.

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Speaker 2: Jeff joins us from here in New York City. Thank

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Speaker 2: you so much, sir for making time to chat with me.

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Speaker 2: Can we begin with the story on credit. Yesterday we

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Speaker 2: heard from Jamie Diamond, obviously the head of JP Morgan Chase.

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Speaker 2: He seemed to issue this kind of ominous warning about

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Speaker 2: credit risk with some of the high profile collapses that

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Speaker 2: we have seen too. In particular, Diamond said, when you

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Speaker 2: see one cockroach, they're probably more. What do you think

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Speaker 2: of what he had to say yesterday and what unfolded today?

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Speaker 1: As you say, Doug, it's an interesting combination the timing

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Speaker 1: of these things, Jamie Diamond's warning, the first brands event

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Speaker 1: a couple of weeks ago, and then these today. What's

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Speaker 1: interesting is it comes against a backdrop where in general

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Speaker 1: credit markets have been very sanguine, spreads are very tight,

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Speaker 1: people have been very comfortable with how growth has behaved,

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Speaker 1: and default rates have been very very low. It does

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Speaker 1: seem like it's isolated and idiosyncratic, as they say, but

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Speaker 1: you know, there have also been signs at the lower

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Speaker 1: end of the consumer spectrum is weak or has been weakening.

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Speaker 1: I think it fits in with some of the narrative

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Speaker 1: about weak are unemployment, weaker employment numbers, and so we'll

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Speaker 1: just sort of have to see how this plays out.

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Speaker 1: I agree, so far it doesn't look systemic though.

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Speaker 2: So we had some FED speak today. Chris Waller, the

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Speaker 2: FED Governor, was saying, the policymakers can keep lowering rates

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Speaker 2: in quarter point increments because the labor market really has

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Speaker 2: been faltering and it needs support. But then we heard

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Speaker 2: from FED Governor Stephen Myron, and he was advocating for

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Speaker 2: a larger cut. He said, this flare up that we

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Speaker 2: have seen lately in the US China trade war has

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Speaker 2: created more downside risk for the economy. He wants to

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Speaker 2: see a half point cut. And then when you put

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Speaker 2: into context what we saw in the regional banks today,

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Speaker 2: I think the KBW Regional Bank index was down about

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Speaker 2: six point eight percent. Do we need to consider the

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Speaker 2: fact not only that the FED is going to continue

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Speaker 2: to ease, but we may need a larger rate cut.

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Speaker 1: Yeah, Well, this is the tension that's happening within the FED.

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Speaker 1: I mean, Stephen Myron, now in his short tenure, has

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Speaker 1: made it very clear that he thinks rates need to

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Speaker 1: be substantially lower. Most of the rest of the board

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Speaker 1: thinks that rates only need to be lowered gradually. By

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Speaker 1: the way, some as we saw on the last dot plot.

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Speaker 1: You know, don't think rates need to be lowered at all,

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Speaker 1: maybe even need to go higher at some point. And

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Speaker 1: you know, it sort of gets to the current situation

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Speaker 1: and the economy. Some call it the K shaped economy,

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Speaker 1: right where the economy.

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Speaker 4: Are doing really well.

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Speaker 1: That would be high end consumers and things buoyed by

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Speaker 1: capex spending, and then there's everything else which is really struggling.

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Speaker 1: And it's pretty clear that the employment backdrop has been

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Speaker 1: weakening and it doesn't help. You know, the tariff news

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Speaker 1: in general is pretty negative for the employment backdrop. You

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Speaker 1: put that on the other side on one hand, and

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Speaker 1: on the other hand, inflation hasn't moderated and in fact

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Speaker 1: seems pretty sticky. So our own view is that you

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Speaker 1: get a couple of rate cuts, but that might be it,

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Speaker 1: barring any much deeper weakness in the economy.

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Speaker 2: So what do you make of the behavior of the

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Speaker 2: bond market? We had yields at the short end. I'm

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Speaker 2: looking at the two year that was down about eight

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Speaker 2: basis points or so in New York, the lowest I

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Speaker 2: think since around twenty twenty two. How do you evaluate

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Speaker 2: the price action in the bond market.

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Speaker 1: It's a big move, and you know, it's certainly consistent

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Speaker 1: with a view that bond markets are pushing for more

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Speaker 1: rate cuts right, certainly more aggressively than that narrative that

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Speaker 1: I just talked about from you know, from our side,

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Speaker 1: and same you know from Waller's view, it seems to

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Speaker 1: push more towards people getting concerned about growth. What's odd

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Speaker 1: about it for me is if you really believe a

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Speaker 1: weak growth backdrop, you would expect equities to be a

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Speaker 1: bit weaker. Now, maybe if financials are starting to tell

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Speaker 1: that story, you're seeing some of it, but you know,

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Speaker 1: you're certainly not seeing it more broadly within risk asset markets.

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Speaker 2: The other thing that we've been dealing with here in

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Speaker 2: terms of market action concern about more tension in the

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Speaker 2: US China trade relation. Today, as part of the World

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Speaker 2: Bank IMF meetings that are going on in Washington, we

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Speaker 2: heard from Japan's finance minister. He seemed to voice a

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Speaker 2: lot of concern here, serious concern over China's latest export

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Speaker 2: controls when it comes to rare earth elements, and he

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Speaker 2: said that really it's important now for some type of

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Speaker 2: coordinated action from G seven nations to avert any type

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Speaker 2: of negative impact that this may have on global supply chains.

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Speaker 2: So it's not just from the US side. Other countries

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Speaker 2: are beginning to express concern about the way in which

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Speaker 2: China is dealing with the United States and how that

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Speaker 2: may impact other countries in other markets. Are we perhaps

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Speaker 2: flirting with something that could turn a lot more serious?

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Speaker 1: I mean, my sense here is that it's more likely

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Speaker 1: people kind of laying out very wide if you like

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Speaker 1: bid ask in terms of a negotiation policy. Right, President

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Speaker 1: Trump is kind of laying one side of very aggressive

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Speaker 1: tariffs potentially one hundred percent, which is highly highly unlikely,

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Speaker 1: And equally on the other side, I think China is

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Speaker 1: trying to play its card, you know, which it views

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Speaker 1: very strongly as being rare earths. I think, and you know,

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Speaker 1: this would just sort of, you know, you know, kind

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Speaker 1: of lead US likely towards something more moderate, something in

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Speaker 1: the middle, because I think it doesn't really, as you say,

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Speaker 1: suit anybody, including not just the US and China, but

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Speaker 1: kind of the broader world economy, to have kind of

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Speaker 1: a massive flare up that results in kind of a

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Speaker 1: full meltdown of global trade.

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Speaker 2: So obviously rare earths are critical when you look at

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Speaker 2: semiconductor production, we had some pretty strong numbers from TSMC.

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Speaker 2: Overnight revenue guidance was also increased a bit, and the

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Speaker 2: day before ASML, the Dutch chip making equipment firm, reported

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Speaker 2: its highest bookings for its cutting edge extreme ultraviolet tools

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Speaker 2: since the fourth quarter of twenty three. So there seems

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Speaker 2: to be a lot of positivity still around the AI trade.

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Speaker 2: How do you feel about this right now? Are we

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Speaker 2: late stage or is there still a lot more in

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Speaker 2: the way of upside?

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Speaker 1: Yeah, I mean there's there's clearly a lot of momentum there.

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Speaker 1: As as I mentioned before, you know, that's been a

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Speaker 1: key underpinning of growth here in the US. My best

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Speaker 1: sense here is that there's a good visit, there's good

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Speaker 1: visibility for capex in the aie AID generally, you know,

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Speaker 1: certainly for the next year, maybe even beyond that. The

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Speaker 1: good news is there's still a lot of cash funded

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Speaker 1: capex right so it's all being funded or largely being

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Speaker 1: funded out of free cash flow, and we're still seeing

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Speaker 1: great growth. We're still seeing people be quite positive about

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Speaker 1: the outlook for revenue generation to kind of follow.

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Speaker 4: I think where the questions.

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Speaker 1: Start to play out over the next twelve to twenty

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Speaker 1: four months is one. Do we get the revenue handoff

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Speaker 1: to help protect free cash flow? Do we need to

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Speaker 1: start seeing, you know, companies issue debt. We've only seen

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Speaker 1: very very small pieces of that, and ultimately can there

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Speaker 1: be kind of profitability that comes from it? So I

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Speaker 1: think it's too soon to completely freak out about it,

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Speaker 1: But there's enough questions on the horizon, you know, to

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Speaker 1: kind of keep an eye on on exactly how it

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Speaker 1: would all play out.

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Speaker 2: Which makes this rally that we have seen in gold

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Speaker 2: all the more interesting. I think that this is some

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Speaker 2: type of haven, right given a lot of the risk

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Speaker 2: that may be on the horizon. We broke above in

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Speaker 2: the spot price in New York trading forty three hundred

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Speaker 2: dollars an ounce, so we're clearly at records. What does

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Speaker 2: this mean to you?

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Speaker 1: Gold's been amazing and equally so has silver. They've certainly

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Speaker 1: kind of as you say, it's sort of if you

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Speaker 1: view it through the lens of a risk trade, it's

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Speaker 1: sort of inconsistent with what we're seeing in other markets.

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Speaker 1: I think there's a couple of different avenues though. One

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Speaker 1: is the dollar has definitely been weaker this year, and

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Speaker 1: I think in general, and when you kind of link

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Speaker 1: this to some of the China questions, there's definitely questions

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Speaker 1: about reserve currency status and the strength of kind of

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Speaker 1: broad fiat currencies, and I think that that's helping to

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Speaker 1: support gold. Central bank reserves of gold have certainly increased,

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Speaker 1: and so that that's probably a piece as well. And

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Speaker 1: then the other pieces that you know, as I said before,

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Speaker 1: inflation has been a little bit sticky. We're not getting

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Speaker 1: down towards the Fed's target of two percent, and our

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Speaker 1: view is that we're not going to We're going to

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Speaker 1: hang closer to three percent going forward, and so maybe

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Speaker 1: there's a little bit of kind of an inflation element

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Speaker 1: under the hood there as well. I don't think that

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Speaker 1: independently any one of those things helps to fully explain

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Speaker 1: the move that we've seen in precious metals, but maybe

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Speaker 1: collectively it helps to explain the direction of travel.

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Speaker 2: So we had the Russell two thousand down about two

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Speaker 2: percent today, maybe some concern about the strength of the

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Speaker 2: economy before I let you go, do we are we

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Speaker 2: flirting with a recession potentially?

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Speaker 1: So we don't think so we think that the economy

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Speaker 1: is going to remain fairly resilient. But you know, there

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Speaker 1: is definitely this case that you know, the stool that

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Speaker 1: we've been you know, supporting the economy with is really

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Speaker 1: kind of two legs. It's this one of you know,

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Speaker 1: some consumers and some cap backs. I think what we

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Speaker 1: really need to see is that that support brought out

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Speaker 1: over the course of the next year. That is some

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Speaker 1: of the objective of lower interest rates, It's some of

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Speaker 1: the objective of some easier fiscal policy. Keep in mind,

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Speaker 1: we are going to get some fiscal stimulus through the

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Speaker 1: bill that was passed earlier this year, the budget bill

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Speaker 1: that was passed earlier this year. Those sorts of things

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Speaker 1: should help the underlying economy. But if you kind of

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Speaker 1: bring this conversation full circle, you know, if there's some

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Speaker 1: are some underlying concerns about trade and employment and credit,

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Speaker 1: you know, those would probably be the areas that caused

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Speaker 1: things to slow down more quickly.

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Speaker 2: Okay, Jeff, we'll leave it there. Thanks so much, Always

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Speaker 2: a pleasure. Jeff Palmer is head of multi Asset at

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Speaker 2: Cohen and Steers, joining us from here in New York

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Speaker 2: City 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 Prisoner

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Speaker 2: and this is Bloomberg