Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Asia Pacific rim. I'm John
Speaker 1: Lee in Hong Kong. Global investors continue to pile into Japan,
Speaker 1: betting that the economy has finally broken out of its
Speaker 1: economic stagnation. The nik A two to five stock index
Speaker 1: has hit record highs and is up twenty five percent
Speaker 1: this year, making it the world's best performing major market
Speaker 1: in local currency terms. The Bank of Japan has also
Speaker 1: raised interest rates for the first time since two thousand
Speaker 1: and seven. How will the return of inflation transform Japan's
Speaker 1: economy and how sustainable is the recovery? Can Japan's efforts
Speaker 1: to improve its corporate governance meet high investor expectations? And
Speaker 1: what are the key strategic industries investors should watch out
Speaker 1: for Here to discuss Japan is Tarro Kimura, Bloomberg senior
Speaker 1: Japan economist and former Bank of Japan veteran. He joins
Speaker 1: Asia Centric for the second time, and Takeshi Katawa, senior
Speaker 1: industrials analysts or Bloomberg Intelligence, both joined from Tokyo. Welcome
Speaker 1: Taro and Takeshi thanks for having us.
Speaker 2: Thank you, John Taro.
Speaker 1: The Bank of Japan finally raised interest rates in March
Speaker 1: this year, the first time in seventeen years. Wages are
Speaker 1: also rising in Japan. Is Japan finally breaking out of
Speaker 1: its economic stagnation?
Speaker 3: Yes, I think Japan's economy is making a sort of
Speaker 3: tectonic shift. I wasn't really expecting that kind of thing
Speaker 3: would happen last year. So the thing is that the
Speaker 3: bottleneck of Japanese economist stagnation is a tape it private consumption,
Speaker 3: and this is because of the very stagnant waste growth,
Speaker 3: mainly so having achieved five point one percent wage growth
Speaker 3: obtained by the labor union in this year's spring wage
Speaker 3: negotiation we call it Shunto in Japanese, is a big
Speaker 3: step for the Japan's economy to recover its healthy shape,
Speaker 3: and the expectation for households and workers that their income
Speaker 3: could actually rise would be providing a big support for
Speaker 3: Japanese consumption, not only in the short term but in
Speaker 3: the long run. So that's why basically I think Japan's
Speaker 3: economy is cleared with the fundamental bottlemet that has been
Speaker 3: dragged down Japan's growth for a long time, and.
Speaker 1: Tarak, can you explain to the listener why the return
Speaker 1: of rising wages and also the return of inflation is
Speaker 1: so important to Japanese corporates and ultimately the Japanese economy.
Speaker 3: Right, So, usually the inflation is bad for the economy,
Speaker 3: but it's also important to have modest inflation. There are
Speaker 3: several ways to think of it. For example, if we
Speaker 3: live in the world where prices have to be very rigid,
Speaker 3: that means corporates cannot adjust prices even they are facing
Speaker 3: cost push pressure for example the high old prices, energy prices,
Speaker 3: food prices, whatsoever. And if they cannot pass onto those
Speaker 3: cost increases to their prices, the workers' wages are also subdued. Therefore,
Speaker 3: having mild inflation to keep the norm that the price
Speaker 3: can rise anytime is important. In Japan experienced deflation and
Speaker 3: this inflation for three decades. That norm that wages and
Speaker 3: prices aren't something that could be changed is dragging down
Speaker 3: the inflation expectations and corporate profits. But finally, the push
Speaker 3: from global inflation triggered by war in Ukraine became the
Speaker 3: big push in catalyst for Japan's corporates to break down
Speaker 3: from that rigid wages and prices setting behaviors, and also
Speaker 3: having no inflation or even deflation means it's sometimes optimal
Speaker 3: for corporates and households to keep their money as cash
Speaker 3: in their bank accounts instead of investing those money into
Speaker 3: more risky new areas. So I think probably this inflation
Speaker 3: and deflation in Japan had hindered the long term positive
Speaker 3: investments in the economy, and that will change if the
Speaker 3: inflation is finally secured.
Speaker 1: And you mentioned modest inflation in the US. There's too
Speaker 1: much inflation in Japan. In the past there was not enough,
Speaker 1: and now China is also suffering from deflationary concerns. Is
Speaker 1: the Bank of Japan also looking at a two percent
Speaker 1: target like the US Fed?
Speaker 3: Yes, the official inflation target for the Bank of Japan
Speaker 3: is the two percent core inflation. Having said that two
Speaker 3: percent is just the kind of global myth, I would say,
Speaker 3: there's no solid academic background why two percent is important.
Speaker 3: So in my reading, it's enough for Japan's economy to
Speaker 3: have one percent or one point five percent of inflation
Speaker 3: because on others in the past thirty years before COVID,
Speaker 3: Japan's core inflation gains are averaged around zero point two percent.
Speaker 3: So as long as the Bank of Japan thinks inflation
Speaker 3: hasn't been anchored around two percent yet, I think they
Speaker 3: will keep their accommodative monetari policies.
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Speaker 1: your expectation of interest rates going forward? There was a
Speaker 1: lot of excitement when the Bank of Japan finally raised
Speaker 1: interest rates, but in reality it was only like a
Speaker 1: ten basis point rise basically from zero percent to zero
Speaker 1: point one percent. What's your expectation? Is there a risk
Speaker 1: that maybe investors are expecting too much from Japan and
Speaker 1: the BOJ I.
Speaker 3: Think generally speaking, the Bank of Japan is taking the
Speaker 3: balance in a way that on one side, Japan's inflation
Speaker 3: is just started to kindle, So the boj really has
Speaker 3: to be careful in jip kindle. The inflation fires so
Speaker 3: that the Japan's economy eventually secure a modest inflation around
Speaker 3: two percent. That said, current policy interest rate is kept
Speaker 3: around zero to zero point one percent given the recent
Speaker 3: inflation expectations around one point five percent to two percent.
Speaker 3: Generally this is too low. So therefore at the Bank
Speaker 3: of Japan is expected to start the adjustment process for
Speaker 3: that too low policy rates. So that's what the market
Speaker 3: and I am expecting. I am expecting the Bank of
Speaker 3: Japan will proceed with another rate hike in July. This month,
Speaker 3: they have the meeting at July thirtieth and thirty first,
Speaker 3: and also my expectation is they will also do another
Speaker 3: rate higher again in October, up to zero point five percent.
Speaker 3: That said, again, let's say if the long term inflation
Speaker 3: expectation is now somewhere in between one point five to
Speaker 3: two percent, they're really interested. It's still negative, so BOJA
Speaker 3: raising rates doesn't mean the monetary condition suddenly gets restrictive.
Speaker 1: Okay, to case I might bring you into the conversation,
Speaker 1: Taro did mention that low inflation kept a lot of
Speaker 1: Japanese households wealth in savings deposits. Now we have wages
Speaker 1: and inflation coming up, are we starting to see Japanese
Speaker 1: households finally reallocate money into say equities or other risk assets.
Speaker 2: Thanks John. I think there's two components to this, and
Speaker 2: one is an easy one. The government from this year
Speaker 2: started a program called new NISA, which is the Nepon
Speaker 2: Individual Saving Account, which allows us about eighteen million yen
Speaker 2: tax free investments on a multiple year basis. So this
Speaker 2: actually allows a lot of the normal day to day
Speaker 2: Japanese households to start to invest, and that's definitely how
Speaker 2: pushed a lot of the households to reallocate some of
Speaker 2: the cash. But also another thing is that we've been
Speaker 2: in a sort of stagnant situation for thirty years, so
Speaker 2: that's a little bit more difficult to change. And as
Speaker 2: Parosan mentioned, we did have the Shunto wage hike above
Speaker 2: five percent this year, but all that continue is still
Speaker 2: likely on Japanese household minds. So I think we need
Speaker 2: to have consistent wage hikes which in the end sort
Speaker 2: of lead to households being comfortable the spend cash instead
Speaker 2: of saving or investing. That really should drive the consumption side,
Speaker 2: which in the end leads to another sort of basis
Speaker 2: for inflation as.
Speaker 1: Well, and do we have any figures like how conservative
Speaker 1: Japanese households are versus say, the US in terms of
Speaker 1: how much they allocate towards savings, deposits and equities.
Speaker 3: If I remember correctly, the share of the equity and
Speaker 3: its Japanese households asset is around ten percent. It's increasing
Speaker 3: because of the NISA effects, but still I guess very
Speaker 3: much lower compared to the US or even other countries.
Speaker 1: To Keshy, you recently co authored a major report entitled
Speaker 1: Emerging from the Lost Decades, and one of the reasons
Speaker 1: why global investors are piling into Japanese equities is this
Speaker 1: optimism over its corporate governance reform, this belief that corporations
Speaker 1: will finally start acting or behaving in the interests of shareholders. Now,
Speaker 1: you've been covering Japanese equities for quite a while, over
Speaker 1: a decade. What's your view. Are we seeing a major
Speaker 1: c change or is it more baby steps?
Speaker 2: Yeah? Thanks for the question. So we are seeing quite
Speaker 2: a drastic sort of proposal out of the Japan Stock
Speaker 2: Exchange on corporate governance, and they have clearly mentioned to
Speaker 2: target above PBR of one times and to do that
Speaker 2: raise the ROE, which in a component also means raise
Speaker 2: the profit margin in the business. At the same time,
Speaker 2: it can also be raised through shareholder returns. So those
Speaker 2: two are some of the corporates are talking and companies
Speaker 2: that I sort of talked to. Industrial companies definitely have
Speaker 2: started to talk about how to raise their corporate value
Speaker 2: more aggressively compared to the past decade or two. For example,
Speaker 2: one of the bigger changes that we've seen with the
Speaker 2: valuation as well as the change in the company has
Speaker 2: been Hitachi. They have predominantly been manufacturing oriented in the past,
Speaker 2: but they have shifted a lot of their sort of
Speaker 2: hardware oriented assets and sold them and invested more into
Speaker 2: the digital side of product portfolio and their IoT platform.
Speaker 2: Loumada is expected to make up about twenty nine percent
Speaker 2: of total sales this fiscal year with a sixteen percent
Speaker 2: adjusted EBITA margin, which is above the company's average target
Speaker 2: of eleven point five and they have I've pointed to
Speaker 2: twenty percent margin eventually for this platform as well. So
Speaker 2: we are in the steps of improving the margins there
Speaker 2: as well, and that's also going to be through training
Speaker 2: GENAI specialists. Fifty thousand of them and to lead that
Speaker 2: to efficiency in their own operation but also clients through
Speaker 2: better solutions. And also there was a report recently on
Speaker 2: Hitachi potentially rewarding external directors with company shares to further
Speaker 2: that initiative. So this is one company example, but as
Speaker 2: you mentioned, baby steps maybe, but we are seeing actual
Speaker 2: change coming from some of the leaders in this area,
Speaker 2: So it'll be an equity market that everyone should continue
Speaker 2: to be focused on.
Speaker 1: Are we seeing more female composition in boards, more female executives?
Speaker 1: I do know the irony of having three miles on
Speaker 1: this podcast, but are there more females getting involved in japan.
Speaker 2: In Basically that's the target and the government has stated
Speaker 2: at least same for thirty percent over the next couple
Speaker 2: of years, and a lot of the companies have real
Speaker 2: targets towards that in terms of having enough sort of
Speaker 2: candidates to fill these positions. A lot of these female
Speaker 2: executives already have positioned in various posts and different companies
Speaker 2: as well, so it'll be a you know, difficulty of
Speaker 2: both filling these spots going forward, but also internally training
Speaker 2: a lot of their current employees to these positions as well.
Speaker 1: Okay, let's get back into some of the industries now.
Speaker 1: Earlier you mentioned AI. What is Japan's role in AI.
Speaker 2: So that's a pretty difficult question. I would say, I
Speaker 2: think Japan's currently not the superb leader in AI technology
Speaker 2: at this point. One thing I can say in the
Speaker 2: area of industrials, for example, is that AI could have
Speaker 2: help with the declining population, which is another megatren that
Speaker 2: we are seeing in Japan ahead of a lot of
Speaker 2: the other countries. So a lot of tasks that currently
Speaker 2: people do need to be done more efficiently so it
Speaker 2: doesn't require as many people. This can come from, for example,
Speaker 2: factory automation equipment, but there is a limitation to applying
Speaker 2: automation to unrepetitive tasks formerly used in the auto industry,
Speaker 2: for example in the welding line. So if we manage
Speaker 2: to utilize AI, it'll allow for broader tasks and non
Speaker 2: repetitive tasks to be automated, and that's a pretty big
Speaker 2: win for Japan as well. And so I think AI
Speaker 2: and actually putting them into application, having the technology and
Speaker 2: actually putting it into works, that putting into the works
Speaker 2: is one area that Japan can continue to be at
Speaker 2: the forefront of.
Speaker 1: Okay, So you mentioned AI factory automation. Is there any
Speaker 1: other key strategic industries that investments should be focused on
Speaker 1: in Japan?
Speaker 2: We mentioned a lot of that in the Japan briefing
Speaker 2: LEEP dive that we did. One was factory automation. For example,
Speaker 2: One area is Jascala's robot using AI technology can do
Speaker 2: a lot of tasks without as much programming that you
Speaker 2: used to need, So that's one area. Other areas will
Speaker 2: be similar efficiency through AI as well, and to do
Speaker 2: these AIS. Semiconductor supply chain is one definite area where
Speaker 2: the base materials of these wafers, production equipment are some
Speaker 2: of the areas that Japan continues to have strong technology
Speaker 2: and so these will continue to be key areas to
Speaker 2: look into for Japan. Another that I would highlight from
Speaker 2: the geopolitical risks rising would be the defense industry. And
Speaker 2: we are seeing a lot of news flow these days,
Speaker 2: but we are seeing the Japan potentially spending up to
Speaker 2: two percent of GDP or the course of the next
Speaker 2: five years or so in their new defense plan, and
Speaker 2: we are already seeing forty two percent of their sort
Speaker 2: of promised budget being deployed on a contract term and
Speaker 2: these will flow into the revenue and also there will
Speaker 2: be a margin boost potential as well, because in the
Speaker 2: past they used to be a mid single digit margin business.
Speaker 2: The government is trying to help to bring that closer
Speaker 2: to double digits, so the supply chain remains strong in
Speaker 2: Japan to manage these defense needs. I'll just mention that
Speaker 2: the next generation jet fighters, which will be co developed
Speaker 2: with global partners like Italy and UK, will be one
Speaker 2: area of highlight in the industry on a global basis.
Speaker 1: And some of these Japanese defense stocks have done really well.
Speaker 1: But you mentioned Japan's going to be spending two percent
Speaker 1: of GDP on defense, but that's also coming from a
Speaker 1: very low base, right, it's almost doubling from one percent currently.
Speaker 2: Correct, Yeah, so it's doubling from one percent, and basically
Speaker 2: I Thinko's spending is around two percent as well, So overall,
Speaker 2: I think it's sort of coming back in line. One
Speaker 2: thing that there is a discussion about is if Trump
Speaker 2: is elected next, would that also raise Japan's responsibility within
Speaker 2: the reason to spend even more. So that's one thing
Speaker 2: that will continue to monitor as we head into the
Speaker 2: US elections.
Speaker 1: I wanted to bring Tara back into the conversation. You know,
Speaker 1: many pundits thought that with the Bank of Japan raising
Speaker 1: interest rates earlier this year, we thought it could actually
Speaker 1: strengthen the Japanese currency. But in fact the currency as
Speaker 1: we can significantly to levels we have not seen since
Speaker 1: the nineteen eighties. Obviously, it's great for your tourists, but
Speaker 1: you know what went wrong and how worrying is this trend?
Speaker 3: Yes, I think recent yen slide is a sort of
Speaker 3: a surprising factors, but having checked history, we have already
Speaker 3: seen this when the Bank of Japan and that its
Speaker 3: first form of quantitativising back in two thousand and six.
Speaker 3: And at that time, although the Bank of Japan is tightening,
Speaker 3: the yen is sold against a dollar because of the speculation. Basically,
Speaker 3: the traders and investors are seizing on still start contrast
Speaker 3: between the US interest rates and Japan's interest rates, and
Speaker 3: that's making a momentum that speculatilating on short position is profitable.
Speaker 3: So in my eyes, the yen now around one sixty
Speaker 3: one zero point seven is supported by a speculative power
Speaker 3: and the correction will happen to some extent at some point.
Speaker 3: But we don't know when and how it's going to happen.
Speaker 3: Probably the trigger would be a more clearer stance from
Speaker 3: the Federal Reserve on its rate cuts, and also probably
Speaker 3: in the Buja's July meeting they will start the quantitative
Speaker 3: tightening and also proceed with the rate hikes simultaneously. That
Speaker 3: could change the yen's declining trend. But as long as
Speaker 3: it's a speculative, we don't know how far the dollar end.
Speaker 3: We'll go further from here.
Speaker 1: Okay, before I let you guys go, I wanted to
Speaker 1: ask you what could go wrong? Like everyone, all investors
Speaker 1: seem to love Japan right now. If you turn on
Speaker 1: Bloomberg TV, you've got activist shareholders loving Japan, private equity investors,
Speaker 1: you hear stories of how investment banks and hedge fund
Speaker 1: traders are looking for Japan rate traders, Like, what could
Speaker 1: go wrong with this bullish case?
Speaker 2: There's a lot that can go wrong. One would be
Speaker 2: going back to the wage hike, whether wage growth will
Speaker 2: continue and boost consumer confidence to spend more. This is
Speaker 2: also on the back of the weekend because for Japanese,
Speaker 2: for example, tourists going abroad is a very difficult thing
Speaker 2: to do right now, so confidence in the wage growth
Speaker 2: could lead to more spending internally at this point. Also,
Speaker 2: the pace of change has always been, you know, it
Speaker 2: not done in a day, so or Hitachi, It took
Speaker 2: a decade or two to actually transition, and now investors
Speaker 2: are noticing that, and we are seeing similar transitions with
Speaker 2: companies like me to be see electric with their portfolio
Speaker 2: of businesses. That just doesn't happen over a period of
Speaker 2: a year for everyone. So I think it'll be a
Speaker 2: gradual step and whether the market is patient enough to
Speaker 2: wait for that step is one thing we do need
Speaker 2: to continue to monitor and be realistic about.
Speaker 1: And Tarosan, do you have any final comments?
Speaker 3: Yeah. On the positive note, the history sets, For example,
Speaker 3: the US Great Depression took two decades or twenty five
Speaker 3: years for the stock market to recover previous peak. Probably
Speaker 3: in Japan's case, it started to plunge in ninety and
Speaker 3: it's more than three decades, probably because we had a
Speaker 3: great financial crisis or some unfortunate events. But we see
Speaker 3: kind of one cycle is over and we are going
Speaker 3: to the positive trend overall. So it's not just about
Speaker 3: waste growth and inflation, some very structural positive shift that's
Speaker 3: happening in many perspectives, so I think investors should be
Speaker 3: focused in various industries and should keep an eye on
Speaker 3: how the economy will be transformed structurally going forward.
Speaker 1: It's been a fascinating discussion on japan It's economic turnaround
Speaker 1: and also some of the risks for the Japan pol story.
Speaker 1: Thanks Takeshi and Taro.
Speaker 3: Thank you, John, thank you so much.
Speaker 1: I'm John Lee in Hong Kong. This podcast was produced
Speaker 1: by Clara Chen and you've been listening to the Asia
Speaker 1: Centric podcast