Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist here at HSBC.
Speaker: On today's episode, we're zooming in on the unique economy that is Japan.
Speaker: It's a story that's evolving on several fronts, from going against the grain on interest rates to ushering in what you might call a manufacturing renaissance.
Speaker: What makes this one-of-a-kind economy tick and where does it go from here?
Speaker: Joining me to help answer those questions is Jun Takazawa,
Speaker: from our Asian economics team here in Hong Kong.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: Welcome to the podcast, Jun.
Speaker: It's the first time we have you here under the banyan tree.
Speaker: Hi, Fred.
Speaker: Thanks for having me.
Speaker: So, Jun, you're looking at, obviously, a number of Asian economies, including Japan.
Speaker: And we really wanted to delve a little bit deeper into the Japanese economy because it's so interesting.
Speaker: It's still one of the largest economies in Asia.
Speaker: And what we have here is actually an economy that's a little bit out of sync with the rest of the world.
Speaker: If you think about it, Federal Reserve is lowering interest rates.
Speaker: The Chinese Central Bank is lowering interest rates.
Speaker: Everywhere we're seeing lower interest rates.
Speaker: But Japan is going to raise interest rates, already has this year.
Speaker: And actually next week, we expect them to raise interest rates again.
Speaker: Now, why is there suddenly this out of cycle kind of movement by the Bank of Japan?
Speaker: It surely must be because inflation is still pretty sticky in Japan.
Speaker: What have we seen on the inflation front lately?
Speaker: Yeah.
Speaker: Right.
Speaker: So Japan is out of sync with a lot of the other central banks because I think it's important to put some context here in the sense that Japan has been seeing significant economic changes that it has not seen in years, if not decades.
Speaker: And inflation primarily has been running above the 2% target for more than two years.
Speaker: Now, let me just stop you there because you say just above 2% inflation target.
Speaker: For most people, that sounds like pretty low inflation.
Speaker: But we should remind ourselves that actually Japan had what?
Speaker: 20 years of almost consistently falling or almost negligible inflation.
Speaker: There was no price pressures whatsoever.
Speaker: So suddenly we're talking about just over 2% inflation.
Speaker: That's enough to then get the Bank of Japan to ultimately raise interest rates.
Speaker: Yes, because for Japan, for a long time, it has experienced what you would call a deflationary mindset.
Speaker: What this does is that it leads to households expecting prices to not change in the future.
Speaker: And that has implications on economic growth.
Speaker: So that's an important point.
Speaker: So we have actually a whole generation of Japan that is
Speaker: used to seeing prices fall and suddenly prices are actually increasing and that must be a big psychological kind of wake up if you will for people who are not used to that seeing suddenly the supermarket's prices increase.
Speaker: Now the first reaction to this increase in price increases was actually a decline in spending.
Speaker: Is that right?
Speaker: Yes, we have seen household spending very weak after the pandemic.
Speaker: And this is primarily because of, as you said, the price shock that has not been accommodated for by a proportionate increase in wages.
Speaker: So people are worse off then.
Speaker: If prices increase but wages don't keep pace, then obviously they have less money.
Speaker: In addition to psychological shock, there's no real reason why they're pulling back.
Speaker: It's just that purchasing power is down.
Speaker: Now, but that is changing.
Speaker: I think this is the key probably new thing in Japan, which is that suddenly we see also wages rising.
Speaker: And importantly, if you look at the last few months, wages are now suddenly rising faster than prices again, which actually means that you see households suddenly seeing an improvement in their income relative to prices and
Speaker: That should then encourage them to start to spend again.
Speaker: Is that a fair expectation?
Speaker: Yes, in theory, real wage growth should provide some support for households to spend more going forward.
Speaker: But we have to keep in mind that Japan has experienced many, many months after the pandemic of negative real wage growth.
Speaker: And so that is why the Bank of Japan has been very cautious in terms of adjusting, normalizing monetary policy, because
Speaker: we still need to see this wage hike momentum continue for a sustained period of time.
Speaker: And that still has question marks surrounding it.
Speaker: So that's to say that actually Bank of Japan will be very cautious in raising interest rates.
Speaker: I mean, after all, we're talking about interest rates.
Speaker: They're still well below 1%, whereas, of course, in the US, we're talking about interest rates about 4%.
Speaker: So there's some very small minor changes, but even there,
Speaker: The Bank of Japan is moving very, very cautiously from essentially what was negative interest rates to then now positive interest rates.
Speaker: But there's one interesting aspect here, and that is we have this phenomenon that wages are suddenly rising in Japan and they haven't for a long time.
Speaker: But why is it that suddenly wages are rising?
Speaker: I mean, why didn't they rise five years ago, 10 years ago?
Speaker: What is it in the last probably two, three years that suddenly leads to this increase in wages?
Speaker: Do you have an explanation for that?
Speaker: I think part of it is structural.
Speaker: And this comes from the fact that Japan is experiencing labor shortages that are increasingly more severe.
Speaker: And what do I mean by that?
Speaker: A lot of the companies and corporates in Japan are
Speaker: have been facing greater and greater challenges in attracting and retaining talent simply because the population is declining and the labor force participation rate of prime-age females and older-age population has already exceeded 80%.
Speaker: So, yeah, let me just stop you right there because I think that's a very interesting point.
Speaker: We knew that the population, Japan,
Speaker: had actually been shrinking already for decades.
Speaker: But in a way, labor shortages didn't really appear until very recently because Japan sort of had over the years very low participation of women in the workforce.
Speaker: But that increase and increase and increase providing extra labor even though the population was shrinking.
Speaker: And the same happened with all the workers.
Speaker: But now we're at the point where actually
Speaker: The labor participation, that is, female workers and older workers, is now saturated.
Speaker: That is, there are not millions of female workers on the sidelines who are still looking for a job.
Speaker: Everybody is employed in Japan.
Speaker: And so suddenly then there is labor constraints.
Speaker: And you actually, I guess you see that when you go to Japan, right?
Speaker: You see fewer workers.
Speaker: workers around.
Speaker: Have you ever experienced that?
Speaker: Yes, especially when you go into restaurants or hotels, you do see this increasing lack of labor being more apparent in Japan.
Speaker: These are services sectors and they're clearly very exposed to these conditions that we're seeing develop.
Speaker: And so that's, of course, where the wage pressures are coming from.
Speaker: That's ultimately where now inflation is coming from.
Speaker: But wages are rising now faster.
Speaker: That's a hope than inflation.
Speaker: So spending should be coming back.
Speaker: And so actually Japan is now in a new cycle where hopefully inflation will encourage people to spend more.
Speaker: And they are able to spend because wages are going up as well.
Speaker: And ultimately, that means the Bank of Japan can now raise interest rates.
Speaker: At least that's the expectation.
Speaker: So we talked a lot about Japan's central bank being out of sync and being able to tighten policy when others are easing policy because of these unique features in the labor market and inflation.
Speaker: But I want to talk about other things about Japan as well.
Speaker: We've seen the currency weaken quite a bit in the past 18 months or so.
Speaker: Now, that's not necessarily bad for the Japanese economy.
Speaker: And you hinted at that already.
Speaker: Tourism is booming.
Speaker: How big a sector is that really for Japan?
Speaker: I try to book flights to Japan and, you know, it's very hard to get a ticket these days because it seems like everybody in Hong Kong is heading over to Japan these days.
Speaker: Certainly when we think about the share or the size of tourism in terms of Japan's economy is less of a proportion compared to say manufacturing, but it is still quite sizable.
Speaker: And that has meant that
Speaker: The increase in inbound tourism has benefited certainly some sectors.
Speaker: But again, as we have talked about, the labor shortages have been a real constraint.
Speaker: And so what we're seeing is that coupled with the fact that we have this inbound tourism, because of the weekend, domestic travelers have also stayed within Japan.
Speaker: And so that has exacerbated this demand supply imbalance.
Speaker: And that is part of the reason why we are seeing these pressures.
Speaker: pressures but of course also on the other hand a growth driver right services are doing well and that's helped by the weak currency but then there is also another feature here of the weak currency and that is it makes Japanese manufacturers quite competitive of course when the currency falls in value you know Japanese producers are able to sell cars more cheaply overseas have we seen also the manufacturing sector benefit from this very weak
Speaker: yen that we had over the past year or so?
Speaker: Yes, certainly.
Speaker: When you look at the quarterly tankan survey, this is a survey that is conducted by the Bank of Japan to kind of gauge how businesses are feeling about the economy, how they're experiencing the current business environment.
Speaker: That has shown that manufacturers are indeed performing very, very well.
Speaker: If you look at their operating profits, they're at record highs.
Speaker: And so to some extent, yes, the weekend has been a major boon for Japanese manufacturers.
Speaker: Okay, this is a great point to take a quick break.
Speaker: We talked about wages, we talked about inflation, talked about the fact that the Bank of Japan is going against the global cycle.
Speaker: And we also talked about the weak yen helping actually some of the manufacturers.
Speaker: But when we come back, I want to talk quickly a bit more about Japan's ambitions in the tech space and really raise the open question, is Japan back?
Speaker: So that's coming up right after the break.
Speaker: So we're back here with John Takazawa, one of our economists here.
Speaker: And, John, there's been certainly many growth industries across Asia over the past year.
Speaker: Everybody talks about AI, for example.
Speaker: Semiconductor manufacturing is very hot right now.
Speaker: Japan has for many years been a technological leader.
Speaker: Is that sort of – do you sense this is coming back?
Speaker: I mean has it ever lost that?
Speaker: What's happening on that front?
Speaker: Sure, Fred.
Speaker: I think there's a little bit of context that needs to be put in place here.
Speaker: Japan was an amazing manufacturing powerhouse back in the 80s and 90s.
Speaker: And to some extent, the rise of other Asian economies have kind of superseded that.
Speaker: But what the government is trying to do now is trying to revive the semiconductor industry in Japan, partly because of geopolitical tensions, but also because national considerations in the sense of supporting domestic growth drivers.
Speaker: So during the pandemic, Japan faced a chip shortage that severely affected its automobile sector.
Speaker: And recognizing these risks going forward, Japan has put considerable emphasis on supporting national resilience in this regard.
Speaker: And so the government has provided extensive financing support
Speaker: towards the semiconductor industry, bringing manufacturing back home, partnering with international companies like TSMC in Kumamoto Prefecture, as well as establishing its own semiconductor manufacturing company, Rapidus, in Hokkaido.
Speaker: Does that mean that we're in some sense also seeing a reshoring of manufacturing industries into Japan?
Speaker: I mean,
Speaker: You talked about Japan being a manufacturing powerhouse in the 80s and 90s.
Speaker: And then Japanese companies often went abroad, invested in Southeast Asia, for example.
Speaker: A lot of production was outsourced to other economies.
Speaker: Is that really coming back?
Speaker: So it's not just about semiconductors and advanced manufacturing.
Speaker: Is a lot coming back into Japan or is that too far a statement?
Speaker: I think we do have to be careful with these big statements.
Speaker: Given the fundamentals of Japan in the sense that the labor force is shrinking and demand as a result is also constrained to some extent because of these forces, the degree of reshoring has to be very selective.
Speaker: And the government is very well aware of this and has therefore focused on bringing back semiconductor manufacturing onshore, but not necessarily other manufacturing goods.
Speaker: So, everything we discussed here, rising wages, kind of there's a renaissance of semiconductor manufacturing in Japan.
Speaker: That's all, you know, suggests that kind of Japan is back, right?
Speaker: It used to be a very dynamic economy.
Speaker: It's kind of lost its mojo a little bit over the years, but it's kind of snapped back a little bit.
Speaker: Yeah.
Speaker: What's the biggest risk in the coming years?
Speaker: Is it still the demographics and the population is still shrinking?
Speaker: Is it lack of ideas and entrepreneurial dynamism?
Speaker: Is it that Japan hasn't really developed an AI industry, for example?
Speaker: What sort of do you think the number one constraint for Japan's economic renaissance?
Speaker: I think when it comes to risks, for Japan, especially in the next, say, two to three years, it won't necessarily be domestic.
Speaker: It'll be more externally driven.
Speaker: In fact, if I think about the domestic opportunities going forward, it's actually a lot brighter.
Speaker: We're already at the end of the tunnel in terms of negative real wage growth.
Speaker: The robust wage hike momentum looks set to continue as shown in sort of the demands raised by Rengo, the largest labor union group for 2025.
Speaker: We're seeing this bounce back in, or at least we expect to see a bounce back in spending, domestic spending going forward.
Speaker: And that should revive a lot of
Speaker: the animal spirits and sentiment, so to speak, in Japan, that has a lot of implications in the sense that you're going to see spending move through the economy and it's going to be a very interesting 2025 for Japan.
Speaker: So there you have it.
Speaker: Lots of exciting things going on in Japan.
Speaker: It's kind of counter cycle, if you will.
Speaker: And there are some very promising trends, whether it's tourism, manufacturing, rising wages, consumption bouncing back.
Speaker: But Jun, I don't want to let you go out of the studio here in the banyan tree.
Speaker: We always like to ask our guests also some other questions, and that is,
Speaker: For me, the question for you would be, if you go to Japan, everybody goes to Tokyo and some of the big sites.
Speaker: What's sort of the secret tip?
Speaker: Do you have a secret kind of destination in Japan that you would recommend somebody go check out?
Speaker: I think for people, places that are like Tokyo, Osaka are probably accessed way too much.
Speaker: And so I definitely agree with you.
Speaker: Other places need to be looked at.
Speaker: For me, I think that the best one to recommend especially would be a place called Nikko.
Speaker: It's north of Tokyo, relatively easy to access for people going to Japan.
Speaker: It's a very beautiful place, a lot of nature in the sense that you get to see snow, lakes, temples, a very natural scenery that I think a lot of people would really enjoy.
Speaker: Well, plenty to explore and I feel like we're going to have a Banyan Tree special with Jun Takazawa's travel tips coming up at some point in the future.
Speaker: Thank you Jun for joining us today.
Speaker: Thank you for having me Fred.
Speaker: Well, we're just about out of time, folks.
Speaker: It's been another great discussion here on The Banyan Tree.
Speaker: If you're still hungry for more macro content, be sure to listen to the macro brief from HSBC Global Research, available wherever you get your podcasts.
Speaker: From all of us in Hong Kong, it's bye for now.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
