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.
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Neumann, Chief Asia Economist at HSBC.
Speaker: And I'm Harold van der Linde, Head of Asia Equity Strategy.
Speaker: On today's show, we're digging into the Japanese equity market, which has been one of the hottest in the world in the last couple of weeks.
Speaker: We're going to discuss the macro and the micro factors that are pulling investors towards the land of the rising sun.
Speaker: Plus, our resident FX guru, head of Asia currency research, Joey Chu, joins us in the studio to explain why the yen has fallen despite a clear rise in foreign investment.
Speaker: All that and plenty more coming up right here under the Banyan Tree.
Speaker: So Harold, for lack of a better term, the Japanese equity market has been on a tear lately, one of the best performing markets probably in the world year to date.
Speaker: Almost the best, but yes, yes.
Speaker: What's going on here?
Speaker: I almost have FOMO myself here seeing that market rally.
Speaker: What's driving this?
Speaker: How do you interpret that rally?
Speaker: Yeah, so you're right.
Speaker: The Japanese indexes, certain Japanese indexes are back at kind of historical highs, not really 1989 back, but we can go back years, decades to reach these particular levels.
Speaker: I think there's a couple of things that goes on.
Speaker: So Japan is not the only one that's performed very well in Asia.
Speaker: Korea and Taiwan as well.
Speaker: And it's the exporters that have done really well.
Speaker: So I think one reason the commonality is that simply the world is a better place than we thought it would be at this particular point in time, say, a year ago, right?
Speaker: People were worried about, in particular, Europe, high gas prices, the ongoing conflict in the eastern side.
Speaker: Turns out things are a little bit better and that's good for exporters.
Speaker: So Taiwan has done well, Korea has done well and Japan has done pretty good as well.
Speaker: So that's one reason.
Speaker: We've seen buybacks also taking place.
Speaker: I think there's also something whereby people want to be having Asian exposure or maybe non-US dollar exposure.
Speaker: Then they look at mainland China.
Speaker: There's an underwhelming cyclical recovery there.
Speaker: So they decide we're not going to go there.
Speaker: And if you run a large fund, and let's say you're running something like a $50 billion fund or something like that, it's nice for us to say, well, you can go to Indonesia.
Speaker: It's a great story.
Speaker: Or even India.
Speaker: India has the capacity to absorb a lot of money.
Speaker: But Japan is just a very large liquid market that can absorb it.
Speaker: So I think there's a couple of reasons why Japan looks interesting in that sense.
Speaker: So, Fred, I've just looked at the market performance, but is there good economic rationale for this stock market rally?
Speaker: There's a very bullish narrative, I think, in the market out there.
Speaker: One is that there's FDI coming back, foreign direct investment coming back into Japan, partly in technology space because of the de-risking of supply chains, partly because Japanese companies are bringing investment back home.
Speaker: That's one part.
Speaker: The other part is that we see a rise in wages come through.
Speaker: In fact, between 1990 and 2019, Japanese wages only rose 4%.
Speaker: But over the past year, that probably rose around 3%.
Speaker: We don't have final numbers just yet, but you can see it's a step change in terms of wage growth.
Speaker: And that, you know, one might argue raises pricing power for Japanese corporates, etc.
Speaker: But we have to keep these two changes in perspective.
Speaker: It doesn't mean that there's a radical step change in the trend growth rate.
Speaker: So,
Speaker: If we had always a very low growth rate in Japan for demographic reasons, this helps at the margin, but it's not likely to be those two factors in themselves, just to keep clear change in the overall trajectory.
Speaker: Which makes me wonder whether the equity market rally, in part, is not necessarily a macro story, but it's also a story around corporate governance reforms, for example.
Speaker: Is that something to that?
Speaker: Because we know for years, investors were concerned about corporate governance standards and that kept return on equity assets fairly low.
Speaker: And did you see changes of that coming through?
Speaker: What has the government done around that?
Speaker: You can take both sides in that debate.
Speaker: Yes, there are changes coming through, but is it enough to really say that corporate standards and corporate governance is improving in Japan is maybe another conclusion.
Speaker: Japan, you're right, they've had low profitability.
Speaker: And one of the key reasons is what we call basically inefficient capital allocation.
Speaker: A lot of Japanese companies are parts of groups whereby company A owns B, B owns D, D owns C, E and F, and F owns A. You see what I mean, right?
Speaker: It's like a bowl of noodles, these corporate structures.
Speaker: So everybody's invested in themselves as a sort of protection.
Speaker: That's a very inefficient way of using capital.
Speaker: You could use that capital to pay dividends to your shareholders, for example.
Speaker: We see this in Korea as well, but not in Taiwan.
Speaker: It's one of the reasons why Taiwan always trades at higher multiples than Korea or Japan.
Speaker: Really, for corporate governance to change, you need to dismantle that.
Speaker: And that we haven't really seen.
Speaker: Japan is trying, the government is trying to do things about this.
Speaker: In the past, they called in corporate leaders and said, listen, can you do this?
Speaker: But nothing happened.
Speaker: They've now created an index, the Nikkei 400 index a couple of years ago, whereby they only include companies that have good high levels of return on equity, profitability.
Speaker: And every year companies get added to that list, but because it's 400, you also have to delete companies and they are publicly shown in newspapers.
Speaker: Some people in Japan jokingly call it the shame index.
Speaker: So it's trying to force Japanese companies to look more at profitability in that sense.
Speaker: I think it's a long way to go and to adjust the rally or to assign that to this particular rally, I think it's a bit too early to do so.
Speaker: But I think other factors might play a role as well.
Speaker: And that's really interest rate policies, BOJ.
Speaker: You talked a bit about inflation.
Speaker: What is your view on that?
Speaker: Well, inflation is still trending higher, at least on the core basis in the every year terms.
Speaker: It's still accelerating, actually.
Speaker: Now, that won't last for very long because it will kind of even out or steady out later in the year.
Speaker: But it's well above the Bank of Japan's inflation target.
Speaker: And that has raised questions about whether the Bank of Japan would...
Speaker: or remove its ultra loose monetary policy.
Speaker: Now we think actually fundamentally not because some of these changes we discussed are not step changes, radical changes.
Speaker: Yes, foreign investments coming in, yes, wage growth a bit higher, but it doesn't mean that Japan is fully out of the woods yet when it comes to slow growth.
Speaker: But there is a minor tweak here that they might actually undertake earlier than expected.
Speaker: And that is the so-called yield curve control, whereby the Bank of Japan keeps 10-year bond yields, government bond yields, in a very narrow range.
Speaker: And they might widen that range, perhaps earlier than the market.
Speaker: Expects the market is now saying, oh, maybe it might happen next year, because the central bank says, oh, we're going to review the policy.
Speaker: It might take 18 months.
Speaker: But
Speaker: Sometimes the Bank of Japan likes to surprise the market.
Speaker: Yeah, there's a tendency to surprise markets, right?
Speaker: There's a tendency to do that.
Speaker: And so there's a chance that, you know, they might do it earlier and sort of surprise the market.
Speaker: But I think what matters here as well also is actually the yen and how that factors in.
Speaker: And we have actually, when we come back after a little break, we should talk to... Joey.
Speaker: Joey Chu.
Speaker: Our resident yen expert.
Speaker: Yen expert and all Asian currencies besides.
Speaker: So when we come back, we'll take this up with Joey.
Speaker: So, Joey, welcome here to the Under the Banyan Tree podcast.
Speaker: Thank you.
Speaker: If I look at the Japanese equity market, so it's up about 19% since the beginning of this year in yen terms.
Speaker: But the US dollar terms, only about, say, 11% or 12% because the yen has depreciated.
Speaker: We've seen about $50 billion flowing into Japanese equities.
Speaker: Why hasn't the yen done much better than I would have expected?
Speaker: I think there are three reasons for this.
Speaker: The first is related to the US-Japan yield differential.
Speaker: It actually widened quite a fair bit on both the US lake and the Japan lake.
Speaker: So US lakes because the Fed continued to high grade, sound hawkish, not done yet.
Speaker: And then on the Japan lake, I think there were at least end of last year after the surprise change in the policy, people expected more changes in the first quarter, but that didn't come through.
Speaker: So there was an adjustment there as well.
Speaker: So this US-Japan yield differential continues to be very unsupportive for yen.
Speaker: So that's the first reason.
Speaker: The second reason is that, you know, even though there were inflows into equity market from foreign investors, Japanese investors themselves were investing abroad.
Speaker: So there were outflows from them.
Speaker: So these things sort of maybe offset each other.
Speaker: And I think the third thing is something that is related to the first factor, the US-Japan yield differential, is that some of these inflows could very well be FX-hatched.
Speaker: Because if you do this FX-hedging, you actually earn extra from this yield differential.
Speaker: Makes sense.
Speaker: So Joey, what does all this mean for the Japanese yen?
Speaker: Now, currencies often trade on yield differentials.
Speaker: That is the difference in interest rates between two economies.
Speaker: Of course, if a country economy has lower interest rates than its trading partner, that usually is negative for the currency.
Speaker: And even if the Bank of Japan does a bit of a tweak, presumably Japanese interest rates will remain far lower than those in the United States.
Speaker: So
Speaker: Yes, equity markets are coming into Japan, equity investors, but the yield differential, that difference in interest rates, remains quite wide, doesn't it?
Speaker: So what would that mean for the currency?
Speaker: I think expectations around the Fed will be very important.
Speaker: So even though the US-Japan yield differential remains wide, if there are expectations that the Fed is going to ease as its next move, in other words, it's done with its rate hike cycle, and I think the dollar can weaken broadly.
Speaker: And right now, amongst all the currencies in the world, the Japanese yen is probably the most undervalued currency, and it also suffered the most during the rate hike cycle.
Speaker: So it stands to reason that if all this is going to reverse, the Japanese yen should benefit.
Speaker: Joey, what sort of timeframe are we looking at?
Speaker: Would that kind of happening maybe later this year or 2024 when we see that yield, that interest rate differential shrink and maybe the currency move?
Speaker: I'm asking really because that's quite important for us when we look at the equity market.
Speaker: You can understand that if the currency depreciates,
Speaker: That is good for exporters.
Speaker: Exporters tend to rally on the back of that.
Speaker: But if it appreciates, yeah, that's good typically for importers or domestic companies.
Speaker: So we want to make those switches on the back of the movements in the Japanese yen.
Speaker: In terms of timing, I think the next couple of months will be interesting for the Fed because a lot of people are already thinking that they are going to make their last hike in the next couple of months.
Speaker: And then beyond that, when do they turn dovish exactly?
Speaker: It would depend on the data.
Speaker: But some believe that the US CPI data may start to soften in the second half of the year, right?
Speaker: As for the Bank of Japan, I think in terms of survey, a lot of people are now thinking maybe early next year.
Speaker: But, you know, as with all market moves, you tend to sort of preempt or anticipate the actual policy changes.
Speaker: So the changes in the FX market could very well happen before any policy changes.
Speaker: And as we said, the Bank of Japan has a tendency to surprise.
Speaker: So they might even do it earlier just to put the market on a bit of a wrong footing.
Speaker: Yeah, absolutely.
Speaker: Yeah, that's interesting.
Speaker: I think even for Japan, stay tuned for surprises in the coming months.
Speaker: Yes, the equity market is rallying, but we might see policy shifts there.
Speaker: And of course, what matters tremendously is where the yen is trading, not just for Japan, but of course, for regional currencies as well.
Speaker: Thank you so much, Joey, for coming in.
Speaker: And we'll need to bring you back once we see those yen moves unfold.
Speaker: Thank you, Joey.
Speaker: Thank you.
Speaker: So Harold, the yen is still pretty cheap, even though, you know, as we just heard, it might kind of appreciate a little bit.
Speaker: But a cheap yen also means it's pretty affordable to travel there at the moment.
Speaker: Big travel boom.
Speaker: Have you any plans to go to Japan?
Speaker: Yeah, actually, I had a couple of friends who recently went to Japan and told me actually how affordable it is now if you're a US dollar traveler and how that contrasts with the 1990s when Japan was so expensive to go to and
Speaker: For me, I love going around in Japan.
Speaker: It's easy to get around by train, by car.
Speaker: The restaurant you go to is fantastic food.
Speaker: There's a lot of character.
Speaker: I love staying in these ryokans, those old wooden hotels where they have these baths and you've got a long breakfast and dinners included.
Speaker: A lot of character, a beautiful place.
Speaker: The countryside in Japan is absolutely amazing.
Speaker: Beautiful place to be here.
Speaker: What about you?
Speaker: Have you got any good experiences there in Japan?
Speaker: Likewise.
Speaker: It's always a pleasure to travel in Japan.
Speaker: It's so varied also that often people forget you have Hokkaido in the north, where you have, of course, in the winter, a lot of snow, winter sports.
Speaker: But then you also have Okinawa in the south, which is almost tropical, right?
Speaker: So it is quite varied.
Speaker: But one other aspect what we see in Japan is not just an increase in tourism, but also foreigners buying property there because it's one of the few places in the world where really property prices are falling because of the shrinking of population.
Speaker: So we talk about unaffordable property in places like Hong Kong and Singapore and Korea and Australia and so forth.
Speaker: In the Japanese countryside, actually, because of the depopulation, there's actually a lack of demand for property.
Speaker: And so we've seen increasingly foreigners looking to buy in Japan property.
Speaker: That's right.
Speaker: I've even heard stories, I don't know how true this is, that actually for literally a few dollars, I'm talking about a few dollars, you can live there as long as you buy a house there, as long as you live in the villages while you contribute to life there in these villages.
Speaker: It might be harder to get a visa than actually buying the house.
Speaker: That's the other issue.
Speaker: Yes.
Speaker: Just before we wrap up the podcast for this week, we want to let you know that the two of us, Fred and I, will be appearing on HSBC Live Insights on LinkedIn in the next few weeks.
Speaker: We'll be taking your questions on Asian markets and economics or anything else you want to talk about in a particular live broadcast.
Speaker: So subscribe to hashtag HSBC Research on LinkedIn for more information.
Speaker: That's a wrap for this episode, folks.
Speaker: A big thanks as always for joining us on The Banyan Tree.
Speaker: We'll be back again same time next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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