November 19, 2025 • 31 mins
Inflation has returned to Japan after decades of near-zero price growth, with consumer prices rising close to 3% – the fastest since the 1980s. The cost-of-living squeeze, driven by food prices, helped topple the previous administration and propel Sanae Takaichi to power as Japan's first female prime minister. Her pro-growth, big government stance promises fiscal stimulus, but risks complicating the Bank of Japan's efforts to contain sticky inflation.
Taro Kimura, Japan senior economist at Bloomberg Economics and Bank of Japan veteran, joins John on the Asia Centric podcast. He explains why inflation may be higher for longer and what Takaichi's policies mean for BOJ independence. He also covers the prime minister's remarks on Taiwan that sparked tension with Beijing, adding a geopolitical layer to Japan's economic challenges.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Inflation is back in Japan after two decades of almost
zero inflation. Consumer prices are now firmly above two percent
and above the Bank of Japan's target rate. But this
is causing significant political and economic ramifications. Rising cost of
living and higher food prices was a major reason that
led to the demise of the previous administration and the
(00:22):
election of Snay Takeichi, Japan's first female prime minister. How
will her pro growth fiscal stimulus policies impact growth and inflation?
Will this conflict with the goals of the Bank of
Japan And what about the outlook for the Japanese yen.
Some argue that the currency is starting to lose its
safe haven status. You're listening to Asia Centric from Bloomberg Intelligence.
(00:46):
I'm John Lee in Hong Kong. Today we have a
regular of the show, Taro Kimura, the Japan economist for
Bloomberg Economics. He joins us from Tokyo. Taro, welcome back
to the show.
Speaker 2 (00:57):
Thank you for having me a year.
Speaker 1 (01:00):
Why is inflation becoming a big issue in Japan.
Speaker 2 (01:05):
It's important to understand the fact that Japan is finally
facing inflation after its so called lost decays. So basically
people hasn't experienced inflation for many years. There are several
ups and downs of the inflation, but it's always around zero.
But now we once have four percent inflation, fastest since
(01:26):
the ninety eighties. It's tempered a little bit due to
cheaper oil prices or several other factors, but it's persistent
still around three percent, and which is above back of
Japan's two percent target for more than three years. So therefore,
people weren't sort of prepared to have sticky inflation, and
(01:47):
that's causing a lot of social stress such as household
coast of living crunch, as well as your deposit money
is losing value because of the inflation.
Speaker 1 (01:57):
And you know, Japanese authorities try for many years to
restart growth and also make sure that inflation is returning
back to Japan. What are the factors that's driving inflation
in Japan right?
Speaker 2 (02:12):
I think initially it happened back in twenty twenty two
with the sudden oil price surges triggered by Russia Ukraine War,
and that price search was so high that the Japanese
corporates couldn't deal with its traditional way, which is reduce
(02:32):
the cost as much as possible. And not to pass
it through to their product prices. So after that, the
Japanese corporates couldn't help but raise product prices. That broke
the sort of the taboo for Japanese corporates to raise prices.
Now they are able to lift their product prices strategically.
(02:54):
And what's also important is Japan is also finally facing
a nominal waste Japan's waste growth has also been frozen
for decades. It's also near zero, so Japan was sort
of in a social norm that you know, we won't
have inflation, but also we won't have income growth. However,
(03:16):
Japan is facing an aging population and given the first
searche of inflation triggered by the Rossia Ukraine War, is
actually comes to household as incompressure, really incompressure. So therefore
the labor union has requested higher wages. So now the
corporates also deal with higher labor costs. So I think
(03:37):
that's important part of current Japan sort of sticky inflation
around three percent because the social norm has shifted in
a way that we don't have wage growth and inflation too.
We have some inflation and some wage growth, but since
the cost of living squeeze. Initial wave of the inflation
(03:58):
after the Roasia Ugray war was too high. I think
wags also spiked and therefore the corporates are also spooked
by some increases of labor costs, and that's another reason
why corporates are aggressively raising prices. And finally, I like
to emphasize the power of inflation expectations. So theoretically inflation
(04:20):
is decided not just purely by demand and supply, but
also inflation expectation, which is a future projection of households
of corporations about inflation. Why this matter is inflation has
a feature of self reinforcing. For example, that many of
the hyperinflation stories and emerging markets are triggered by higher
(04:43):
inflation expectations and its cycles gets unstoppable. Japan isn't in
that stage. But actually, after many Japanese corporates and households
recognized we ended the era of zero inflation and zero
wasge growth, they lifted inflation expectation and they aren't spooked
by watching the prices are lifted. Therefore, the corporates are
(05:07):
now doing some strategic price tagging to retain more profits,
and that kind of factors raising inflation expectations are bolstering
broad based inflation too.
Speaker 1 (05:19):
So with rising inflation expectations, do you think that the
inflation recently Japan will be more sticky going forward?
Speaker 2 (05:29):
Exactly? For example, if you look at the services prices
very closely, the rents started to increase gradually, and rents
in Japan has long been in deflation or only in
a very modest inflation, because generally speaking, Japan has no inflation,
and if you live in the residence, the service you
(05:50):
get from the residents will deteriorate every year because your
resident's going to get old gradually as the time goes.
We now having a rents infla which shares about twenty
percent of whole CPI basket, reflects the fact that the
inflation expectations are picking up and the landlords can persuade
(06:12):
the residents that since we are facing inflation, we need
to lift rents now. And those movements are happening everywhere.
For example, the public transportation fees, public service fees like
the physical mailing of your letters or whatever, which has
been frozen for many years. This is just a tip
of the icebergs. So still there are many items prices
(06:35):
hasn't been lifted for many years, but because inflation expectations
are entrenched, there are now gradually raising. I think those
factors are probably overlooked by probably many investors or economists,
and that will bolster the inflation going forward. So I
don't think it's not easy for Japan's inflation to temper
(06:57):
towards two percent target.
Speaker 1 (07:00):
And what world did inflation play in the recent elections
in Japan.
Speaker 2 (07:06):
It's not just about Japan, but inflation is very, very
politically costly for the administration, and I explained the wages
are growing, but inflation is faster than the wage growths.
And also in Japan it's an aging society, so there
are many pensioners. And for pensioners, Japan has a sort
(07:29):
of unique system that their pension income doesn't grow as
much as inflation. This system is introduced in the two
thousands by the government to secure the fiscal balance of
the pension system. So for many households, the inflation is irksome,
and it's important that those inflations are mostly lifted by
(07:51):
food prices. For example, the rise prices fresh food prices
as well as a processed food. So more than two
thirds of current which is around three percent. The contribution
is by food prices, so those are workstams for not
just for low income households as well as medium households.
So that brought a very serious consequence for a Shigeiri
(08:14):
Issuba's administration, and that's one of the factors that she
needed to face a setback in two general elections last
year and this year.
Speaker 1 (08:23):
Asia Centric is produced by Bloomberg Intelligence. We're more than
five hundred experienced analysts and strategists work around the clock
to bring you timely, world class research. Our coverage spans
two hundred market industries, currencies, commodities, and industries, as well
as over two thousand equities and credits. To learn more
about Bloomberg Intelligence, visit bi go on the Bloomberg terminal.
(08:46):
If you like what you hear, don't forget to subscribe
and share. Okay, So we have the new Prime Minister.
Now we know that her idol is Margaret Thatcher, so
some have caught her like the Iron Lady of Japan.
She's also known as a pro of the late Shinzo Abby.
What type of policies can we expect from her going forward?
Speaker 2 (09:07):
Right? I always tell my client's caution about calling her
Toucher type politician because probably her posture is similar the
gender is the same, but Takaichi's economic policy stance is
totally different from Thatcher. Thatcher is famous for reducing the
(09:30):
government intervention and leave the business as much as to
private field. I read Takaichi is sort of the opposite
in a way that she calls for fiscal investment towards
growth area and strategic area. So in terms of the
economic policy, she's clear that she calls for more intervention
(09:54):
by the government to foster long term growth. So I
recognize her as sort of a big government type when
it comes to her economic policy stance, and I think
in a diplomacy she's very hawkish because she succeeds the
political base from late Shinzo Abbe, and at least she
(10:17):
needs to posture her as a hawkish lawmaker in order
to sustain her political base. Remember her win in the
Liberal Democratic Party's leadership election this year and subsequently becoming
a prime minister was surprised because many investors or many
markets expected the Koizumi would have higher chances of winning
(10:40):
and becoming a prime minister. That means the support from
lawmakers for Takaichi isn't very strong, brother, I call it
very woply. And she was able to win because the
LDP members, which aren't lawmakers but the rights to have
a vote for LDP leadership election, was actually suffering from
(11:03):
a current inflation and her call for more physical stimulus
resonated with the ILEDP members on the street, which means,
I guess for general voters too, the inflation is irksome.
That's her political base. She has a very high pall. However,
it's important to recognize she doesn't have a solid political base.
(11:25):
So therefore, at least in order to sustain her rigid
political base, she needs to post her hok ish and
she's actually taking a balance after becoming a Prime minister.
But recently her remarks in the parliament about Taiwan is
triggering as spats between Beijing and Tokyo. In a nutshell,
(11:45):
she's a big government person, big government oriented lawmaker in
an economic policy and right leaning politician in terms of
the diplomacy.
Speaker 1 (11:55):
Yes, so can you go into that a bit more
like she did make big headlines, but she said that
a conflict over Taiwan would be an existential risk for Japan,
and this was insinuating that Japan could become involved, which
clearly anchored Beijing. Why do you think she said these statements.
Speaker 2 (12:16):
She probably should have been a bit more cautious in
saying that, and it was a remark in a diet
on November seventh, But after that she herself seems to
regret making those specific comments on Taiwan related issue as
Prime minister. So what she said is the issues around Taiwan.
If Beijing uses armed forces, it could be a self
(12:40):
threatening situation for Japan, which provides a legal justification for
Japan's self defense military to be involved. But to be
fair with her, the remarks came in response to a
question from the opposite party about what she had said
on Taiwan during the last years dep leadership race where
(13:02):
she lost against Ishiba, and as Prime minister, I agree
that it was a kind of question she should have sidestepped,
but she ended up answering more directly than she could have.
And to be clear, I was watching the parliamentary debate
and what she meant wasn't that Japan's self defense forces
would automatically intervene if China uses military force. She actually
(13:25):
said it would depend on the situation. And alongside the conversation,
she raised one hypothetical, which was a situation where Japan
could be drawn into a conflict alongside the US if
America came to defend Taiwan. So I think she herself
thought her comments were balanced, although I think she should
have been more cautious. But what I want to say
(13:47):
is her remark shouldn't be read as she's deliberately hardening
her stance towards China and.
Speaker 1 (13:54):
Regarding her economic policies. So she's pro growth, she supports
fiscal stimus. Some call her like a proponent of arbonomics.
So this could lead to more inflationary pressure. Would this
complicate the aims of the Bank of Japan.
Speaker 2 (14:12):
Many investors are worried that stimulating the economy amid inflation
is risky. I think her policy is in the right
direction in terms of the long term growth because after
the LDP made a new coalition with Japan's Innovation Party
(14:33):
called ishing in Japanese. I think it's a good coalition
because Ishan agrees on fiscal stimulus only if that contributes
to Japan's strategic sector's growth or Japan's long term growth.
So That means I think Takaiji's pro stimulus stance will
meet not with more calls for cash handouts or broader stimulus,
(14:56):
but rather it's going to be more targeted towards strategy
acceptors such as AI chips, shipbuildings. She lays out seventeen fields.
I think it matches the geopolitical reality we are facing,
and I agree that Japan probably needs more government intervention
to foster domestic supply chains. What I am more concerned
(15:19):
about is her intervention to the Bank of Japan's monetary
policy stats. I think she herself has turned down about
her remarks on the BOJ policy. For example, last year,
she once mentioned the Bank of Japan's rate hikes are stupid,
but I think after she realistically needs to be a
(15:42):
prime minister. I think she thought that kind of remarks
of courtious, and she herself refrained from job bonning on
the boj's monetary policy. That said, her appointment on personnel
on the key councils regarding a common policy is clearly
(16:02):
comeback of Abinomics reflationists. And even if she herself doesn't
speak loudly about the Bank of Japan, I think her
political posture will be regarded by the market that she's
actually interfering the Bank of Japan's independence in a wrong time.
When the inflation is above boj's price target for more
(16:25):
than three years. So that's going to be inflationary, not
just because the yen is said to be weakened further,
but as well as the expectation that the Bank of
Japan couldn't handle with inflation properly because of the political pressure.
That will also rise the inflation expectations that I flagged
(16:45):
as important factor earlier.
Speaker 1 (16:47):
Okay, it was. The independence of central banks has been
a key topic this year, especially with President Trump in
the US, you know, criticizing the FED for not cutting
rates quick enough. In Japan, you'll see testing that, you know,
the current Prime minister could pressure the Bank of Japan
to not raise interest rates given the inflationary pressure.
Speaker 2 (17:08):
Right. Important thing to understand is even before the emergence
of Takaichi, the Bank of Japan had already turned davish.
Probably many audiences here had an impression that the Bank
of Japan aggressively normalizing policy rates last year, but as
many of you know, last July's Bank of Japan's great
(17:31):
hike was followed by a global market shot, triggering an
unwinding of the so called Yang carry traits, and since then,
to my eye, the Bank of Japan became clearly dovish
and cautious, although they haven't given up normalizing its policy,
because that episode was a clear reminder for the Bank
(17:54):
of Japan that it's not working in isolation and still
it has an influence towards global market. So after July's
rate hike last year, the Bank of Japan shifted towards
a stance which emphasizes more uncertainties around global market US
(18:15):
trade policies as well as Tamaya is they're also concerned
with the domestic policies because even with former Prime Minister Ishiba,
he was relatively for the Bank of Japan's normalization. For
his one year tenure, the Bank of Japan delivered only
one twenty five basis rat hike. So what I want
(18:37):
to say is the Takaichi is kicking the boj when
it's already down. They're already dubbish and market recognized it,
and Takaich and her team is pressuring further. So that's
I think too much of interference, and that's triggering the
current weakening of the end.
Speaker 1 (18:56):
And we should also remind the audience that Tara, before
you joined the Bloomberg Economics you were actually working for
the Bank of Japan. But yeah, what's your rate forecast
going forward? How many times will the Bank of Japan
raise interest rates?
Speaker 2 (19:10):
Right? So, although Tadaichi is basically broadly speaking against the
Bank of Japan's policy normalization, the reality is it has
been almost a year since the Bank of Japan lastly
hiked rate, so she recognizes current weakness of d en
is inflationary and could be politically costly for her administration.
(19:34):
So therefore there is some signal from her team that
the Bank of Japan's additional rate hike, either in December
or January is sort of acceptable in order to stem
the slide in the end, and I expect the Bank
of Japan will pull the trigger in December and lift
raised to zero point seventy five percent, But I expect
(19:57):
when can BOJ increase rate further is very uncertain because
of the political pressure. Zero point seventy five percent is
sort of a realistic balance for the BOJA in politics,
because the Bank of Japan communicates as its lowest estimate
of neutral rate is one percent and zero point seventy
(20:18):
five percent. The Bank of Japan can explain to the
government that we are still stimulating the economy. But I
don't think the political side will easily allow the Bank
of Japan to proceed with next rate hike, which will
lead to its lowest estimate of the neutral rates. So
probably it's going to take some time. My baseline scenario
(20:41):
is the July next year, but the risk is more
towards the delayed side, and probably it will take a
year if the political pressure is so high. But if
the Bank of Japan continues to be cautious on its
rate hikes, I think begin's going to gradually keep weakening,
and also the asset price is gonna be fueled. But
(21:03):
at the same time, households were keept suffering from cost
of living squeeze, which isn't good for consumption.
Speaker 1 (21:11):
Okay, So with this current monetary policy, this is a
big tail wind for Japanese risk assets like equities as
well as property, right right. You just also mentioned the currency. Now,
the Japanese yen has been very weak against all the
major currencies around the world. Some people are saying, and
(21:33):
I think you've also mentioned that it's starting to lose
its safe haven status. Can you explain, right?
Speaker 2 (21:41):
I come to dig deeper into this topic of d
EN's safe havenness because although there are many geopolitical incidences
all around the world, the end is kept wakening and
the number two, the end is not just weak against
a dollar, but also it's getting weakest against the Swiss frank,
(22:03):
which is another synonym of safe haven currency. So that
leads me to think why the ends safe heavenness is diluting.
And actually, if we look at the association with vix,
the indicator for a risk of sentiments, and how the
yen is bought, the association is getting less career. Now
think about why in the first place, the Japanese yen
(22:25):
is recognized as a safe haven currency. Safe heaven currency
isn't because Japan's economy is safe haven, but as a
result of trading, the yen tends to be bolt when
a risk of event happens. And why is that? The
logic here is markets will think in an emergency situational
(22:46):
risk of movement. The Japanese corporates as a global investor,
they operate all around the world, and they invest in
all around the world in a risk of moment, the
markets will think those Japanese cope will repatriate those assets
and selling them and repatriate them into the end, and
(23:07):
that kind of speculation works to strengthen the end in
the past periods when the risk of event happens. And
I think the opposite is probably happening right now because
after the long term economic downtrem Japanese corporates has reduced
its leverages and their balance sheets are very very healthy
(23:30):
right now, and thanks to a prolonged weekend after ebonomics
until today, their profitability is getting stronger. So therefore, with
solid balance sheet and profitability, we can't really imagine when
some risk of event happens in let's say Middle East
or the other parts of the world. It's really hard
(23:52):
for markets to imagine the Japanese corporates to repatriate because
they're healthy enough and they are resilient enough. It was
a famous Japanese book written by famous x JP Morian
chief strategist torus Asaki. The book's name is the Week
Japan's Strong Yen. But I think the opposite is happening.
Japan has a strong corporate side and therefore they don't repatriate,
(24:16):
so therefore we have the week er yen, so we
can call it strong Japan's week yen. I was skeptical
at the start of the year that this weeknes is
going to be kept for a long time, but I
think with these structural factors, it's getting harder for the
yen to get strengthened like few years back level because
(24:39):
Japanese corporates will continue to invest uproad and won't repatriate.
Speaker 1 (24:45):
And for Japanese corporates, is a weekend still positive or
negative for them?
Speaker 2 (24:52):
I think it depends on who you are. If you
are big corporates who has many let's say factories abroad,
or who are big exporters weak and absolutely is a
tailwid And given those big corporates have enough share in
Japan's economy itself, I would say the weekiand itself in
(25:12):
a big picture is a plus for the economy for
the growth. That said, the weaker end is painful for
SMEs as well as households because the Japanese business operates
as the SMEs import something and create a part, and
the large corporates procure parts from SMEs and export them.
(25:34):
So of course the SMEs can negotiate with the margin,
but it's really hard for them to negotiate a full
pass through of higher import costs as well as household
Japan is a large importer of food and also energy. Therefore,
weaker m means you know, the daily dining as well
as electricity gas prices, all the energy costs will increase. Therefore,
(25:58):
I think in general the week or en hampers household consumption,
so in a net modestly positive, but the serious pains
will hit on SMEs and households and taro.
Speaker 1 (26:12):
You're in Japan, when you meet your friends, your colleagues,
you know you have a week yen, you have inflation
coming up. What are people doing with their money? What
are they doing with their savings? This perception that a
lot of Japanese people have their funds in a bank deposit.
Are people starting to move that money into more riskier assets.
Speaker 2 (26:33):
Yeah. On the ground, I seriously feel a momentum for
Japanese people to shift its asset from bank deposits to
risk assets including equities and properties. Let's say, for many
generations of people living in Japan, they haven't really experienced
(26:54):
the Japanese equity picking up continuously. I mean, it's only
started after our ponomics, and before that, Japanese equities are
something that just declines, and I think still that image
continues and Japanese households are still not confident that the
Japanese equity is going to pick up continuously, and therefore
(27:16):
they tend to be invested in foreign equities, particularly the
SMP five hundred. I think that's also a factor that
the end is at that week level for many years,
the households shift their asset from the end to the
US equities. And also property prices are I think picking
up faster under the current BOJ governor Uda, although he
(27:39):
is normalizing compared with his predecessor Hrehiko Kruda, who had
delivered Batzuka manitally easing in terms of the real interest rate.
Because inflation is picking up and the Bank of Japanese
lifting rates only modestly, the real eels are very negative
and therefore it incentivizes still purchasing properties. Therefore, the dubvish
(28:03):
BOJ with sticky inflation, it will keep being a tailwind
for property prices, and I think the property price could
continue to pick up in the near term. That said,
the Bank of Japan is alert in its Financial System
report pubulished in October that the yield from investing in
Japanese properties are slowing down despite the slower rises in
(28:28):
rents and higher acquisition costs and properties. So the Bank
of Japan is sort of starting to step in to
say the risks of price correction in property prices. That's
a risk if you're thinking about investing in Japan's properties,
probably the prices are too high and there's the correction risks.
Speaker 1 (28:47):
Okay, great, Taro. I've asked all the questions that I
wanted to ask. Is there anything else that you think
I missed out or you wanted to discuss.
Speaker 2 (28:56):
I think many things are happening in Japan, and if
you need to watch Japan closely for whatever reason, I
think it's really hard to decide for what's going on.
And my advice is take a bigger picture. And it's
in a sort of recovery process for the first time
since thirty years after an asset price bubble, which is
(29:16):
a sort of a very rigid positive momentum. But at
the same time, in the near term, what Japan is
struggling is we aren't very prepared to have a sticky inflation,
and that's what's struggling right now. So in the near term,
the topic is whether or not the Japanese economy could
overcome a cost of living squeeze, because it's going to
(29:37):
be costly not only for households but also for the
new Takaichi administration. If inflation persists, I think her administration
could be short lived. And she's trying to temper inflation
in many ways like cutting the gasoline texts or whatever.
I think she needs to proceed with it quickly and nimbly.
But if that inflation jolt is solved, I think I'm
(29:58):
optimistic about Japan's long term growth because the strengthening the
domestic supply chain by fiscal investment is I think, as
I explained earlier, it's a good direction that Japan has
missed for many years because Japanese government was haunted for
the government intervention on private businesses aren't good thing. They
(30:19):
used to be still in such a legal world of
smaller government, but the Takaig's appearance could change the landscape
of fiscal policy in a better way. And also inflation
is by the way, helping the government because inflation is
good for betters the problem is inflation, but in the
long term, I'm sort of optimistic about Japan's growth.
Speaker 1 (30:41):
Okay, Taro, thanks for coming on the show.
Speaker 2 (30:44):
Thank you very much.
Speaker 1 (30:45):
You've been listening to the Asia Centric podcast from Bloomberg Intelligence.
I'm John Lee in Hong Kong. You can listen to
all our episodes on Apple Podcasts, Spotify, or wherever you listen.
And this episode was produced and edited by Clara Chen.
Thanks for joining me.
Inflation is back in Japan after two decades of almost
zero inflation. Consumer prices are now firmly above two percent
and above the Bank of Japan's target rate. But this
is causing significant political and economic ramifications. Rising cost of
living and higher food prices was a major reason that
led to the demise of the previous administration and the
(00:22):
election of Snay Takeichi, Japan's first female prime minister. How
will her pro growth fiscal stimulus policies impact growth and inflation?
Will this conflict with the goals of the Bank of
Japan And what about the outlook for the Japanese yen.
Some argue that the currency is starting to lose its
safe haven status. You're listening to Asia Centric from Bloomberg Intelligence.
(00:46):
I'm John Lee in Hong Kong. Today we have a
regular of the show, Taro Kimura, the Japan economist for
Bloomberg Economics. He joins us from Tokyo. Taro, welcome back
to the show.
Speaker 2 (00:57):
Thank you for having me a year.
Speaker 1 (01:00):
Why is inflation becoming a big issue in Japan.
Speaker 2 (01:05):
It's important to understand the fact that Japan is finally
facing inflation after its so called lost decays. So basically
people hasn't experienced inflation for many years. There are several
ups and downs of the inflation, but it's always around zero.
But now we once have four percent inflation, fastest since
(01:26):
the ninety eighties. It's tempered a little bit due to
cheaper oil prices or several other factors, but it's persistent
still around three percent, and which is above back of
Japan's two percent target for more than three years. So therefore,
people weren't sort of prepared to have sticky inflation, and
(01:47):
that's causing a lot of social stress such as household
coast of living crunch, as well as your deposit money
is losing value because of the inflation.
Speaker 1 (01:57):
And you know, Japanese authorities try for many years to
restart growth and also make sure that inflation is returning
back to Japan. What are the factors that's driving inflation
in Japan right?
Speaker 2 (02:12):
I think initially it happened back in twenty twenty two
with the sudden oil price surges triggered by Russia Ukraine War,
and that price search was so high that the Japanese
corporates couldn't deal with its traditional way, which is reduce
(02:32):
the cost as much as possible. And not to pass
it through to their product prices. So after that, the
Japanese corporates couldn't help but raise product prices. That broke
the sort of the taboo for Japanese corporates to raise prices.
Now they are able to lift their product prices strategically.
(02:54):
And what's also important is Japan is also finally facing
a nominal waste Japan's waste growth has also been frozen
for decades. It's also near zero, so Japan was sort
of in a social norm that you know, we won't
have inflation, but also we won't have income growth. However,
(03:16):
Japan is facing an aging population and given the first
searche of inflation triggered by the Rossia Ukraine War, is
actually comes to household as incompressure, really incompressure. So therefore
the labor union has requested higher wages. So now the
corporates also deal with higher labor costs. So I think
(03:37):
that's important part of current Japan sort of sticky inflation
around three percent because the social norm has shifted in
a way that we don't have wage growth and inflation too.
We have some inflation and some wage growth, but since
the cost of living squeeze. Initial wave of the inflation
(03:58):
after the Roasia Ugray war was too high. I think
wags also spiked and therefore the corporates are also spooked
by some increases of labor costs, and that's another reason
why corporates are aggressively raising prices. And finally, I like
to emphasize the power of inflation expectations. So theoretically inflation
(04:20):
is decided not just purely by demand and supply, but
also inflation expectation, which is a future projection of households
of corporations about inflation. Why this matter is inflation has
a feature of self reinforcing. For example, that many of
the hyperinflation stories and emerging markets are triggered by higher
(04:43):
inflation expectations and its cycles gets unstoppable. Japan isn't in
that stage. But actually, after many Japanese corporates and households
recognized we ended the era of zero inflation and zero
wasge growth, they lifted inflation expectation and they aren't spooked
by watching the prices are lifted. Therefore, the corporates are
(05:07):
now doing some strategic price tagging to retain more profits,
and that kind of factors raising inflation expectations are bolstering
broad based inflation too.
Speaker 1 (05:19):
So with rising inflation expectations, do you think that the
inflation recently Japan will be more sticky going forward?
Speaker 2 (05:29):
Exactly? For example, if you look at the services prices
very closely, the rents started to increase gradually, and rents
in Japan has long been in deflation or only in
a very modest inflation, because generally speaking, Japan has no inflation,
and if you live in the residence, the service you
(05:50):
get from the residents will deteriorate every year because your
resident's going to get old gradually as the time goes.
We now having a rents infla which shares about twenty
percent of whole CPI basket, reflects the fact that the
inflation expectations are picking up and the landlords can persuade
(06:12):
the residents that since we are facing inflation, we need
to lift rents now. And those movements are happening everywhere.
For example, the public transportation fees, public service fees like
the physical mailing of your letters or whatever, which has
been frozen for many years. This is just a tip
of the icebergs. So still there are many items prices
(06:35):
hasn't been lifted for many years, but because inflation expectations
are entrenched, there are now gradually raising. I think those
factors are probably overlooked by probably many investors or economists,
and that will bolster the inflation going forward. So I
don't think it's not easy for Japan's inflation to temper
(06:57):
towards two percent target.
Speaker 1 (07:00):
And what world did inflation play in the recent elections
in Japan.
Speaker 2 (07:06):
It's not just about Japan, but inflation is very, very
politically costly for the administration, and I explained the wages
are growing, but inflation is faster than the wage growths.
And also in Japan it's an aging society, so there
are many pensioners. And for pensioners, Japan has a sort
(07:29):
of unique system that their pension income doesn't grow as
much as inflation. This system is introduced in the two
thousands by the government to secure the fiscal balance of
the pension system. So for many households, the inflation is irksome,
and it's important that those inflations are mostly lifted by
(07:51):
food prices. For example, the rise prices fresh food prices
as well as a processed food. So more than two
thirds of current which is around three percent. The contribution
is by food prices, so those are workstams for not
just for low income households as well as medium households.
So that brought a very serious consequence for a Shigeiri
(08:14):
Issuba's administration, and that's one of the factors that she
needed to face a setback in two general elections last
year and this year.
Speaker 1 (08:23):
Asia Centric is produced by Bloomberg Intelligence. We're more than
five hundred experienced analysts and strategists work around the clock
to bring you timely, world class research. Our coverage spans
two hundred market industries, currencies, commodities, and industries, as well
as over two thousand equities and credits. To learn more
about Bloomberg Intelligence, visit bi go on the Bloomberg terminal.
(08:46):
If you like what you hear, don't forget to subscribe
and share. Okay, So we have the new Prime Minister.
Now we know that her idol is Margaret Thatcher, so
some have caught her like the Iron Lady of Japan.
She's also known as a pro of the late Shinzo Abby.
What type of policies can we expect from her going forward?
Speaker 2 (09:07):
Right? I always tell my client's caution about calling her
Toucher type politician because probably her posture is similar the
gender is the same, but Takaichi's economic policy stance is
totally different from Thatcher. Thatcher is famous for reducing the
(09:30):
government intervention and leave the business as much as to
private field. I read Takaichi is sort of the opposite
in a way that she calls for fiscal investment towards
growth area and strategic area. So in terms of the
economic policy, she's clear that she calls for more intervention
(09:54):
by the government to foster long term growth. So I
recognize her as sort of a big government type when
it comes to her economic policy stance, and I think
in a diplomacy she's very hawkish because she succeeds the
political base from late Shinzo Abbe, and at least she
(10:17):
needs to posture her as a hawkish lawmaker in order
to sustain her political base. Remember her win in the
Liberal Democratic Party's leadership election this year and subsequently becoming
a prime minister was surprised because many investors or many
markets expected the Koizumi would have higher chances of winning
(10:40):
and becoming a prime minister. That means the support from
lawmakers for Takaichi isn't very strong, brother, I call it
very woply. And she was able to win because the
LDP members, which aren't lawmakers but the rights to have
a vote for LDP leadership election, was actually suffering from
(11:03):
a current inflation and her call for more physical stimulus
resonated with the ILEDP members on the street, which means,
I guess for general voters too, the inflation is irksome.
That's her political base. She has a very high pall. However,
it's important to recognize she doesn't have a solid political base.
(11:25):
So therefore, at least in order to sustain her rigid
political base, she needs to post her hok ish and
she's actually taking a balance after becoming a Prime minister.
But recently her remarks in the parliament about Taiwan is
triggering as spats between Beijing and Tokyo. In a nutshell,
(11:45):
she's a big government person, big government oriented lawmaker in
an economic policy and right leaning politician in terms of
the diplomacy.
Speaker 1 (11:55):
Yes, so can you go into that a bit more
like she did make big headlines, but she said that
a conflict over Taiwan would be an existential risk for Japan,
and this was insinuating that Japan could become involved, which
clearly anchored Beijing. Why do you think she said these statements.
Speaker 2 (12:16):
She probably should have been a bit more cautious in
saying that, and it was a remark in a diet
on November seventh, But after that she herself seems to
regret making those specific comments on Taiwan related issue as
Prime minister. So what she said is the issues around Taiwan.
If Beijing uses armed forces, it could be a self
(12:40):
threatening situation for Japan, which provides a legal justification for
Japan's self defense military to be involved. But to be
fair with her, the remarks came in response to a
question from the opposite party about what she had said
on Taiwan during the last years dep leadership race where
(13:02):
she lost against Ishiba, and as Prime minister, I agree
that it was a kind of question she should have sidestepped,
but she ended up answering more directly than she could have.
And to be clear, I was watching the parliamentary debate
and what she meant wasn't that Japan's self defense forces
would automatically intervene if China uses military force. She actually
(13:25):
said it would depend on the situation. And alongside the conversation,
she raised one hypothetical, which was a situation where Japan
could be drawn into a conflict alongside the US if
America came to defend Taiwan. So I think she herself
thought her comments were balanced, although I think she should
have been more cautious. But what I want to say
(13:47):
is her remark shouldn't be read as she's deliberately hardening
her stance towards China and.
Speaker 1 (13:54):
Regarding her economic policies. So she's pro growth, she supports
fiscal stimus. Some call her like a proponent of arbonomics.
So this could lead to more inflationary pressure. Would this
complicate the aims of the Bank of Japan.
Speaker 2 (14:12):
Many investors are worried that stimulating the economy amid inflation
is risky. I think her policy is in the right
direction in terms of the long term growth because after
the LDP made a new coalition with Japan's Innovation Party
(14:33):
called ishing in Japanese. I think it's a good coalition
because Ishan agrees on fiscal stimulus only if that contributes
to Japan's strategic sector's growth or Japan's long term growth.
So That means I think Takaiji's pro stimulus stance will
meet not with more calls for cash handouts or broader stimulus,
(14:56):
but rather it's going to be more targeted towards strategy
acceptors such as AI chips, shipbuildings. She lays out seventeen fields.
I think it matches the geopolitical reality we are facing,
and I agree that Japan probably needs more government intervention
to foster domestic supply chains. What I am more concerned
(15:19):
about is her intervention to the Bank of Japan's monetary
policy stats. I think she herself has turned down about
her remarks on the BOJ policy. For example, last year,
she once mentioned the Bank of Japan's rate hikes are stupid,
but I think after she realistically needs to be a
(15:42):
prime minister. I think she thought that kind of remarks
of courtious, and she herself refrained from job bonning on
the boj's monetary policy. That said, her appointment on personnel
on the key councils regarding a common policy is clearly
(16:02):
comeback of Abinomics reflationists. And even if she herself doesn't
speak loudly about the Bank of Japan, I think her
political posture will be regarded by the market that she's
actually interfering the Bank of Japan's independence in a wrong time.
When the inflation is above boj's price target for more
(16:25):
than three years. So that's going to be inflationary, not
just because the yen is said to be weakened further,
but as well as the expectation that the Bank of
Japan couldn't handle with inflation properly because of the political pressure.
That will also rise the inflation expectations that I flagged
(16:45):
as important factor earlier.
Speaker 1 (16:47):
Okay, it was. The independence of central banks has been
a key topic this year, especially with President Trump in
the US, you know, criticizing the FED for not cutting
rates quick enough. In Japan, you'll see testing that, you know,
the current Prime minister could pressure the Bank of Japan
to not raise interest rates given the inflationary pressure.
Speaker 2 (17:08):
Right. Important thing to understand is even before the emergence
of Takaichi, the Bank of Japan had already turned davish.
Probably many audiences here had an impression that the Bank
of Japan aggressively normalizing policy rates last year, but as
many of you know, last July's Bank of Japan's great
(17:31):
hike was followed by a global market shot, triggering an
unwinding of the so called Yang carry traits, and since then,
to my eye, the Bank of Japan became clearly dovish
and cautious, although they haven't given up normalizing its policy,
because that episode was a clear reminder for the Bank
(17:54):
of Japan that it's not working in isolation and still
it has an influence towards global market. So after July's
rate hike last year, the Bank of Japan shifted towards
a stance which emphasizes more uncertainties around global market US
(18:15):
trade policies as well as Tamaya is they're also concerned
with the domestic policies because even with former Prime Minister Ishiba,
he was relatively for the Bank of Japan's normalization. For
his one year tenure, the Bank of Japan delivered only
one twenty five basis rat hike. So what I want
(18:37):
to say is the Takaichi is kicking the boj when
it's already down. They're already dubbish and market recognized it,
and Takaich and her team is pressuring further. So that's
I think too much of interference, and that's triggering the
current weakening of the end.
Speaker 1 (18:56):
And we should also remind the audience that Tara, before
you joined the Bloomberg Economics you were actually working for
the Bank of Japan. But yeah, what's your rate forecast
going forward? How many times will the Bank of Japan
raise interest rates?
Speaker 2 (19:10):
Right? So, although Tadaichi is basically broadly speaking against the
Bank of Japan's policy normalization, the reality is it has
been almost a year since the Bank of Japan lastly
hiked rate, so she recognizes current weakness of d en
is inflationary and could be politically costly for her administration.
(19:34):
So therefore there is some signal from her team that
the Bank of Japan's additional rate hike, either in December
or January is sort of acceptable in order to stem
the slide in the end, and I expect the Bank
of Japan will pull the trigger in December and lift
raised to zero point seventy five percent, But I expect
(19:57):
when can BOJ increase rate further is very uncertain because
of the political pressure. Zero point seventy five percent is
sort of a realistic balance for the BOJA in politics,
because the Bank of Japan communicates as its lowest estimate
of neutral rate is one percent and zero point seventy
(20:18):
five percent. The Bank of Japan can explain to the
government that we are still stimulating the economy. But I
don't think the political side will easily allow the Bank
of Japan to proceed with next rate hike, which will
lead to its lowest estimate of the neutral rates. So
probably it's going to take some time. My baseline scenario
(20:41):
is the July next year, but the risk is more
towards the delayed side, and probably it will take a
year if the political pressure is so high. But if
the Bank of Japan continues to be cautious on its
rate hikes, I think begin's going to gradually keep weakening,
and also the asset price is gonna be fueled. But
(21:03):
at the same time, households were keept suffering from cost
of living squeeze, which isn't good for consumption.
Speaker 1 (21:11):
Okay, So with this current monetary policy, this is a
big tail wind for Japanese risk assets like equities as
well as property, right right. You just also mentioned the currency. Now,
the Japanese yen has been very weak against all the
major currencies around the world. Some people are saying, and
(21:33):
I think you've also mentioned that it's starting to lose
its safe haven status. Can you explain, right?
Speaker 2 (21:41):
I come to dig deeper into this topic of d
EN's safe havenness because although there are many geopolitical incidences
all around the world, the end is kept wakening and
the number two, the end is not just weak against
a dollar, but also it's getting weakest against the Swiss frank,
(22:03):
which is another synonym of safe haven currency. So that
leads me to think why the ends safe heavenness is diluting.
And actually, if we look at the association with vix,
the indicator for a risk of sentiments, and how the
yen is bought, the association is getting less career. Now
think about why in the first place, the Japanese yen
(22:25):
is recognized as a safe haven currency. Safe heaven currency
isn't because Japan's economy is safe haven, but as a
result of trading, the yen tends to be bolt when
a risk of event happens. And why is that? The
logic here is markets will think in an emergency situational
(22:46):
risk of movement. The Japanese corporates as a global investor,
they operate all around the world, and they invest in
all around the world in a risk of moment, the
markets will think those Japanese cope will repatriate those assets
and selling them and repatriate them into the end, and
(23:07):
that kind of speculation works to strengthen the end in
the past periods when the risk of event happens. And
I think the opposite is probably happening right now because
after the long term economic downtrem Japanese corporates has reduced
its leverages and their balance sheets are very very healthy
(23:30):
right now, and thanks to a prolonged weekend after ebonomics
until today, their profitability is getting stronger. So therefore, with
solid balance sheet and profitability, we can't really imagine when
some risk of event happens in let's say Middle East
or the other parts of the world. It's really hard
(23:52):
for markets to imagine the Japanese corporates to repatriate because
they're healthy enough and they are resilient enough. It was
a famous Japanese book written by famous x JP Morian
chief strategist torus Asaki. The book's name is the Week
Japan's Strong Yen. But I think the opposite is happening.
Japan has a strong corporate side and therefore they don't repatriate,
(24:16):
so therefore we have the week er yen, so we
can call it strong Japan's week yen. I was skeptical
at the start of the year that this weeknes is
going to be kept for a long time, but I
think with these structural factors, it's getting harder for the
yen to get strengthened like few years back level because
(24:39):
Japanese corporates will continue to invest uproad and won't repatriate.
Speaker 1 (24:45):
And for Japanese corporates, is a weekend still positive or
negative for them?
Speaker 2 (24:52):
I think it depends on who you are. If you
are big corporates who has many let's say factories abroad,
or who are big exporters weak and absolutely is a
tailwid And given those big corporates have enough share in
Japan's economy itself, I would say the weekiand itself in
(25:12):
a big picture is a plus for the economy for
the growth. That said, the weaker end is painful for
SMEs as well as households because the Japanese business operates
as the SMEs import something and create a part, and
the large corporates procure parts from SMEs and export them.
(25:34):
So of course the SMEs can negotiate with the margin,
but it's really hard for them to negotiate a full
pass through of higher import costs as well as household
Japan is a large importer of food and also energy. Therefore,
weaker m means you know, the daily dining as well
as electricity gas prices, all the energy costs will increase. Therefore,
(25:58):
I think in general the week or en hampers household consumption,
so in a net modestly positive, but the serious pains
will hit on SMEs and households and taro.
Speaker 1 (26:12):
You're in Japan, when you meet your friends, your colleagues,
you know you have a week yen, you have inflation
coming up. What are people doing with their money? What
are they doing with their savings? This perception that a
lot of Japanese people have their funds in a bank deposit.
Are people starting to move that money into more riskier assets.
Speaker 2 (26:33):
Yeah. On the ground, I seriously feel a momentum for
Japanese people to shift its asset from bank deposits to
risk assets including equities and properties. Let's say, for many
generations of people living in Japan, they haven't really experienced
(26:54):
the Japanese equity picking up continuously. I mean, it's only
started after our ponomics, and before that, Japanese equities are
something that just declines, and I think still that image
continues and Japanese households are still not confident that the
Japanese equity is going to pick up continuously, and therefore
(27:16):
they tend to be invested in foreign equities, particularly the
SMP five hundred. I think that's also a factor that
the end is at that week level for many years,
the households shift their asset from the end to the
US equities. And also property prices are I think picking
up faster under the current BOJ governor Uda, although he
(27:39):
is normalizing compared with his predecessor Hrehiko Kruda, who had
delivered Batzuka manitally easing in terms of the real interest rate.
Because inflation is picking up and the Bank of Japanese
lifting rates only modestly, the real eels are very negative
and therefore it incentivizes still purchasing properties. Therefore, the dubvish
(28:03):
BOJ with sticky inflation, it will keep being a tailwind
for property prices, and I think the property price could
continue to pick up in the near term. That said,
the Bank of Japan is alert in its Financial System
report pubulished in October that the yield from investing in
Japanese properties are slowing down despite the slower rises in
(28:28):
rents and higher acquisition costs and properties. So the Bank
of Japan is sort of starting to step in to
say the risks of price correction in property prices. That's
a risk if you're thinking about investing in Japan's properties,
probably the prices are too high and there's the correction risks.
Speaker 1 (28:47):
Okay, great, Taro. I've asked all the questions that I
wanted to ask. Is there anything else that you think
I missed out or you wanted to discuss.
Speaker 2 (28:56):
I think many things are happening in Japan, and if
you need to watch Japan closely for whatever reason, I
think it's really hard to decide for what's going on.
And my advice is take a bigger picture. And it's
in a sort of recovery process for the first time
since thirty years after an asset price bubble, which is
(29:16):
a sort of a very rigid positive momentum. But at
the same time, in the near term, what Japan is
struggling is we aren't very prepared to have a sticky inflation,
and that's what's struggling right now. So in the near term,
the topic is whether or not the Japanese economy could
overcome a cost of living squeeze, because it's going to
(29:37):
be costly not only for households but also for the
new Takaichi administration. If inflation persists, I think her administration
could be short lived. And she's trying to temper inflation
in many ways like cutting the gasoline texts or whatever.
I think she needs to proceed with it quickly and nimbly.
But if that inflation jolt is solved, I think I'm
(29:58):
optimistic about Japan's long term growth because the strengthening the
domestic supply chain by fiscal investment is I think, as
I explained earlier, it's a good direction that Japan has
missed for many years because Japanese government was haunted for
the government intervention on private businesses aren't good thing. They
(30:19):
used to be still in such a legal world of
smaller government, but the Takaig's appearance could change the landscape
of fiscal policy in a better way. And also inflation
is by the way, helping the government because inflation is
good for betters the problem is inflation, but in the
long term, I'm sort of optimistic about Japan's growth.
Speaker 1 (30:41):
Okay, Taro, thanks for coming on the show.
Speaker 2 (30:44):
Thank you very much.
Speaker 1 (30:45):
You've been listening to the Asia Centric podcast from Bloomberg Intelligence.
I'm John Lee in Hong Kong. You can listen to
all our episodes on Apple Podcasts, Spotify, or wherever you listen.
And this episode was produced and edited by Clara Chen.
Thanks for joining me.
Hosts And Creators
John Lee
Tom Corbett
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.