October 16, 2025 • 21 mins
Japan's Finance Minister Katsunobu Kato voiced serious concern over China's latest export controls on rare earths, stressing the importance of coordinated action from Group of Seven nations. "Japan is deeply concerned about these measures," Kato told reporters in Washington on Wednesday, referring to China's latest trade measures. "I called for G-7 nations to unite and respond," Kato said. Kato spoke following a G-7 meeting held on the sidelines of the International Monetary Fund and World Bank annual meetings. Also in Japan, ruling party leader Sanae Takaichi's chances of becoming prime minister strengthened after progress on policy talks with the Japan Innovation Party, with Monday emerging as a deadline for deciding whether the parties form a new coalition. The Liberal Democratic Party and the Osaka-based JIP, also known as Ishin, confirmed they are on the same page on major policy items. But one major sticking point remains in place: reforms on political funding rules. For more perspective, we speak to Shuntaro Takeuchi, Portfolio Manager at Matthews Asia.
Plus - Stocks slid, extending a weeklong stretch of volatility on Wall Street, as bad loans at two regional banks stirred concern about credit quality in the economy and further underscored the fragility of the $28 trillion bull market. Following an earlier advance driven by another solid outlook for artificial-intelligence demand, the S&P 500 turned lower as a pair of regional lenders disclosed problems with loans involving allegations of fraud, adding to concern that more cracks are emerging in borrowers' creditworthiness. We turn to Jeff Palma, Head of Multi Asset at Cohen & Steers.
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Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Daybreak Asia podcast. I'm Doug Krisner. We
are well aware of how markets reacted to Beijing's move
on export controls for rare earth minerals. Well, political leaders
are taking notice as well. Today, on the sidelines of
the meetings of the IMF and World Bank, Japan's finance
minister voiced serious concern and he stressed the importance of
(00:32):
coordinated action from G seven nations to avert a negative
impact on global supply chains. For a look now at
Japan and how it's being impacted by the US China
trade war. I'm joined by Shintaro Takauchi, who is portfolio
manager at Matthews Asia. Shintaro joins us from San Francisco.
Thank you for making time to chat with me. Let's
(00:53):
begin with a little bit of exploration here as to
how Japan is being caught up in the US China
trade war. Can you give me some perspective?
Speaker 3 (01:02):
Sure so, with regards to the tensions between US and China. Unfortunately,
the new reality is that the one way of globalization
is at least slowing, if not reversing, meaning that the
capital expenditure of manufacturing activity across the world would be
(01:25):
inefficient than before. You can no longer make everything at
one area and export it globally. In that way, I
think we believe that Japanese manufacturers will actually benefit from
that increase of capital expenditure coming from I would say
(01:47):
less efficient cap ex spending.
Speaker 2 (01:50):
So I want to change gears because we're hearing that
the Trump administration is poised to ease some tariffs on
the US auto industry. We are being told that the
Commerce Department is set to announce a five year extension.
This would allow automakers to reduce what they pay in
tariffs on imported car parts. Now, we both know that
the Trump administration has been in the process of redefining
(02:14):
US trade relations, largely through the use of tariffs, and
Japan has clearly been impacted a great deal steal, Yes,
but particularly autos. Give me your sense of what's going
on on the ground in Japan as it relates to
US trade policy, especially for the car makers.
Speaker 3 (02:33):
Yes, I think regarding US and Japan, the single most
important industry for the Japanese exports sector is in autos.
Given that how many people are actually employed in Japan
and encouragingly that Japan and the US has reached a
(02:56):
deal with regards to the tariff rates. And also another
thing that is benefiting from for the Japanese automakers is
they are actually increasing market share as a result of
that given their efficiency in.
Speaker 4 (03:16):
Their hybrid technologies.
Speaker 2 (03:18):
Let's pivot to monetary policy in Japan. Governor Uweita has
indicated that the BOJ will continue to tighten if the
BOJ has confidence in achieving its economic outlook. Now we
know that inflation is obviously a big problem now, and
I'm curious to get the house view at Matthew's Asia
when it comes to predicting the next step for the BOJ.
Speaker 3 (03:41):
Yes, so our base scenario is a twenty five basis
point race sometime late this year or early next year
and then put on hold for at seventy five basis
points for a while.
Speaker 4 (03:54):
The reason why I say this is there are.
Speaker 3 (03:57):
Shoots of real waste growth happening in the larger corporate space.
Hopefully that will trickle down to the SME, which is
ninety nine percent of all the corporates in Japan, and
Governor da is really looking at the real wage growth
to happen to have a sustained pace of raising rates.
(04:20):
But basically our case is a twenty five basis points
and put on hold for the time being.
Speaker 2 (04:25):
So how do you expect the market to continue performing?
I mean, the equity market in Japan is very close
to record heis, We're not quite there. We're seeing a
little bit of weakness actually in the Friday morning session.
What is your outlook for Japanese equities?
Speaker 3 (04:40):
Yes, in the very short term, japan market is trading
at sixteen times for twelve month price to earnings, which
is in the high end of a ten year range.
It is the fact that some thematic fields such as
defense and AI related names are trading at all time
high valuations. However, mid to long term, we see opportun
communities for japan equities as an asset class, mainly because
(05:04):
one nominal GDP growth, which we view as a proxy
to domestic top line growth, is starting to gain tractions.
So Japan lacked meaningful nominal GDP growth for nearly thirty years,
and additionally, an adjustment of overly conservative tariff impact of
Japanese corporate profit guidance for this year, earning's revisions are
starting to improve and secondly, lower return on equities compared
(05:31):
to US and Europe, which have capped Japan valuations levels
is starting to see improvement via a margin improvement as
well as better capital allocation policies. Unwinding crosshair holdings have
been happening, but still ten percent of outstanding is held
by the corporates, and by bringing that down towards zero
(05:53):
will have meaningful upward pressure in the return on equities,
hopefully leading to the evaluation expansion. And third, but not least,
it is not a crowded trade Japan. Despite its relatively
stronger performance, it's still common underweight among global investors and
it's very far from a crowded trade. We don't expect
(06:16):
that US excepersonalism to reverse overnight, but we still see
a meaningful gap between opportunities that the Japan equities have
and investors real positioning.
Speaker 2 (06:26):
Speaking of positioning, maybe we can move into the political
environment right now in Japan. There's been a lot of volatility.
I think we can agree on that much. Sana A
Takaichi appeared as though a couple of weeks ago she
was set to become the first female prime minister of Japan.
Is that very much in doubt. Now, can you give
me a sense of what Matthews Asia is expecting on
(06:48):
the political front.
Speaker 4 (06:51):
Sure, So this.
Speaker 3 (06:52):
Past few weeks was full of surprising outcomes, even like
when Takaichi got elected. Koizumi was initially the most favored
to win the LDP leader race, but in the end
Takaichu on the runoff in the end, and then Kome
has suddenly withdrew from the twenty six year outstanding coalition,
and this past week has been a scramble of all
party leaders meeting each other to secure the majority. And
(07:15):
as of today October seventeenth morning, in Asia, LDP and
Japan Innovation Party ISSHIN, the second largest opposition party, is
currently in talksbury possible coalition alliance. So the possibility of
Takaichi becoming prime minister came down after the breakup of
LDP Kome coalition, but came back up given that if
(07:40):
LDP issing coalitions happen, it will bring the maximum total
seats in the Lower House to two hundred and thirty one,
which is only too short of majority, and Lower House
of one hundred and twenty, which is only about five
shy of majority.
Speaker 4 (07:54):
But again nothing is certain.
Speaker 3 (07:56):
Until the Diet vote to elect the next Prime Minister,
which is scheduled to be held on twenty first of October.
So our current view is that LdB issuing coalition if
that happens, along with a possible collaboration with other parties
for selected legistration. Legislation will likely involve fiscal expansionary policies,
(08:19):
which we view positively.
Speaker 4 (08:20):
From a domestic demand perspective.
Speaker 3 (08:24):
Ishan has been calling for lower social insurance premium for
working generations to boost household income. Other parties, some parties
are advocating for raising income tax threshold, abolishing provisional gasoline
and diesel taxes.
Speaker 4 (08:41):
So these areas and other areas of possible change.
Speaker 3 (08:45):
But again, you know, real wage growth is really critical
for domestic consumption as well as a normalization of botiate
rate policies.
Speaker 2 (08:53):
Okay, so that's what your expectations would be for a
Prime Minister taka Ichi in terms of the domestic economy
in Japan. Do you expect should she become Prime minister,
that the relationship with the United States would shift in
a meaningful way.
Speaker 3 (09:10):
Yes, So I think the base case is that US
in Japan continues to be an important ally and they're
working together. Takaichi was very close to Prime Minister Abi,
whom Abi was very close to President Trump.
Speaker 4 (09:27):
So I think on a relative basis.
Speaker 3 (09:30):
I think Japan is in a good situation between the
two countries of US and Japan.
Speaker 2 (09:36):
Shintara will leave it there. Thank you so very much
for joining us. Shintaro Takauchi, who is portfolio manager at
Matthews Asia, joining from San Francisco here on the Daybreak
Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm
Doug Chrisner. The equity market in the US retreated today
(09:58):
on worries over credit quality. We had two regional banks
disclosing sizeable charge offs related to alleged fraud. Zion's Bank Corp.
And Western Alliance Bank Corp. Both said they were victims
of fraud on loans made to fund investments in distressed
commercial mortgages. Now, analysts were saying, this seems to be
kind of an isolated case. Nothing here to suggest systemic risk.
(10:23):
For a closer look. Now, I'm joined by Jeff Palmer.
He is head of Multi Asset at Cohen and Steers.
Jeff joins us from here in New York City. Thank
you so much, sir for making time to chat with me.
Can we begin with the story on credit. Yesterday we
heard from Jamie Diamond, obviously the head of JP Morgan Chase.
He seemed to issue this kind of ominous warning about
(10:43):
credit risk with some of the high profile collapses that
we have seen too. In particular, Diamond said, when you
see one cockroach, they're probably more. What do you think
of what he had to say yesterday and what unfolded today?
Speaker 1 (11:00):
As you say, Doug, it's an interesting combination the timing
of these things, Jamie Diamond's warning, the first brands event
a couple of weeks ago, and then these today. What's
interesting is it comes against a backdrop where in general
credit markets have been very sanguine, spreads are very tight,
people have been very comfortable with how growth has behaved,
(11:22):
and default rates have been very very low. It does
seem like it's isolated and idiosyncratic, as they say, but
you know, there have also been signs at the lower
end of the consumer spectrum is weak or has been weakening.
I think it fits in with some of the narrative
about weak are unemployment, weaker employment numbers, and so we'll
(11:42):
just sort of have to see how this plays out.
I agree, so far it doesn't look systemic though.
Speaker 2 (11:48):
So we had some FED speak today. Chris Waller, the
FED Governor, was saying, the policymakers can keep lowering rates
in quarter point increments because the labor market really has
been faltering and it needs support. But then we heard
from FED Governor Stephen Myron, and he was advocating for
a larger cut. He said, this flare up that we
have seen lately in the US China trade war has
(12:09):
created more downside risk for the economy. He wants to
see a half point cut. And then when you put
into context what we saw in the regional banks today,
I think the KBW Regional Bank index was down about
six point eight percent. Do we need to consider the
fact not only that the FED is going to continue
to ease, but we may need a larger rate cut.
Speaker 1 (12:31):
Yeah, Well, this is the tension that's happening within the FED.
I mean, Stephen Myron, now in his short tenure, has
made it very clear that he thinks rates need to
be substantially lower. Most of the rest of the board
thinks that rates only need to be lowered gradually. By
the way, some as we saw on the last dot plot.
You know, don't think rates need to be lowered at all,
(12:51):
maybe even need to go higher at some point. And
you know, it sort of gets to the current situation
and the economy. Some call it the K shaped economy,
right where the economy.
Speaker 4 (13:00):
Are doing really well.
Speaker 1 (13:01):
That would be high end consumers and things buoyed by
capex spending, and then there's everything else which is really struggling.
And it's pretty clear that the employment backdrop has been
weakening and it doesn't help. You know, the tariff news
in general is pretty negative for the employment backdrop. You
put that on the other side on one hand, and
(13:22):
on the other hand, inflation hasn't moderated and in fact
seems pretty sticky. So our own view is that you
get a couple of rate cuts, but that might be it,
barring any much deeper weakness in the economy.
Speaker 2 (13:34):
So what do you make of the behavior of the
bond market? We had yields at the short end. I'm
looking at the two year that was down about eight
basis points or so in New York, the lowest I
think since around twenty twenty two. How do you evaluate
the price action in the bond market.
Speaker 1 (13:49):
It's a big move, and you know, it's certainly consistent
with a view that bond markets are pushing for more
rate cuts right, certainly more aggressively than that narrative that
I just talked about from you know, from our side,
and same you know from Waller's view, it seems to
push more towards people getting concerned about growth. What's odd
(14:10):
about it for me is if you really believe a
weak growth backdrop, you would expect equities to be a
bit weaker. Now, maybe if financials are starting to tell
that story, you're seeing some of it, but you know,
you're certainly not seeing it more broadly within risk asset markets.
Speaker 2 (14:26):
The other thing that we've been dealing with here in
terms of market action concern about more tension in the
US China trade relation. Today, as part of the World
Bank IMF meetings that are going on in Washington, we
heard from Japan's finance minister. He seemed to voice a
lot of concern here, serious concern over China's latest export
(14:46):
controls when it comes to rare earth elements, and he
said that really it's important now for some type of
coordinated action from G seven nations to avert any type
of negative impact that this may have on global supply chains.
So it's not just from the US side. Other countries
are beginning to express concern about the way in which
(15:06):
China is dealing with the United States and how that
may impact other countries in other markets. Are we perhaps
flirting with something that could turn a lot more serious?
Speaker 1 (15:18):
I mean, my sense here is that it's more likely
people kind of laying out very wide if you like
bid ask in terms of a negotiation policy. Right, President
Trump is kind of laying one side of very aggressive
tariffs potentially one hundred percent, which is highly highly unlikely,
And equally on the other side, I think China is
(15:40):
trying to play its card, you know, which it views
very strongly as being rare earths. I think, and you know,
this would just sort of, you know, you know, kind
of lead US likely towards something more moderate, something in
the middle, because I think it doesn't really, as you say,
suit anybody, including not just the US and China, but
(16:01):
kind of the broader world economy, to have kind of
a massive flare up that results in kind of a
full meltdown of global trade.
Speaker 2 (16:09):
So obviously rare earths are critical when you look at
semiconductor production, we had some pretty strong numbers from TSMC.
Overnight revenue guidance was also increased a bit, and the
day before ASML, the Dutch chip making equipment firm, reported
its highest bookings for its cutting edge extreme ultraviolet tools
(16:31):
since the fourth quarter of twenty three. So there seems
to be a lot of positivity still around the AI trade.
How do you feel about this right now? Are we
late stage or is there still a lot more in
the way of upside?
Speaker 1 (16:44):
Yeah, I mean there's there's clearly a lot of momentum there.
As as I mentioned before, you know, that's been a
key underpinning of growth here in the US. My best
sense here is that there's a good visit, there's good
visibility for capex in the aie AID generally, you know,
certainly for the next year, maybe even beyond that. The
(17:04):
good news is there's still a lot of cash funded
capex right so it's all being funded or largely being
funded out of free cash flow, and we're still seeing
great growth. We're still seeing people be quite positive about
the outlook for revenue generation to kind of follow.
Speaker 4 (17:23):
I think where the questions.
Speaker 1 (17:24):
Start to play out over the next twelve to twenty
four months is one. Do we get the revenue handoff
to help protect free cash flow? Do we need to
start seeing, you know, companies issue debt. We've only seen
very very small pieces of that, and ultimately can there
be kind of profitability that comes from it? So I
(17:45):
think it's too soon to completely freak out about it,
But there's enough questions on the horizon, you know, to
kind of keep an eye on on exactly how it
would all play out.
Speaker 2 (17:55):
Which makes this rally that we have seen in gold
all the more interesting. I think that this is some
type of haven, right given a lot of the risk
that may be on the horizon. We broke above in
the spot price in New York trading forty three hundred
dollars an ounce, so we're clearly at records. What does
this mean to you?
Speaker 1 (18:15):
Gold's been amazing and equally so has silver. They've certainly
kind of as you say, it's sort of if you
view it through the lens of a risk trade, it's
sort of inconsistent with what we're seeing in other markets.
I think there's a couple of different avenues though. One
is the dollar has definitely been weaker this year, and
(18:35):
I think in general, and when you kind of link
this to some of the China questions, there's definitely questions
about reserve currency status and the strength of kind of
broad fiat currencies, and I think that that's helping to
support gold. Central bank reserves of gold have certainly increased,
(18:55):
and so that that's probably a piece as well. And
then the other pieces that you know, as I said before,
inflation has been a little bit sticky. We're not getting
down towards the Fed's target of two percent, and our
view is that we're not going to We're going to
hang closer to three percent going forward, and so maybe
there's a little bit of kind of an inflation element
under the hood there as well. I don't think that
(19:17):
independently any one of those things helps to fully explain
the move that we've seen in precious metals, but maybe
collectively it helps to explain the direction of travel.
Speaker 2 (19:26):
So we had the Russell two thousand down about two
percent today, maybe some concern about the strength of the
economy before I let you go, do we are we
flirting with a recession potentially?
Speaker 1 (19:38):
So we don't think so we think that the economy
is going to remain fairly resilient. But you know, there
is definitely this case that you know, the stool that
we've been you know, supporting the economy with is really
kind of two legs. It's this one of you know,
some consumers and some cap backs. I think what we
really need to see is that that support brought out
(20:00):
over the course of the next year. That is some
of the objective of lower interest rates, It's some of
the objective of some easier fiscal policy. Keep in mind,
we are going to get some fiscal stimulus through the
bill that was passed earlier this year, the budget bill
that was passed earlier this year. Those sorts of things
should help the underlying economy. But if you kind of
(20:21):
bring this conversation full circle, you know, if there's some
are some underlying concerns about trade and employment and credit,
you know, those would probably be the areas that caused
things to slow down more quickly.
Speaker 2 (20:32):
Okay, Jeff, we'll leave it there. Thanks so much, Always
a pleasure. Jeff Palmer is head of multi Asset at
Cohen and Steers, joining us from here in New York
City on the Daybreak Asia podcast. Thanks for listening to
today's episode. Of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
we look at the story shaping markets, finance, and geopolitics
(20:53):
in the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Daybreak Asia podcast. I'm Doug Krisner. We
are well aware of how markets reacted to Beijing's move
on export controls for rare earth minerals. Well, political leaders
are taking notice as well. Today, on the sidelines of
the meetings of the IMF and World Bank, Japan's finance
minister voiced serious concern and he stressed the importance of
(00:32):
coordinated action from G seven nations to avert a negative
impact on global supply chains. For a look now at
Japan and how it's being impacted by the US China
trade war. I'm joined by Shintaro Takauchi, who is portfolio
manager at Matthews Asia. Shintaro joins us from San Francisco.
Thank you for making time to chat with me. Let's
(00:53):
begin with a little bit of exploration here as to
how Japan is being caught up in the US China
trade war. Can you give me some perspective?
Speaker 3 (01:02):
Sure so, with regards to the tensions between US and China. Unfortunately,
the new reality is that the one way of globalization
is at least slowing, if not reversing, meaning that the
capital expenditure of manufacturing activity across the world would be
(01:25):
inefficient than before. You can no longer make everything at
one area and export it globally. In that way, I
think we believe that Japanese manufacturers will actually benefit from
that increase of capital expenditure coming from I would say
(01:47):
less efficient cap ex spending.
Speaker 2 (01:50):
So I want to change gears because we're hearing that
the Trump administration is poised to ease some tariffs on
the US auto industry. We are being told that the
Commerce Department is set to announce a five year extension.
This would allow automakers to reduce what they pay in
tariffs on imported car parts. Now, we both know that
the Trump administration has been in the process of redefining
(02:14):
US trade relations, largely through the use of tariffs, and
Japan has clearly been impacted a great deal steal, Yes,
but particularly autos. Give me your sense of what's going
on on the ground in Japan as it relates to
US trade policy, especially for the car makers.
Speaker 3 (02:33):
Yes, I think regarding US and Japan, the single most
important industry for the Japanese exports sector is in autos.
Given that how many people are actually employed in Japan
and encouragingly that Japan and the US has reached a
(02:56):
deal with regards to the tariff rates. And also another
thing that is benefiting from for the Japanese automakers is
they are actually increasing market share as a result of
that given their efficiency in.
Speaker 4 (03:16):
Their hybrid technologies.
Speaker 2 (03:18):
Let's pivot to monetary policy in Japan. Governor Uweita has
indicated that the BOJ will continue to tighten if the
BOJ has confidence in achieving its economic outlook. Now we
know that inflation is obviously a big problem now, and
I'm curious to get the house view at Matthew's Asia
when it comes to predicting the next step for the BOJ.
Speaker 3 (03:41):
Yes, so our base scenario is a twenty five basis
point race sometime late this year or early next year
and then put on hold for at seventy five basis
points for a while.
Speaker 4 (03:54):
The reason why I say this is there are.
Speaker 3 (03:57):
Shoots of real waste growth happening in the larger corporate space.
Hopefully that will trickle down to the SME, which is
ninety nine percent of all the corporates in Japan, and
Governor da is really looking at the real wage growth
to happen to have a sustained pace of raising rates.
(04:20):
But basically our case is a twenty five basis points
and put on hold for the time being.
Speaker 2 (04:25):
So how do you expect the market to continue performing?
I mean, the equity market in Japan is very close
to record heis, We're not quite there. We're seeing a
little bit of weakness actually in the Friday morning session.
What is your outlook for Japanese equities?
Speaker 3 (04:40):
Yes, in the very short term, japan market is trading
at sixteen times for twelve month price to earnings, which
is in the high end of a ten year range.
It is the fact that some thematic fields such as
defense and AI related names are trading at all time
high valuations. However, mid to long term, we see opportun
communities for japan equities as an asset class, mainly because
(05:04):
one nominal GDP growth, which we view as a proxy
to domestic top line growth, is starting to gain tractions.
So Japan lacked meaningful nominal GDP growth for nearly thirty years,
and additionally, an adjustment of overly conservative tariff impact of
Japanese corporate profit guidance for this year, earning's revisions are
starting to improve and secondly, lower return on equities compared
(05:31):
to US and Europe, which have capped Japan valuations levels
is starting to see improvement via a margin improvement as
well as better capital allocation policies. Unwinding crosshair holdings have
been happening, but still ten percent of outstanding is held
by the corporates, and by bringing that down towards zero
(05:53):
will have meaningful upward pressure in the return on equities,
hopefully leading to the evaluation expansion. And third, but not least,
it is not a crowded trade Japan. Despite its relatively
stronger performance, it's still common underweight among global investors and
it's very far from a crowded trade. We don't expect
(06:16):
that US excepersonalism to reverse overnight, but we still see
a meaningful gap between opportunities that the Japan equities have
and investors real positioning.
Speaker 2 (06:26):
Speaking of positioning, maybe we can move into the political
environment right now in Japan. There's been a lot of volatility.
I think we can agree on that much. Sana A
Takaichi appeared as though a couple of weeks ago she
was set to become the first female prime minister of Japan.
Is that very much in doubt. Now, can you give
me a sense of what Matthews Asia is expecting on
(06:48):
the political front.
Speaker 4 (06:51):
Sure, So this.
Speaker 3 (06:52):
Past few weeks was full of surprising outcomes, even like
when Takaichi got elected. Koizumi was initially the most favored
to win the LDP leader race, but in the end
Takaichu on the runoff in the end, and then Kome
has suddenly withdrew from the twenty six year outstanding coalition,
and this past week has been a scramble of all
party leaders meeting each other to secure the majority. And
(07:15):
as of today October seventeenth morning, in Asia, LDP and
Japan Innovation Party ISSHIN, the second largest opposition party, is
currently in talksbury possible coalition alliance. So the possibility of
Takaichi becoming prime minister came down after the breakup of
LDP Kome coalition, but came back up given that if
(07:40):
LDP issing coalitions happen, it will bring the maximum total
seats in the Lower House to two hundred and thirty one,
which is only too short of majority, and Lower House
of one hundred and twenty, which is only about five
shy of majority.
Speaker 4 (07:54):
But again nothing is certain.
Speaker 3 (07:56):
Until the Diet vote to elect the next Prime Minister,
which is scheduled to be held on twenty first of October.
So our current view is that LdB issuing coalition if
that happens, along with a possible collaboration with other parties
for selected legistration. Legislation will likely involve fiscal expansionary policies,
(08:19):
which we view positively.
Speaker 4 (08:20):
From a domestic demand perspective.
Speaker 3 (08:24):
Ishan has been calling for lower social insurance premium for
working generations to boost household income. Other parties, some parties
are advocating for raising income tax threshold, abolishing provisional gasoline
and diesel taxes.
Speaker 4 (08:41):
So these areas and other areas of possible change.
Speaker 3 (08:45):
But again, you know, real wage growth is really critical
for domestic consumption as well as a normalization of botiate
rate policies.
Speaker 2 (08:53):
Okay, so that's what your expectations would be for a
Prime Minister taka Ichi in terms of the domestic economy
in Japan. Do you expect should she become Prime minister,
that the relationship with the United States would shift in
a meaningful way.
Speaker 3 (09:10):
Yes, So I think the base case is that US
in Japan continues to be an important ally and they're
working together. Takaichi was very close to Prime Minister Abi,
whom Abi was very close to President Trump.
Speaker 4 (09:27):
So I think on a relative basis.
Speaker 3 (09:30):
I think Japan is in a good situation between the
two countries of US and Japan.
Speaker 2 (09:36):
Shintara will leave it there. Thank you so very much
for joining us. Shintaro Takauchi, who is portfolio manager at
Matthews Asia, joining from San Francisco here on the Daybreak
Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm
Doug Chrisner. The equity market in the US retreated today
(09:58):
on worries over credit quality. We had two regional banks
disclosing sizeable charge offs related to alleged fraud. Zion's Bank Corp.
And Western Alliance Bank Corp. Both said they were victims
of fraud on loans made to fund investments in distressed
commercial mortgages. Now, analysts were saying, this seems to be
kind of an isolated case. Nothing here to suggest systemic risk.
(10:23):
For a closer look. Now, I'm joined by Jeff Palmer.
He is head of Multi Asset at Cohen and Steers.
Jeff joins us from here in New York City. Thank
you so much, sir for making time to chat with me.
Can we begin with the story on credit. Yesterday we
heard from Jamie Diamond, obviously the head of JP Morgan Chase.
He seemed to issue this kind of ominous warning about
(10:43):
credit risk with some of the high profile collapses that
we have seen too. In particular, Diamond said, when you
see one cockroach, they're probably more. What do you think
of what he had to say yesterday and what unfolded today?
Speaker 1 (11:00):
As you say, Doug, it's an interesting combination the timing
of these things, Jamie Diamond's warning, the first brands event
a couple of weeks ago, and then these today. What's
interesting is it comes against a backdrop where in general
credit markets have been very sanguine, spreads are very tight,
people have been very comfortable with how growth has behaved,
(11:22):
and default rates have been very very low. It does
seem like it's isolated and idiosyncratic, as they say, but
you know, there have also been signs at the lower
end of the consumer spectrum is weak or has been weakening.
I think it fits in with some of the narrative
about weak are unemployment, weaker employment numbers, and so we'll
(11:42):
just sort of have to see how this plays out.
I agree, so far it doesn't look systemic though.
Speaker 2 (11:48):
So we had some FED speak today. Chris Waller, the
FED Governor, was saying, the policymakers can keep lowering rates
in quarter point increments because the labor market really has
been faltering and it needs support. But then we heard
from FED Governor Stephen Myron, and he was advocating for
a larger cut. He said, this flare up that we
have seen lately in the US China trade war has
(12:09):
created more downside risk for the economy. He wants to
see a half point cut. And then when you put
into context what we saw in the regional banks today,
I think the KBW Regional Bank index was down about
six point eight percent. Do we need to consider the
fact not only that the FED is going to continue
to ease, but we may need a larger rate cut.
Speaker 1 (12:31):
Yeah, Well, this is the tension that's happening within the FED.
I mean, Stephen Myron, now in his short tenure, has
made it very clear that he thinks rates need to
be substantially lower. Most of the rest of the board
thinks that rates only need to be lowered gradually. By
the way, some as we saw on the last dot plot.
You know, don't think rates need to be lowered at all,
(12:51):
maybe even need to go higher at some point. And
you know, it sort of gets to the current situation
and the economy. Some call it the K shaped economy,
right where the economy.
Speaker 4 (13:00):
Are doing really well.
Speaker 1 (13:01):
That would be high end consumers and things buoyed by
capex spending, and then there's everything else which is really struggling.
And it's pretty clear that the employment backdrop has been
weakening and it doesn't help. You know, the tariff news
in general is pretty negative for the employment backdrop. You
put that on the other side on one hand, and
(13:22):
on the other hand, inflation hasn't moderated and in fact
seems pretty sticky. So our own view is that you
get a couple of rate cuts, but that might be it,
barring any much deeper weakness in the economy.
Speaker 2 (13:34):
So what do you make of the behavior of the
bond market? We had yields at the short end. I'm
looking at the two year that was down about eight
basis points or so in New York, the lowest I
think since around twenty twenty two. How do you evaluate
the price action in the bond market.
Speaker 1 (13:49):
It's a big move, and you know, it's certainly consistent
with a view that bond markets are pushing for more
rate cuts right, certainly more aggressively than that narrative that
I just talked about from you know, from our side,
and same you know from Waller's view, it seems to
push more towards people getting concerned about growth. What's odd
(14:10):
about it for me is if you really believe a
weak growth backdrop, you would expect equities to be a
bit weaker. Now, maybe if financials are starting to tell
that story, you're seeing some of it, but you know,
you're certainly not seeing it more broadly within risk asset markets.
Speaker 2 (14:26):
The other thing that we've been dealing with here in
terms of market action concern about more tension in the
US China trade relation. Today, as part of the World
Bank IMF meetings that are going on in Washington, we
heard from Japan's finance minister. He seemed to voice a
lot of concern here, serious concern over China's latest export
(14:46):
controls when it comes to rare earth elements, and he
said that really it's important now for some type of
coordinated action from G seven nations to avert any type
of negative impact that this may have on global supply chains.
So it's not just from the US side. Other countries
are beginning to express concern about the way in which
(15:06):
China is dealing with the United States and how that
may impact other countries in other markets. Are we perhaps
flirting with something that could turn a lot more serious?
Speaker 1 (15:18):
I mean, my sense here is that it's more likely
people kind of laying out very wide if you like
bid ask in terms of a negotiation policy. Right, President
Trump is kind of laying one side of very aggressive
tariffs potentially one hundred percent, which is highly highly unlikely,
And equally on the other side, I think China is
(15:40):
trying to play its card, you know, which it views
very strongly as being rare earths. I think, and you know,
this would just sort of, you know, you know, kind
of lead US likely towards something more moderate, something in
the middle, because I think it doesn't really, as you say,
suit anybody, including not just the US and China, but
(16:01):
kind of the broader world economy, to have kind of
a massive flare up that results in kind of a
full meltdown of global trade.
Speaker 2 (16:09):
So obviously rare earths are critical when you look at
semiconductor production, we had some pretty strong numbers from TSMC.
Overnight revenue guidance was also increased a bit, and the
day before ASML, the Dutch chip making equipment firm, reported
its highest bookings for its cutting edge extreme ultraviolet tools
(16:31):
since the fourth quarter of twenty three. So there seems
to be a lot of positivity still around the AI trade.
How do you feel about this right now? Are we
late stage or is there still a lot more in
the way of upside?
Speaker 1 (16:44):
Yeah, I mean there's there's clearly a lot of momentum there.
As as I mentioned before, you know, that's been a
key underpinning of growth here in the US. My best
sense here is that there's a good visit, there's good
visibility for capex in the aie AID generally, you know,
certainly for the next year, maybe even beyond that. The
(17:04):
good news is there's still a lot of cash funded
capex right so it's all being funded or largely being
funded out of free cash flow, and we're still seeing
great growth. We're still seeing people be quite positive about
the outlook for revenue generation to kind of follow.
Speaker 4 (17:23):
I think where the questions.
Speaker 1 (17:24):
Start to play out over the next twelve to twenty
four months is one. Do we get the revenue handoff
to help protect free cash flow? Do we need to
start seeing, you know, companies issue debt. We've only seen
very very small pieces of that, and ultimately can there
be kind of profitability that comes from it? So I
(17:45):
think it's too soon to completely freak out about it,
But there's enough questions on the horizon, you know, to
kind of keep an eye on on exactly how it
would all play out.
Speaker 2 (17:55):
Which makes this rally that we have seen in gold
all the more interesting. I think that this is some
type of haven, right given a lot of the risk
that may be on the horizon. We broke above in
the spot price in New York trading forty three hundred
dollars an ounce, so we're clearly at records. What does
this mean to you?
Speaker 1 (18:15):
Gold's been amazing and equally so has silver. They've certainly
kind of as you say, it's sort of if you
view it through the lens of a risk trade, it's
sort of inconsistent with what we're seeing in other markets.
I think there's a couple of different avenues though. One
is the dollar has definitely been weaker this year, and
(18:35):
I think in general, and when you kind of link
this to some of the China questions, there's definitely questions
about reserve currency status and the strength of kind of
broad fiat currencies, and I think that that's helping to
support gold. Central bank reserves of gold have certainly increased,
(18:55):
and so that that's probably a piece as well. And
then the other pieces that you know, as I said before,
inflation has been a little bit sticky. We're not getting
down towards the Fed's target of two percent, and our
view is that we're not going to We're going to
hang closer to three percent going forward, and so maybe
there's a little bit of kind of an inflation element
under the hood there as well. I don't think that
(19:17):
independently any one of those things helps to fully explain
the move that we've seen in precious metals, but maybe
collectively it helps to explain the direction of travel.
Speaker 2 (19:26):
So we had the Russell two thousand down about two
percent today, maybe some concern about the strength of the
economy before I let you go, do we are we
flirting with a recession potentially?
Speaker 1 (19:38):
So we don't think so we think that the economy
is going to remain fairly resilient. But you know, there
is definitely this case that you know, the stool that
we've been you know, supporting the economy with is really
kind of two legs. It's this one of you know,
some consumers and some cap backs. I think what we
really need to see is that that support brought out
(20:00):
over the course of the next year. That is some
of the objective of lower interest rates, It's some of
the objective of some easier fiscal policy. Keep in mind,
we are going to get some fiscal stimulus through the
bill that was passed earlier this year, the budget bill
that was passed earlier this year. Those sorts of things
should help the underlying economy. But if you kind of
(20:21):
bring this conversation full circle, you know, if there's some
are some underlying concerns about trade and employment and credit,
you know, those would probably be the areas that caused
things to slow down more quickly.
Speaker 2 (20:32):
Okay, Jeff, we'll leave it there. Thanks so much, Always
a pleasure. Jeff Palmer is head of multi Asset at
Cohen and Steers, joining us from here in New York
City on the Daybreak Asia podcast. Thanks for listening to
today's episode. Of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
we look at the story shaping markets, finance, and geopolitics
(20:53):
in the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg
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