Welcome to the Bloomberg Daybreak Asia Podcast. I'm Doug Chrisner. So it's New Year's Eve, the final day of trading in twenty twenty four across the Eightpac region, and when markets return from the holiday, there will be no shortage of new forces to confront. Joining me now for a look ahead is Vishnu Varathan, head of Economics and Strategy at Misoho Securities, joining us from Singapore. Vishnu, Happy New Year to you. It's always a pleasure to benefit from
your insight. I think we can agree that right across the APAC, twenty twenty four has been a year of dramatic events, and certainly when you look at things like the end carry trade, when you look at what happened in China, a struggling economy, additional stimulus, and a lot of equity market volatility, I'm curious as to whether you think twenty twenty five will be a similar story.
At twenty twenty five has the potential to be just as dramatic. Maybe the reasons for that might differ, but I think you know, if someone thought that this is just platooing off, then that's probably not going to play out. And one example, and I won't drawn on about this is the Japanese ye and I think for a while their markets thought we're over the carry trade volatility, primarily because there would be greater convergence between you know, US
and Japanese raids. Whereas two big things have changed. One is the FED is now far less dubbish, you know, the delta there has been hawkish, whereas in contrast, the BOG is far more guarded about tightening, and the tariffs will have a negative impact on the end, which might induce more on and off territory and certainly volatility around it. So that's that's one example.
So do you think in both of those cases maybe they share in common the possibility of a minor policy error. In the case of the FED that maybe that first rate cut was too generous, and in the case of the Bank of Japan, maybe the boj has waited too long to titan.
I think in many cases the trouble is if we were to, you know, in isolation, look at each of the central banks, the moves appear to be reasonable, but the dilemma for them is their policy moves are not in a vacuum and certainly depend a lot on what goes on elsewhere, primarily driven by the FED. So the moment the FED started on you know, much earlier, the Cocomo rate hikes, you know, get their fast, take it slow, after which, you know, US exceptionalism persisted, that inherently created
you know, huge policy dilemmas for central banks elsewhere. The only question is the positioning that allowed them to stand that. And I think for the BOJ, markets are going to continue to have a problem because the boj's time horizon when they give signals and references are far longer than what markets perceive uh and and you know take it to be elsewhere uh in the developed world, And I think that's going to lead to a lot more miscommunication, which translates into mispricing from policy.
Well, does that necessarily mean that we'll see persistent dollar strength and a much weaker Japanese currency going forward.
It certainly is the far greater risk for the first half of the year, at least, beyond which I think a lot will come down to a whether you know,
US exceptionalism continues to defy gravity. Our side bet is it might not because of consumer strains uh and and how a lot of the policies may not be unequivocally reflationary to the point where it's it's super good for growth and and for that reason, we do see a case to be made whether the FED could start cutting back and that could allow the dollar to mellow at
most of a soft lending but not crash. The yen is going to hinge a lot more on a fat convergence, so they're going to wait for the you know, the yen's problem has always been it's it's a bog problem, right,
but it's got a fat solution. And so the fat solution will start taking shape, but that the tariff outcomes will have a huge bearing, and so it necessarily needs to be the case that the bite is you know, the bark is worse than the bite, and we end up with a negotiated outcome rather than going nuclear on it. And that's where I think we could see that narrative changing and a lot more relief coming for the bog as things start to converge globally rather than you know, apprasively diverge.
Well, let's take a closer look at what that means for China, especially whether or not tariffs are ultimately kind of a bargaining ploy here, a way to get what the US, specifically the Trump administration would like to extract from Beijing. Talk to me about how you're viewing the macro picture in China right now now, especially when you begin to discount the impact of potential potential tariffs.
Well, I think the tariff situation for for China, there are two thoughts around it.
One is, China has you know, done its homework.
They've watched this, they've watched the prequel, and so they're in a far stronger position to negotiate. And I also think the current administration is not just going to roll over and concede all ground. As much as they are intent on and on you know, coming to a negotiated compromise, UH, they're not going to do this in a fashion that looks like they've you know, thrown in the towel either. So China will have a lot more to negotiate with UH. And they also have got Plan B in place already.
They've already started diversifying, which is why if you look at China's share of global exports, it's not declined. And for that reason, I think that is where UH the execution on the part of the US administration.
Can you know and and and the thought behind.
And it will be very important. I think to a large extent, the ability to strike particular compromises is silver lining here. I think China is willing to concede a lot of grounds, but they're very clear on their strategic goals and objectives which they probably will not relent on.
So if Beijing is surprised, let's say, by a deterioration further deterioration in the domestic economy, does that necessarily erode some of the leverage that you perceive authorities in China may have at the moment.
That's That's a wonderful question and something that bugs me.
So, you know, the basic premise of economics is to oversimplify.
Something has got to give, And.
If you want to look at it that way, my sense is what has got to give is Beijing needs to really lower his hurdles in terms of their worries about moral hazards, competing factions in the political sphere, so on and so forth. And to some extent, I think the central government needs to almost issue a blank check. Does that create problems for the future, you bet, But does it then stop the wolf at the door. It gives them a lot more breathing space where they need it.
And I think this is where the prioritization of key tech industries, the new engines of growth will probably start to reveal itself whether it has really got the kind of prominence that people make it out to have from China's growth mantra.
So, do you think authorities in China are misjudging the impact that deflation is having and what a problem it is and how difficult it is to kind of extract an economy from that state.
At the risk of sounding almost disrespectful, that's my fear. I think they do, because my sense is that they're looking back and saying, look, we need to put an x amount of fiscal stimulus, X amount of money to stimulus, and then these would be the economic outcomes based on
our models before. However, given the chronic confidence deficit after the wealth destruction and the huge income shocks from local governments being unable to pay, and you know, the whole slew of things from conspicous consumption being knocked back in terms of bankers base on and so forth.
So if you've got.
Both a simultaneous income and balance sheet shock. Then my postulation is the growth multipliers have been decimated far beyond what the historical models will lead us to believe, so Beijing, and that that might partly explain why Beijing continues to disappoint with the drip feed of stimulus, because at each point they think this should lift it sufficiently such that we balance all our constraints and it doesn't.
Bishnu, before I let you go, if we can take a step back and look at the global economy right now, I'm curious about the risk, the greatest risk that you perceive globally as we look to twenty twenty five.
For me, one of the greatest risks is a further breakdown of diplomacy and trust, which would then lead to far worse fiscal outcomes all over because governments would need to placate the social fabric and so on and so forth, and that's going to lead us down a far greater economic turmoil down the road.
Vishnu, it's always a pleasure. Thank you for being with us on this special edition of the Daybreak Asia podcast. Happy New Year two. Vishnu Verarathan, head of Economics and Strategy at Misoho Securities, joining from Singapore. Here on the Daybreak Asia Podcast. Welcome back to a special New Year's Eve edition of the Daybreak Asia Podcast. I'm Doug Chrisner. We want to end the year with a look at Japan.
The latest inflation ratings for the month of December really support the case for a January rate hike by the Bank of Japan. For more, we heard from Ed Rodgers. He is the CEO and Chief Investment Officer at Rogers Investment Advisors. He spoke with bloomberg'shust Linda Ahman.
Let's take a water perspective of the Japanese market. We had Goldman coming out to say that given the en way it is hovering close to one sixty, it is probably a sweet spot for investors to be buying into Japanese stocks. Do you agree? I do.
We think everything's on sale in Japan. As you say, as you're closing it on one sixty, you know, we've got a little ways to go. We've got a month to wait and see what the BOJ does in January. But the impact of a FED rate cut in the Bank of Japan holding SETI is clear. Get impact on FX is There's just no way you can deny it, so everything's on sale. Will rates normalize? Are we going into the Are we finally going into the sort of post two thousand and eight financial crisis mode of central
banks all working in unison and having similar policies. I think absolutely we've reached a point where regionalization and specific countries are going to be responding according to their specific needs. There is not a global approach. There's not a G seven approach to interest rates. Central banks are not capable given the current global environment, frankly, of working together the way they did for much of the last fifteen, ten twelve years.
What's the approach of the boj It's been sounding davish and just wondering if it could be under a lot of pressure to make that move given where the yen is headed.
Absolutely there's pressure to make a move, There's no doubt about that. I think the biggest if you were to prioritize the pressures, though, is to understand what is the Federal reserve US Federal reserve policy going to be. The sort of hawkish tone of that recent cut of twenty five business points, I think many many folks in the market who've been in the space for a few decades, are really wondering when we're going to have serious dialogue about rates going back up again in the United States.
I know we're expecting two more cuts, but it's hard not to view current US policies and what we expect over the next one to two three years to not be inflationary. So there's a, if you will, a looming challenge of Jerome Powell versus the incoming administration, and it's hard not to see rates going back up in the United States at some point, and maybe sooner rather than later.
So having said that, Adam, what do you see the BOJ doing? How soon do you see that hike coming? And what does it mean for the end?
So we think that there will be a January a move in January. I think that rate will go up in the in Japan, and I think the BOJ again, the Japanese interest in the Japanese economy versus US interest in US economy, and the political convergence, if you will, that created a global zero interest rate environment. It's gone. There has been significant inflation in Japan, some bit good inflation, some ait bad inflation. The good inflation is wage inflation.
We have seen significant rise in wages, which makes the BOJ very happy. Some of the external factors over energy prices and other things that the bad inflation, if you will, is also clearly still present. The consumer driven recovery driven by wage increases has not played out fully. We think there is more of that to come, and we think that Japan will certainly raise rates once and then they'll
sort of wait and see. The incoming Trump administration will take office in January twentieth, the power will change, and then we'll start to see what policies really get enacted at the US at the national level, We'll see what
happens in Congress. It's very murky right now. There have been a number of appointees that would seem very sort of if you're middle of the road and traditionalists in their approach to certain things, and there are a number of appointees from the Trump administration that might seem to be a bit more radical and implementing change. It's a little bit hard to tell who's going to win out and specifically in this economic policy space where the US will land.
Yeah, despite the markets and the uncertainty in the US, I mean, US exceptionalism has continued and people say it will continue to persist back in the year ahead in twenty twenty five. Given that scenario, AD I mean, I'm wondering if how you're assessing the foreign interest in the Japanese market in comparison, I mean, if US exceptionalism were to continue, I mean, how much interest is there in Japan the US side there.
I said, there's a significant amount of optimism in the economic and business space with the incoming administration. But I'd also say, as an investor, you look at markets, you look at the run up, the significant run up in US prices and the leadership, if you will, of the Magnificent seven. Japan remains significantly undervalued and on sale the
United States. It's hard to imagine the next couple of years performance mimicking mirroring the last couple of years of performance, and the chickens will come home to roost on inflation in the United States, and the chickens will come home to roost on a what might turn out to be a very challenging Congress with regards to well as we just recently saw frankly in the what's the debt ceiling
going to be? What sort of legislation is going to get pass the Continuing Resolution to fund the US government. It seems there's going to be a significant amount of controversy there. So final policy will look like in the United States is still very much up in the air in our opinion, So until there is clarity on that it actually becomes, it would be very unusual for the Japanese to make precipitous moves at the boj and responding to a policy that they don't even know exactly what
the policies will look like. You know. A good example would be tariffs, you know, and how will tariffs be applied? Will will China and Japan be all in the same bucket, or will there be some preferential treatment for some allies used to be tariffs? This is this is all very unclear right now.
If Japan is under owned, what your investors been looking at? What must you own in Japan in twenty twenty five.
So I think there's some areas that are clear and obvious. You know, what's important to the Japanese. What is the Japanese government going to support. There's a huge moment of opportunity right now in Japan, and I think many many people at the Japanese government level and many people at the Japanese business level see a potential pivot. We've already for the first time in over almost twenty years. Twenty years ago, China became Japan's largest trading partner in the world,
replacing the United States as Japan's largest trading partner. Given the geopolitical realities of the day, we think that we have now reached the pivot point where we're going to go back to seeing the United States as the largest trading partner for Japan, and that has some enormous implications. How did the United States economies, not just the economies,
but the political economy work together. What are the very targeted, specific goals of the Japanese government in the science and technology space in many of the areas where they want to exploit certain research and development advantages, in certain areas where they've maintained, if you will, significant R and D technological innovation leadership, other areas where they've fallen behind semiconductors is an obvious example, and then other areas where we
see explosion of interests, such as in the venture capital, early stage risk taking investment space. We think the Japanese government is very, very focused and committed to improving the overall ecosystem and environment for in making risky investment. So in our world, what do we think about venture capital, hedge funds, private equity, everything called alternatives. We think is going to be dramatically different the opportunity set in Japan
over the next five to ten years. We also think in certain sectors it's clear and obvious where there's Japanese government interests, all these interests are converging and creating opportunity for investors.
That was Ed Rogers, the CEO and CIO of Rogers Investment Advisors, in conversation with Bloomberg's Hustlinda Ahman, And as twenty twenty four comes to a close, we want to thank you for listening to the Daybreak Asia podcast. It certainly was a year chocked full of consequential stories right across the region, and we hope you found our storytelling
and conversations interesting, perhaps even useful. From all of us here at Bloomberg Radio and especially the Daybreak Asia podcast team, we wish you a happy, healthy, and prosperous twenty twenty five