Markets React to Takaichi's Historic Supermajority

Bloomberg Audio Studios, podcasts, radio News. Welcome to the Daybreak Asia podcast. I'm Doug Krisner. We have a rally underway in Japanese equities. This is after our Prime Minister, Sunday Takaichi managed a historic landslide win in Sunday snap election, and the local broadcaster NHK is reporting Takaichi's ruling Liberal Democratic Party has secured a two third super majority in

In any way, the win itself is not that much of a prize, and the LDP Echane coalition securing a majority was widely expected. However, this level of landslide meaning that LDP alone securing the super majority of two thirds, which is basically the largest win since post World War Two.

At least caught me as a surprise.

So take is intending to do a lot in terms of stimulating the economy. She's going to accelerate talks on a tax cut for the sales of food. She's also pledging to ramp up defense spending. Is that really what the equity market is focused now on. I mean the largesse of the fiscal stimulus.

Yes, I think last night's a landslide victory enables her administration to push for the agenda. The focus area of investments will be in growth areas such as science technology, semiconductors, defense industry, digital infrastructure.

And also strategic supply chain resilience.

And also at the same time, they have been announcing a tax cut on food and beverages only for the two years, so that is also an action, and I think the market is reacting on that.

It's interesting if you look at the currency market today. When Asian trading began, the end showed a little bit of weakness, but I'm seeing a strengthening again right now at around one fifty six eighty. Is this really a part of her strategy to keep the end a little weak so that you can have some of the exporters benefit from that.

I think in part the range between one hundred and forty to one hundred and sixty en to the dollar is our base case, and so long as it's within the range, I think the government is not making any kind of push like to low or you know, weaken the currency.

At this moment.

Another thing is the Minister of Finance, Satsuki Katayama, has reiterated the mention of the food sales taxes only for two years and will not issue fresh government bond for this. So I think this also helped not like a yeah and sliding too much.

What are you seeing in the Japanese bond market and how may that impact some of the big banks in Japan.

I think overall, currently the eel curve itself. You know, of course you're seeing the longer end of the bond yield spiking, but the shorter end is relatively stable at this moment. Although you know, compared to a couple of years ago, it's obviously higher, but it's still much lower than the inflation rate itself that is happening in Japan.

I think overall, what.

We need to watch, especially as an equity investor, is that the nominal GDP growth of Japan is for the first time in a very long while, is meaningfully growing, and we view nominal GDP growth is a proxy of top line growth of opportunity in domestic Japan. Nominal GDP in Japan has been stuck around five hundred twentyon yen for almost thirty years until it started to rise in the past four or five years.

Global markets right now are consumed with the AI trade, and we know that SoftBank will be releasing earnings in the coming week. Will this give us any indication of what is happening in technology industries within Japan.

I think a lot of currently a lot of the so called thematic names like the AI and defense. It is a fact that they're training at all time high valuation levels and the momentum is very i would say hot right now. However, if you look at the overall market, it is still trading at probably the high end of

Where do you stand on the deflation story in Japan? I mean, for a couple of years now, overall consumer prices have been moving higher. I think we're in I would call it a inflationary environment, but we know what the history is. For three decades at least Japan was mired in deflation. Have we begun to see a significant turn here? Is it a pivotal moment? Do you think?

One thing about this landslide victory is that the current government and also the people in Japan actually supported Takaichi's agenda to basically grow itself for a very long time. Japanese government, understandably because of it's hired that the GDP ratio has more inclined.

To basically shrink to fit.

And that's one of the reasons why the inflation and also the nominal GDV growth of Japan has been so an emit or for multiple decades. But whether this takai is agenda will succeed or not, we shall see. But I think it's a bold move in the direction towards growth. That's a key difference compared to the other generations.

So before the results of this snap election, the equity market in Japan was not far from record highs. Is being long Japanese equities and overcrowded trade right now, do you think or is there still a lot more in terms of upside?

So currently the valuation level of MSCA Japan, for example, is trading about seventeen times for twelve month earnings, which is the high end of the tenure range. However, the earnings revisions the consistus earnings are trending up, mainly driven by the technology in the financial sector. And also going forward over the next two years, you're seeing three to four percent top line growth and high single digit to low double digit.

Earnings growth for japan equities.

So even at this evaluation level, it is not an overheat at this moment. And also another thing is I think the global investors are still well underweight Japan overall in terms of their allocations, and that hasn't changed for a very long time.

So I mentioned the Takeiichi is planning to ramp up defense spending. When you look at that agenda, are you inclined to put money to work in certain Japanese defense contractors or would you look elsewhere.

So we do have exposure in Japanese defense stocks, but also at the same time we're well aware of evaluation levels, so we are in basically we're mindful of the valuations, and we see opportunities in the growth areas that is trading at basically relatively lower evaluation levels. And that's where we focus on right now, because I think over the course of the last twelve months, it was all about momentum and a lot of times most expensive stocks did

Last year, you know, well that Prime Minister Takeiichi made some comments on the defense of Taiwan, which upset leadership in Beijing, and in turn, China restricted group tourism to Japan. Are you seeing evidence of fewer tourists in Tokyo?

I think for the Chinese tourists, the group tours are.

Restricted at this moment, and you're seeing these monthly sales.

Number of retailers seeing some impact.

However, the individual tourists are still coming in although it has low down and also a lot of the retailers also companies that are exposed to the inbound tourism. Have been making efforts to diversify the source of inbound tourism not just from China, but also in other regions such as Korea, Taiwan, Australia and even the United States.

So we heard from the Prime Minister after the snap election and she's looking forward to a visit at the White House in the spring with the aim of strengthening the alliance between Japan and the United States. When you look at that relationship, whether it's politics or trade, what do you come away with?

I think Japan and the United States has has been an ally post World War Two, and generally the relationship has been has been very strong, and I think Taki is very committed to keep in the relations strong in that way. A lot of the Japanese companies have exposure to the US economy. While it is it is still the largest economy in the world.

But I think, you know, Takaichi.

Is trying to balance between the US and also you know, trying to improve the relationship with with with China as well after a hiccup earlier in her administration.

Are you concerned about anything in the aftermath of this election outcome?

I think over the mid to long term.

Given that LDP has secured two thirds of the majority, you can also say that they became too strong. I'm hoping that they will not become too arrogant and push for too much too far. But I think the coalition party Ishan is working together and and you know, I hope that the Ishan Party will be a good balancer of.

The l d P.

Chintara will leave it there. Thank you so very much for helping us understand the nuances of the snap election that occurred Sunday in Japan, with a local broadcaster NHK reporting Prime Minister Takeiichi's ruling Liberal Democratic Party has secured a two third super majority in the lower House. Shintaro Takuchi, he is portfolio manager at Matthews Asia. On the line from San Francisco here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia podcast. I'm Doug Chrisner in

Well, we had quite a bit of volatility on the downside leading into Friday, and it appears that the dip buyers certainly came in in our perspective. You know, if you look at the at least the chart of the S and P and the Dow, they just gradually ticked higher throughout the day, almost closing at the high of the day with a little drop off at the end, but pretty amazing the turnaround and just the continual strength throughout the day.

So we had the news from Anthropic last week on their new AI model that will allow applications more focused to certain businesses, and I'm thinking immediately of the legal profession, also financial research and analysis. That really hit many of the software stocks very hard.

Last week.

Are we kind of in a weird way running a risk of avoiding the message from anthropic when it comes to some of these software issues, or was that an overreaction in your view?

It's hard to say. Obviously, time will tell. There's certainly been some big impacts. You know, look at Factset, you can take a look at Gartner simple It, which is down quite a bit as well. You know, some of these names have really taken a shell acking here, and

Goldman Sachs has what it calls its panic index, and I think it was on Friday it reached nine point two to two, a level that's not far from maximum fear. Are you seeing any evidence that maybe, even with that rebound that we had Friday, that there is some complacencies setting in?

Certainly possible from that standpoint, but you know, we've seen some pretty dramatic moves in other things, including bitcoins down fifty percent. On the other hand, gold and silver sore, the silver one from twenty to one twenty or higher, and O's pulled back to eighty or so. There's been a lot of volatility in other things besides stocks as well.

So how are you dealing with that when you're putting capital to work in the market, or whether you're watching the positions that you've put on, let's say, on the long side of the trade, how are you handling the volatility.

At Carnegie Investment Console, we're a traditional long only manager. We seek to find the best companies we can and have growing revenues, growing cash flows, growing earnings. Some of those are getting disrupted. You know, Adobe had been in our portfolios and we have exited over the last year or so. We look for companies that have some sort

So let me get your view on the macro because we have a big week for US data that slightly delayed employment report for January, and then we have CPI data and retail sales as well. How you are you viewing the American economy.

We think the economy is actually pretty in pretty good shape. I mean, I look at the Red Book sales numbers that come out every week, and it seems like it's up five six seven percent every week on a year over year basis. That seems to be good. You've seen a lot of we think employment of funds into manufacturing facilities, not just data centers. Because companies are able to write this off immediately, both the the equipment, the buildings, the R and D relative to the attacks bill, that's a

So to what extent is there any degree of urgency to cut interest rates again. I mean, it seems as though the market's view is that the next rate cut, if one does occur, won't happen until June. Does that kind of sit with your thinking?

It seems to be. I don't know if there's any great rush from that standpoint. The issue that needs to be addressed somehow, and it's probably a combination of factors, is the housing market. It's really been in a quagmire for a good four years. And I don't know how you solve that because you've had prices go up, rates have started to come down, but they're still high. Somehow we have to break this log jam, and I don't

Greg will leave it there, Thank you so very much. Greg Halter is director of Research at Carnegie Investment Council, joining us from Cleveland, Ohio here 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 in the Asia Pacific. You can find us on Apple, Spotify, The Bloomberg podcast, YouTube channel,

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