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Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. On today's episode, we'll check in on US Japan relations as the Biden administration's time and office comes to a close. We'll be hearing in a moment from US Ambassador to Japan, Rama Manuel. But let's begin with markets in the States.
On Friday, economist at some of the big banks in the States began reducing their forecast on the number of FED rate cuts after that blowout jobs report in December, the American economy added the most jobs since March, and the unemployment rate fell unexpectedly down to four point one percent. Joining us now is James Abata. He is managing director also the CIO at Center Asset Management. James joins us from here in New York. Thank you for taking the time to chat with us. Happy New Year to you.
I've been near it to you, Doug, Thank you.
I was struck by the fact that Bank of America, among the big banks, no longer sees any rate cuts this year. Do you think that's overdoing it just a bit?
I think so. My belief is that the FED has been really following the market, and if you look at two year Treasury note yields at this point in time, there are about twenty five basis points lower than where the Fed funds rate is today. So our expectations that the Fed will move one more time twenty five basis points and then, assuming no other surprises in terms of information, see the Fed actually just stay at that four to twenty five level for the foreseeable future until they see
Trump policies come to fruition. And what you really need to see is a continuation of the labor market remaining stable in this type of environment.
I think it's fair to say that the equity market is looking at the longer end of the curve right now, and that tenure was up to four seventy five Friday. As we get closer to five percent, is there a question in your mind as to whether or not we could see maybe some corrective behavior on the part of the equity market.
It's possible, but let's put everything in perspective. I mean, just because there's stronger growth in the services side of the economy, let's not forget that the ISM manufacturing index has been in negative territory for over a year now, so we have a dichotomy of fortunes between the manufacturing
sectors and the services sector. And going back to your point with regard to long term bonds, I mean, the move that we've had in yields has not been driven by inflation per se, but really a normalization of the term premium or simply the spread between long and short term rates. I mean, eighty percent of the recent increase in treasure yield has come from those rising term premium.
So I think despite the hysteria, I mean, the term premium right now is still below the normal one to two percent that existed from the nineteen nineties the global financial crisis. So I think when you look at other areas, you know, credit risk premiums and equity risk premiums are low. But at this stage, you know, markets are priced for perfection,
both in credit and equities. But I don't think the long term bond market, treasury market that is, is enough yet to basically crystallize any type of significant ramifications on the order of, let's say, in nineteen eighty seven crashes. Things along those lines.
We're going to be hearing from some of the big banks this week. They'll report earnings. City Group Goldman Sacks on the list. How do you think the yield curve in the way that it's been adjusted lately is going to impact the results of the big banks?
Well, that's the point. I mean, obviously, it's the big move that we've had in this term premium rising has
only occurred over the last several weeks. But when you look out further, I would expect that the net interest margin expectations of forecasts many of these major banks is actually going to be quite healthy, and that's going to go long way to type, let's say, offsetting the continuing credit problems that we're seeing in the commercial real estate and some of the emerging issues which are starting to
bubble up in certain segments of the consumers. So overall, when you look at where we are this I think Chairman Powell has done and to be fair to Chairman Powell, I think he's done a reasonably good job, and he's targeting back to getting monetary policy to the levels where it was back in the nineteen nineties with stable inflation, stable term premiums. And you know, more importantly, you know with regard to you know, the unknowns with regard to
tariffs and other Trump policies. You know, the way the executive branch is now, I mean, the executive branch has unilateral authority to implement tariffs. This is not something that needs to go to Congress. So he has to be aware of, you know, shifting policies that can come out of the Trump administration in any day.
So if they come to fruition, is it more likely that the net impact is inflationary.
We have to get out of the mindset where growth automatically equals inflation. And you know, the argument about whether or not, you know, tariffs are inflationary, you know, is not yet rooted in economic science to a certain degree. And I think, you know, one of the key things that we have to look at is potentially the contradictions
that we're going to see. You know, I think one of the things that we always have to be aware of is, you know, if Trump is genuine in the sense that he wants to have labor reclaim a share of economic wealth like he did with just siding with the recent Long Shorman's union strike because of automation, Obviously that's bad for corporate profits and it has a negative
impact on inflation. And you know, from that perspective. You know what we have to really look at, I would say in terms of a guidepost in terms of inflation and markets and other things. I think the key thing to watch is Trump's relationship with the nominated Treasury Secretary Scott Bessen. He's a very thoughtful conservative and not impulsey, and if that's a phrase, I think that's bad news for financial assets and stock markets in general.
So we had some news over the weekend. The deadline for Nipon Steel to abandon its bid for usteal has been extended scifius. The Committee on Foreign Investment in the US has given the companies now until June eighteenth. And then I saw a report in the NIKE indicating that Prime Minister Ishiba is planning to visit the US in the first half of February to meet with then President Trump and they may end up discussing this Nipon bid
for US steal. Is it too soon to talk about the possibility that this dal may get done?
I actually, after I saw that news, crystallized in my mind that the deal indeed will get done. Japan is just too important of an ally of the United States. Furthermore, the deal makes a lot of sense. The only other alternative is either to just let us Steal continue to operate and don't have the capacity to modernize many of
their last furnace mills. The other is in'saction with Cleveland Cliffs, with would basically give in essence and monopoly to old school steelmaking in the United States to one company who doesn't really have the same financial resources and the commitment to capital investment that Nipon does. So I think at some point we're going to see this deal get done.
It's obviously been enmeshed in the political fight that we've seen between President Biden and President elect Trump, both of them wanting to obviously side with Union against the foreign purchaser. But at the end of the day, the deal makes sense, and Japan is too important of an ally, and I think the deal will get done.
We were talking a moment ago about tariffs, obviously many targeting China, and then there's this issue with TikTok. The app as we know, is said to be shut down in the US next week. Last Friday, the Supreme Court seemed to signal it is unlikely to grant a reprieve to TikTok from that US law banning the app unless it is divested on the part of its Chinese owner Bike Dance. What do you think the road ahead is for US China relations?
You know, I'm not sure, and you know, the reality is the majority owner of the controlling owner of TikTok is not a Communist Party member. I don't really have a strong opinion on how this is going to shake out. I think, you know, if it was up to me, and I'm an old person, maybe just put a simple warning that if you want to become an imbecile watching TikTok videos all day, God bless you. And that's enough of a warning for people to, you know, to avoid TikTok in itself.
What about in terms of the impact on US China relations. I mean, obviously we were talking about the tear of some moment ago. Do you think that this is going to be four years now, as Trump comes into office of further decoupling between these two powerhouses.
It's it's going to be interesting because what we have to think about, right is that with regard to the point that we've raised before, with regard to labor reclaiming greater share in investment back into the United States, I mean, the reason why we've had you always have to go
back to this. The reason why we've had an unprecedented bull market, you know, since the nineteen nineties, and you know, really, you know significantly since China's ascension into the WTO is the fact that labor share of income in the United States has declined significantly, as have tax rates as well
as interest costs. So you know, this is the real key with regard to contradictions that we'll see you out of President Trump because you know it's wealth no. I mean, he measures the stock market as his barometer of success and to the extent that you know inbound investment, higher labor costs are not good for stock prices per se. I think that's going to basically be a governor on how aggressive he will be with regard to tariffs in China and recognition that again, you know, he needs also
inbound investment. I think will likely see some type of middle akin to what happened with Japan in the mid nineteen eighties, whereby you'll see more inbound investment in the United States by Chinese companies to compliment not the substitute, but to compliment some of their own export activities.
Great insights. James, thank you so much for being with us. James Abonte, Managing Director ce IO at Center Asset Management, joining us here on the Daybreak Asia Podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Prisner, the US Ambassador to Japan. Ram Emanuel will be stepping down from his post and he will return to the US January fourteenth, as his time in Japan comes to a close. He joined Bloomberg to reflect on the current state of relations
between Washington and Tokyo. Here's Emmanuel in conversation with Bloombergh, sherry On and Heidi Stroud Watts.
So, how are you feeling?
A sense of accomplishment also a sense of kind of you know, it's been three years almost to the day. We've got a tremendous amount of setting what I believe that the relationship has been reinvigorated, re energized and reformed and better prepared for the future. And you hand your paton off. But at the same as I jokingly say, well, it's been three years for the Japanese, it's felt like thirty.
And you've actually said that, you said at the start of your tenure that the next three years would be very consequential for the next thirty. Right, how much has been achieved and how much more could have been achieved? Are there any areas that you would have lied to have done more well?
I mean you hand off the baton. It's not like you run a race and you hit an equilimbrium and there's a finish line. The question is where was the relationship beforehand? Where is it when you walk off exit to the stage. And I think as a totality, whether you look at diplomatic front the two trilts that we've created with Japan, the United States, Korea, Japan, the United States and the Philippines, you look at the security arrangement, the cooperation, the type of exercises we do, and integration
in our forces. Everything has been re energized and reinmigrated and better prepared to reflect a credibility of deterrence to China and to North Korea. Taking one example, last week, when North Korea shot off another ICBM, both the Republic of Korea, the United States, and Japan were sharing intel in real time, just one manifestation of a reflection of
that didn't exist three years ago. In the same way that the President of the United States and the Philippine president and the Japanese Prime Minister had a conference call and discussing maritime issues in the South China. See, that kind of coordination didn't exist. And one of the things
I think also changed in a subtle point. A lot of times when you think of the terms, you think about battleships planes having a trilateral with Korea, the United States, and Japan, or one with the Philippines, Japan and the United States. That also is de terms because China's whole strategy is to isolate X country through our multilateral strategy and our lattice work. China is the isolated party in their own backyard.
We have seen the first administration of President Trump though, how he engaged with these rogue nations, including North Koreas King Youngman, is that going to be a threat to everything that's been built so far?
Well, you know, I try to I hate using sports menaphors, but as what I let me try this one is that the Indo Pacific is a home game for China, it's an away game for the United States. You want to level the playing field a little of the competition you have allies. The one thing China doesn't have anywhere in the world, and specifically in their own backyard Australia, Japan, Singapore, Korea, Philippines, India. They do not want to untether China. They want the
United States anchored here. That's a huge strategic advantage for the United States. We can project our deterrens to credibility, so China doesn't try to do something either through economic coercion, political coercion, or military coercion.
Ambassora, you mentioned a number of countries that have vested interests in this right. Do you think for countries like Australia and some of the other I guess middle nations around the region, is the alliance a sort of counter alliance strong enough or do you think there needs to be sort of more of an effort to work cohesively.
Well, you know, let me say this on the question is you don't hit an equilibrium and that's it. It's a work in project. You're always improving, you're always strengthening. You have reciprocal agreements now between Japan and Australia that didn't exist before. You have twelve coastcardships from Japan with the Philippines another five. I think or six are on delivery.
You also have radar. You're constantly moving and improving your deterrence and the credibility behind your deterrence and the effectiveness on there. I do think when China began its wolf warrior strategy on the diplomatic front and it's economic coercion on the economic framework, all the countries in the region realized and woke up to the fact that this was not a benign China. This was a China that was
determined to crush their own sovereignty. That has helped in the United States under President Biden, has effectively used that threat to organize the region of like minded countries that believe in the same set of principles to coordinate both their security front, economic front, and their diplomatic slash political front. And that's been done at an enhanced level and now
in China's own backyard, and they realize this. They are the isolated party because of the mistakes they have made in the policies they've adopted that have woken everybody up. This is not a China that talks about win win. The only thing they know is they win, you lose.
The Yui Shiba Cabinet we have a whole different political landscape here in Japan as well. They're going to be meeting with the new president, incoming President Trump. How do you expect that relationship to shape up?
I mean the last person to ask that question.
I mean, I'm really curious about what sort of chemistry we can expect. We saw the whole chemistry with a former Prime Minister Abbe and President Trump, and you have seen how governments here officials interacting Japan. Do you expect that? And I guess a follow up to that is would that have positive outcomes for the now delayed US seal NIP and steel business relationship.
Here's what I think is it's not wrong to face look at the two heads of state. As I saw firsthand, President Biden and Prime Minister Kaushida have an incredibly warm relationship that helped push both leaders farther than were their comfort zones. That said, one of the things that people lose sight of in the question, Japan has huge support
on the Hill Democrats and Republicans. That and having been a congressman, haven't been a chief of staff that has an impact on the construction of a national security visa via country has a state too, but do not lose sight.
There's two countries that have huge bipartisan consensus, China on one side, Japan on the other, and that will have a big impact because by just one reference, in our last three years, there have been one hun and eighty plus members of Congress, two speakers have come through Japan. And then second, you've had thirty governors. You've had an immense, immense direct investment from Japan into the United States as
well as the United States in here. So you have thirty governors who have a vested economic interest in good relationship with Japan, and you have one hundred and eighty members both Housing Seidate D and R who also want to see our ally fully integrated into our strategy.
We're very more encouraging towards the Niplancio used still deal.
Well, look, here's the one thing I remarked to everybody, and I think it's really kind of important. One is the relationship is much deeper than a single business transaction. Five years ago, Japan had the same words around to Shiba. Second, the United States four months ago awarded a Japanese company twenty billion dollar contract to replace all the cranes at our ports. And get the Chinese cranes out. Second. Japan is the only country that produces also a co production
on the Patriot Pac three. They've also a series of other weapons systems. Nothing speaks more to trusted ally than those examples. So is there a single economic transaction Tshiba five years ago? Relationship is still strong. You look at the nip on US deal today. The relationship is more complex and deeper in the roots and friendship than just a single economic transaction.
Ambassador, it was really great speaking to you, and thank you very much for always joining us and always being open to conversations with us. US Ambassador to Japan Ram Amamo.
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, 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 Prisner, and this is Bloomberg