Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. The Japanese yen is trading at a five month high today against the US dollar. It was earlier on Sunday that we heard from Prime Minister taka Ichi sending a fresh warning to markets with the assertion that the government is ready to take action in the face of a weaker yen and surging Japanese
bond yields. Now. Last Friday in the States, traders reported that the New York Fed had contact at financial institutions to ask about the yen's exchange rate. Now, the reason behind that rate check was unclear, However, the possibilities do include that Japan's Ministry of Finance did ask the US Department of Treasury to request a rad check to stabilize the end without any direct intervention. Let's take a closer look at what this means for market action. I'm joined
by k Mura. Kay is, portfolio manager and managing director for Japanese equities at Newburger Berman. K joins from Tokyo. Thank you so much for being here. We heard over the weekend from Prime Minister Takei ICHI's sending a fresh warning to markets, perhaps signaling the potential for some sort of intervention. I'm curious, K, when you listen to some of the chatter on trading floors in Tokyo, what are you hearing right now?
Me personally sitting here, we haven't heard anything directly, just because our trading has actually done in Hong Kong. But what I can say, though, is based on our internal communication, is that we have been hearing over the last several weeks that the government has been more keen to put
some kind of a floor for the Japanese yend. That rhetoric has sharply increased since Friday, and that was following the boj governor's press conference started off with rate checks from the central Bank, and I think what caught people off guard was what happened on the state side, with speculation about the FED New York Office also intervening, which I think would be quite a rare event if it
actually did happen. I think at the moment there is also some speculation that the government in Japan has intervened in the markets, just given the way the yen has moved. And so we are currently watching at the moment, if
the yen would appreciate any further. On the other hand, if the moves that we've been seeing on the end is driven partly on speculation that the US government has also intervened in the market, which we haven't yet heard of, that is something that I think we need to pay attention to more carefully because that's sort of coordinated action by the two central banks. It's something that we haven't seen since what March of twenty eleven, and that would be quite a very very rare move.
So we're seeing big moves in the for X today dollar weakness, with the Bloomberg Dollars spot index down about a third of one percent right now, the end much stronger. Some of this may be tied to a bit of short covering. Do you have a sense of how much time will need to elapse before we can kind of conclude that this is perhaps a durable move that we're not going to see a resumption of en weakness.
It's hard to say, because at the moment, what is driving the dollar yen is speculation about intervention, which historically has helped for very near term movements. By that said, the weakness that we're seeing for the end where we have been seeing has been driven by more economic fundamentals
structural issues with the Japanese economy. We are of the view though, that the moves have been somewhat excessive, especially given the fact that government finances in Japan have been improving over the last several years, and so we're of the view that once there's some normalcy coming back to the markets, yet would appreciate gradually against the US dollar, albeit this would also be dependent on what the FED does over the next or six to twelve months.
We recently saw in the Japanese bond market a little bit of anxiety tied to the Prime Minister's plan for a tax cut on food, and that put the spotlight clearly on the fiscal situation that Japan has been struggling with for quite some time. Now. Do you think that that is also something that is pretty much a short term blip that we shouldn't be too overly concerned about, or is there a potential for some type of return to that type of volatility in the Japanese bond market.
It's hard to say at the moment, but what I can say is that most investors have already priced in the prospect of some kind of tax cut involving food stuffs in Japan, and this has to do with the fact that most of the political parties in this potential
upcoming election have also looked to make similar policy statements. However, I think what investors are keenly focused on is how the election would help Prime Miaster tak push through other economic fiscal stimulus measures, potentially increase defense spending down the line.
We're of the view that if the Liberal Democratic Party wins more seats in the parliament, if Miss Takaichi Solidus bias her power even further, then she will likely push through more measures that will further support to domestic economy, especially on private spending, and then of course on defense spending as well. And our portfolios are well positioned to try to capture some of those gains down the line.
And of course, I think we're of the view that if this helps the prop up the economy further, that could be especially helpful for regional banks as well as also some of the big lenders as well that could benefit from a healthier economy.
So we're seeing a pullback in Japanese equities that seems to be directly correlated to the end strengthening today. Longer term, what is your outlook for stocks in Japan.
Yeah, no, that's a that's a very good point. You know, this sort of temporary pullback is something that you know, we think is actually quite healthy. It gives us an opportunity to dive into some really good names. Our view of the mid to long term is that there are companies out there in Japan that are very much discounted versus global peers, but have really good economic fundamentals and macro fundamentals underneath it, but also good growth stories over
the mental long term. So we own a company like say Nitara, which used to be a company called JC Spark, Plug and Doug. You know, if you're a driver, you'll probably know what that is. It's it's a key device that goes into an internal internal combustion engine vehicle. This company owns seventy percent of the global market share, and as we've all been seeing internal combustion engines, hybrid vehicles,
plug and hirrins are all coming back. And our view is that as this market continues to do quite well, this company with this type of global market share will be able to not only maintain good margins but also be able to pass on increasing costs and further improve
profitability down the line. These are the types of companies that we think have really good potential over the mental interm and they're still you know, training at low teams, which is a really nice discount compared to some of the really high cyclic goal high valuation names out there today.
So kay and the week ahead here in the States, we're going to be getting earnings from four of the mag seven companies, and a portion of what we will be hearing will be reflective of the environment around artificial intelligence. Give me a sense of what's happening in Japan right now in AI and how this is being played out in the equity market.
We also have exposure to this play, but more from a cautious valuation standpoint. So what I mean by that is, you know the likes of say Advan Tests or took Electron. These are hardware semiconductor production equipment type plays. They've seen a huge run up in their share price in evaluations
with a little stretch. But actually if you go down the value chain, you'll find that there are companies like Kinden which are very focused in terms of the building in construction of the semiconductor plants and the data centers. And actually these are the companies that have actually done very very well, and we continue to see them doing very well because up until now they haven't been able
to make much money in construction projects. But with the last sort of three to four years Japan coming back with inflation sticking real interest rates higher, these companies can now pick and choose really profitable projects and voila. They tend to be the AI related investment place. And so
that has done tremendously well for us. More, from a macroeconomic standpoint, AI is going to have a really big boost to productivity and you know, Doug, as you know, in Japan we have a shrinking population, so any incremental improvements that we could see in productivity for the labor market would bode well, very well for Japanese companies. And these are types of companies that you'll find exposure to in our portfolios.
Okay, before I let you go, I have to ask about inflation, because at the end of the week we're going to get the data on Tokyo CPI. We're speaking, you're in the Japanese capital. Give me a sense of what's happening on the inflation story, particularly at the retail level.
Yeah, Doug, I think we are seeing the inflation and take a bite out of people's wallets. And you know, when we're looking at some of the numbers from retail sales figures, we did notice some weakness, especially among SI apparel and some of the you know, basic items. I think you know you can you can get a sense that some people are starting to trade down towards some of the cheaper goods. However, it is important to note that in the upcomings next several months, we're going to
see wage negotiations from laboring unions. They're going to be very keen on seeing higher wages continue for the foreseeable future. But that's why it is very important that as equity investors, you're invested in these companies that have good, solid fundamentals, that have high market share, that can pass on rising costs such as labor. Those are the ones that will continue to survive. And I think you know, our view is is as economy gets better and better, we will
see the consumption pick up. It might take a little bit of time, but it will pick up. And that's I think what makes us market burber interesting.
Okay, we'll leave it on that optimistic note. Kay, thank you so much. Kaya Kimura is portfolio manager also managing director for Japanese equities at Newberger Berman. Joining from Tokyo here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Krisner. We are seeing a rally in the precious metals market. Earlier today, spot gold rose above five thousand dollars in ounce for the very first time, and silver also hit a record high on Monday.
For a closer look at market action, I'm joined by Katie Kaminski. Katie is chief for Search strategist at Alpha Simplex. She's on the line from Boston, a very cold and snowy Boston. Katie, thank you so much for being here. What do you make of what we're seeing right now in the precious metal space.
Well, I mean, I think the precious metals market is a little bit of a shock for us that we've seen so much movement there.
It's almost like you have supply and.
Demand and balance and so much demand for precious metals that prices have just really surged drastically. I mean, I think gold spot prices broke five thousand today future is even higher than that, of course, so you're really seeing precious metals as the safety trade, and it continues.
To go safety against I think.
Against potential weakness for the US dollar, geopolitical uncertainty, just so many variables looking for something that has clear value, tangible value, and in some senses a hedge on the potential for challenging environments for equities at some point.
So you mentioned the dollar weakness. Flip side of that today is a great deal of strength that we're seeing right now in the Japanese yen. Earlier on Sunday, Prime Minister Takich she sent a fresh warning to the currency market. She was saying that the government's going to be ready to take action in the face of a lot of the weakness that we have seen. In the end, now we know that last week the boj did not adjust policy.
Whether or not that contributed to a lot of the recent weakness that we're seeing in the end, I'll let you answer that question, but first talk to me about what you're seeing in the dollar and what accounts for the dollar weakness.
Well, the dollar has a lot of things going against it right now, obviously US rates are higher, and potentially we're one of the few economies that might still cut rates at some point.
So I think that's very negative for the dollar.
You've also seen strong growth rally that has also been somewhat non dollar, and then there's been a lot of concern about sort of the anti dollar trade as well, so sort of you know, moving out of US assets. So you've definitely seen that for the last year, and you continue to see that this month. So that's been really occurring for the last couple of days as well.
So we have a FED rate decision this week. In our survey, policymakers are widely expected to keep rates steady. But there's another idea here is that we'll probably have to wait until June before we get another rate cut from the Fed. Is that consistent with your thinking.
That's consistent with what most people are thinking right now. I think bonds have been the hardest asset class to trade. We have seen YU fields up quite a bit, and you're seeing sort of this short views on fixed income. That being said, these are not really strong signals.
You're still sort of it feels like.
Fixed income is in limbo, and that's consistent with the idea that we're not probably going to have some big moves or changes in the short term.
We get PPI at the end of the week. Are you satisfied with the level of inflation right now? I mean, if you had to put money to work in the bond market, that inflation is not a pain point for you.
So I think the challenge here is the short term versus the long term view. The short term view seems to be relatively mild on inflation, and bonds have been trading sort of not too concerned about inflation. But I think if we really did have a shift in policy where in some sense you have rates go lower because there's a lot of pressure for that, and you have a lot of growth accelerated and overstimulation, that's where longer term you might see some potential for inflation.
We don't see that.
Now, but I think over longer horizons it's definitely a concern.
We have a lot of key earnings reports in the week. I had four of the mag seven are reporting, and this is very much part of the AI story and the build out of the infrastructure that has helped to drive a lot of economic growth in the US. What will you be listening for as we hear from four of the mag seven this week.
Well, this is an important point because if you look at the market will be very focused on the strength of these earnings. But if you look at market moves this month, actually the Russell and some other sectors have been outperforming, so we've seen somewhat of a rotation, and I think it could be a trigger point if you did see some concerning news in something that has been the main support of the market recently.
But it has been interesting that the market.
Has been kind of pivoting and rotating a little bit out of sort of tech and more in favor of small cap this month. Maybe that's something that could continue depending on how this news and how earnings come out.
So is the move into small cap that we've been seeing recently, is that just based on the attractiveness of valuation or is it a bet on the fact that we're going to see a resurgence and economic growth.
That is a good question. I mean you have to ask the question of is this a real rally or is this a broadening rally where you're kind of seeing, you know, equities have gone up so much growth is strong, does that mean that sort of undervalued areas of the
market might actually have opportunity for expansion as well. It could be one or it could be the other, and it really depends on if this is a fundamentally based and we're actually going to see that growth in those companies, and maybe that people are just looking for other places to diversify, and that means that it may not be growth related but sort of diversification.
Take that a step further. If you're looking for diversification, do you want to be exposed offshore right now? Is that a safer bet?
Definitely, I would say, because if you've looked at things that have really worked this month, it's things like em Those markets are really benefiting from some of the big moves in the metal space, et cetera. So you're seeing opportunities outside of just US. Japan, despite today, has been up quite a.
Bit as well.
And it has been interesting because you've seen China and India have been down, but you've seen really positive returns in other places like Hong Kong and Japan and et cetera.
Is it surprising to you that we haven't seen, let's call it a meaningful pullback in the US equity market something substantial to the tune of around ten percent or more. Does that surprise you?
It's not that surprising to me, given the level of growth that we've seen and sort of growth numbers. So I think looking back at last year when we were sort of in the height of this tariff discussion, I think everybody thought, there's no way that we're going to see what we've seen over the last year months. But as long as we continue to see growth strong, then sort of there's something for this market to lean on.
And I think that's why you're seeing that.
So you're fully invested right now. You're not holding any dry powder, so to speak.
Well, i'd see.
I mean, for us, we were really following the trends and themes that you're seeing, and you're seeing not full like signal strength in terms of equities, but you have seen pretty consistent and strong views that equities are continuing to rally and for now, there's really little that goes against us at this point.
So what is the one thing then that potentially could alter your thesis here that may prove to be a good warning signal or something that may indicate that a reversal is on the horizon.
I think the places a look right now are sort of I am a little concerned about the massive moves in the metals markets. So if you see that and then you start to see energy join that particular theme, then the sort of eventual inflation concern comes in. I think the fact that you're seeing yields up and the potential for sort of a weakening in the bond market is also another precursor to potentially pullback in the equity market.
So I think we have to look outside of the equity markets for areas where there might be some concern.
Okay, Katie, well leave it there. Thank you so much. I hope the week ahead is a productive one for you. Katie Kaminski is chief for search strategist at Alpha Simplex, joining from Boston 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. If 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 Chrisner and this is Bloomberg.
Hmm