南方财经全媒体记者 李依农 上海报道
Japan has battled economic stagnation since the late 1990s. And the Bank of Japan just ended its negative interest rate policy, marking a historic shift away from an aggressive monetary easing program that was implemented years ago to fight deflation. At the same time, we see Japan’s Nikkei index continue its record-breaking bull run. To understand the implications, we had the opportunity to speak with UBS Chief Japan Economist Masamichi Adachi. According to Mr. Adachi, Japan's economy has faced tough times over the past three decades, however, recent developments, such as a significant rise in wages and the transition from nominal stagnation to growth, signal a potential turnaround.
Inaddition, Mr. Adachi emphasizes the importance of remaining agile in investment strategies and highlights the significance of artificial intelligence as a driving force for future economic growth, urging international cooperation to manage world's potential risks.
Something is Really Different This Time
SFC Markets and Finance: Japan's economy appears to be on the path to recovery. What are some of the positive factors and potential challenges along the way?
Masamichi Adachi: Looking back at Japan’s history of the last three decades, it's quite a tough time. As you may know, Japan experienced big asset price bubbles in the second half the 1980s, and we got the bubble bust at the beginning of the 1990s. And since then, we call the era as a "Lost Three Decades". And this "Lost Three Decades" started after this asset price bubble bust, and then we got a banking crisis at the end of 1990s. And we got the global financial crisis in 2008. We got a big earthquake in 2011. We also got this big political turmoil from 2009 to 2012.
After that, we got this so-called policy package called the Abenomics, which is a combination of super monetary easing and flexible fiscal policy, so-called growth strategy, promoting private investment through the structural reforms. But through that time, we saw a unique situation of the economy, which is stagnation of the nominal growth, where nominal GDP was basically flat for the last three decades. And even with the very powerful policy tool by the Abenomics, we couldn't change the dynamics.
However, we got another big shock coming to all over the world, the pandemic. The COVID pandemic made a very different dynamics of the global environment. Especially the inflation peaked due to the pandemic, as reopening effect of the global economy, especially in the U.S. and Europe or many other places. The demand picked up, especially with huge government subsidies to the ordinary people all over the world.
Then we got to another shock, the war between Russia and Ukraine. So what was a consequence on that? Big inflation, globally. And that transmitted to Japan as well. We got the big rise of the import prices, then we got the higher CPI inflation.
This higher CPI inflation, initially, many people thought is another cost-pushing inflation we experienced the same case in 2006 and 2007, when the oil prices went up to the hundred dollars per barrel, before the global financial crisis. So, we often say this is a cost-pushing inflation, and therefore this is rather deflationary, because the higher import prices, meaning for our country, is the loss of the national income, it is also called the time of trade deteriorate.
Therefore, we thought this is another negative shock again for Japan. However, a big difference happened in 2023. We got a big jump in a wage growth. Wage growth didn't pick up in 2006 and 2007 when the import prices picked up. But this time we got the high import prices with the new opening effect in a domestic demand. So we got the higher demand and higher input cost shock, which made Japanese people need higher wages, and corporations actually pay the wages.
Therefore, we experienced the big jump of the wages starting from last year. At that time, I found this time may be different, then these dynamics of the wages and prices is probably rolling over. Then this year, that last week we got a big surprise from the so-called "Shuntō", that spring wage negotiation outcome, which boosted their wage growth for this year. It's amazing that we saw for two consecutive years of the big wage growth, which we have never experienced for last 30 years.
Now we are seeing that economy is eventually growing in the nominal term. This transition from a nominal stagnation to the descent nominal growth around 3%, I call it the nominal renaissance. The key challenge for Japan, and the Bank of Japan (BOJ) is the success of this nominal renaissance. This is my understanding and explanation of what's going on now compared to the last 30 years.
However, I have to emphasize other things as well. We have, at least, two circular challenges. One is the demographics. Our total population is shrinking 0.5% per year, and working age population is shrinking a little bit faster than that. And we are experiencing aging as well. So this is a huge burden for the macro economy. The second challenge is definitely an elevated common debt, which links to the aging society as well.
So these challenges we have to overcome, with not only the higher nominal GDP growth, but we also definitely need another reforms on fiscal and other economic structures. As I mentioned, our biggest challenge is, of course, a success of this nominal renaissance. But we have to have another success of reforms in fiscal dynamics and demographic dynamics.
SFC Markets and Finance: Bank of Japan (BOJ) just ended its negative interest rate policy. Will it hinder Japan's economic recovery? Are you confident that BOJ has sufficient space and wisdom to balance YCC with inflation and effectively manage the economy?
Masamichi Adachi: I'm more confident than before that these dynamics is manageable. Because BOJ ended Yield-Curve-Control, negative interest rate policies and the quantitative easing. A bunch of so-called non-traditional policies packages are all now done. And the biggest surprise and biggest success, I think, from the perspective of policy is there is no confusion in the market.
It's a rather smooth transition from very extraordinary policy package to the very standard policy of targeting a short overnight rate and giving a guidance on the bond purchases. Of course, a bond purchases is still not traditional, when you think about more than 20 years ago. But in the last 20 years, many central banks such as the Fed and the ECB are doing the same thing. So I think now quantitative easing is a sort of already traditional policy, and the standard short-term rate and bond purchase, these policy framework is much easier to manage.
And also, I have to emphasize that BOJ's communication is getting much simpler. Because policy tools are much simpler, meaning that communication to the public and market is much simpler. Therefore, I think compared to two weeks ago, when the BOJ continued such aggressive policies, I think market and the BOJ are feeling more comfortable to have a normal game of the market.
SFC Markets and Finance: What do you expect the interest rate to be by the end of this year?
Masamichi Adachi: Our base case is expecting 0.25% at the end of this year, but after 0.15% hike, from current 0%～0.1% to October. That is our base case. However, if the weak Yen above 150 against U.S. dollar continues through the next couple of months, I think the BOJ may raise the rate to the 0.25% in July, or even June. It's possible.
Stock Markets Can’t Rally Forever
SFC Markets and Finance: Japan’s Nikkei 225 stock index continues to hit new records. What does it mean in terms of investors’ sentiment and for Japan's economy?
Masamichi Adachi: That's definitely a positive factor. In Japan, it is s-called wealth effect, which is the consumers spend more when they are asset value increases. Is probably not so high because that not many people have equity. Only 10% of the households have equities. Therefore, wealth effect is probably less than many other countries like the U.S.
However, still, the higher equity prices are encouraging for many people, and especially corporates are feeling quite comfortable to catch up with these higher equity prices, they have to do more. For instance, new businesses or new services, to improve their profitability, therefore that will encourage the economic growth, I believe.
And also, I can tell that there is the public pension system, which has huge pension funds. And the core of the pension funds is the Japanese equities. So, the value of these pension funds increases, means our wealth is increasing. Basically, higher equity prices is encouraging for the whole economy. But the only problem is whether this is sustainable or not. And we hope that's sustainable. But if that collapse, then we will get into trouble. Whether it will be another asset price bubble, we have to tell in five years later or something.
SFC Markets and Finance: Indeed, some people are worried that the Japanese stock market is currently in a bubble again. Do you believe the strong rally can be sustainable?
Masamichi Adachi: It's a very good question. If someone ask me that's question from overseas, especially in the U.S., I ask them 'do you believe that S&P 500 will keep going up?' Because I believe that the Japanese equity market, or even European or any other market will continue to rally because U.S. market is rallying.
But is the U.S. market really sustainable or not? It's debatable. The rise of the stock prices in the U.S. is very skewed to the AI related (sectors), some people call it the AI bubble. Maybe AI boom or AI bubble, we are not so sure on that yet. And the Federal Reserve in the U.S., is now hinting to cut the rates based on assumption that the U.S. inflation slows to 2%. But if that is not the case, then the rate cuts will be delayed or even no rate cuts through this year. That means that the financial condition will deteriorate rather than improve, which is a baseline assumption for the whole financial market.
And the U.S. economy is quite fragile as you know. The interest rate is quite high relative to the past, and household's balance sheet is rather stretched, and the banks are now tightening their credit to their consumers. So I feel it's a narrow path that the equity market in the U.S. and all around the world continue to rise in next 5 to 10 years.
I think someday we need to expect some corrections. But the issue is whether these corrections will be huge like a global financial crisis in the 2008 and 2009, or some more normal corrections of just 10% or so. If it's a 10% and we get sort of normal recovery with the Fed rate cuts, then we can tell that the uptrend of assets prices will keep going in a sustainable manner. But if the crash is significant, then we are in trouble.
SFC Markets and Finance: What would be the best strategy for investors in the current Japanese market?
Masamichi Adachi: I'm not the strategist, and I'm not a guy who can recommend any investment transaction, I can tell just the general comment. You monitor the development and pay attention to what's happening in the world, and be agile, meaning that it should be flexible. Don't bet on very risky assets. But at the same time, don't be too complacent on just keeping cash, because inflation is getting higher.
SFC Markets and Finance: At the same time, Buffett raised his investment in Japanese trading houses. What opportunity did he see? Will the inflow of foreign capital lead to possible risks of stock market volatility?
Masamichi Adachi: Mr. Buffet invested in the trading companies in the Spring of last year. And the global market participants recognized this is a great opportunity to pay attention to Japan and the trading companies and so on. That was a very unique time, that the attention of international investors return to Japan for the first time since 2013. So it was very interesting.
But for me, it's hard to tell why he invested to these trading companies. I understand international investors pay attention to Japan, because as I mentioned at the beginning, Japanese economy is probably seeing a big shift of non-nominal growth to the higher nominal growth. If you think of positive factor for the equity market, inflation is back. That's one thing. And on top of that, even BOJ decided to end the aggressive policy, it doesn't mean that they are tightening and the real interest rate is still quite negative. Therefore weakness of the Yen is translating into the higher profit of the exporters.
Also, as I mentioned before, the U.S. market is driven by the tech companies, and that's linking to the Japanese exporters. Therefore, that will bring up the Japanese equity market. I think all of these things are partly related to Mr. Buffet's investment, but not all.
I think the trading companies are very unique. So these companies are very similar to the Mr. Buffet funds as well. I mean, even you call trading companies, they are investing to many places, investing commodities, new businesses and new frontiers. So they are actually investment companies. To some extent, Mr. Buffett strategy is similar to these trading companies.
One more thing I can tell you is there are five trading companies and Mr. Buffet invested same amount to the each. So five of them are now competing. So that's probably giving more sort of boost to the change of the management. So I think in case of Japan, this kind of competition, or peer pressure within a group, is probably powerful motivation to change anything. So from investors point of view, I think one area for you to focus more is what is the rival of the industry and within some groups.
AI May Be the Most Important Driver of Future Growth
SFC Markets and Finance: The global economy seems to be slowing down. Can Japan's export business sustain growth? What impact might this have on Japan's economy and market?
Masamichi Adachi: Yes, we still rely on the rather solid global demand. As I mentioned, our population is shrinking 0.5 %. And corporate investment is, even though it picked up in last year, it's still sluggish. And so we still need to rely on external demand. And last year, when we talk about external demand, which is not the typical goods export, it's a rather unique service export. We call the inbound tourist, which is foreign tourists from overseas. We defined that as a service export, and that was a definite support for Japanese economy last year, in 2023, and we hope that will continue.
And of course, also Japan export a lot of autos and capital goods and many other materials. So if the global economy slows more significantly, especially if the U.S. enters recession or something, then we are really in trouble. So I hope that the global economy continue to expand at a decent pace, around 3%, as the case of the last couple years. You mentioned that it's slowing, but my observation is not slowing, just softish, but not outright slowing yet, at least.
SFC Markets and Finance: As you mentioned earlier, when discussing the Japanese economy, it's often associated with the "Lost Decades" and the challenge of getting Japan out from recession. What lessons can we learn from Japan's experience in tackling economic stagnation?
Masamichi Adachi: First of all, don't make a mistake that this amazing recovery for the last two years because of the policy successes or something. I don't say that the BOJ or government haven't done anything or something. Of course, they did it. Weakened Yen due to the abuse of aggressive easing was a part of the reason why this inflation dynamics changed. But, at the same time the "Lost Decade" is a combination of the several factors not only the demand side, which is coming from so-called balanced adjustment. And we had a significant banking crisis, and we got several big earthquakes, including a nuclear power plant accident. So bad luck, mistaken policies and inevitable headwinds from demographic challenges, these are the causes of the Lost Three Decades in my understanding.
Only one lesson, that I always emphasize to the Chinese clients, is that if the policy reaction is timid and slow, the problem lingers. I think things will getting worse. I think China can avoid the sort of banking crisis like the case of Japan, because the financial system in China is very constructive.
In our case, the deflation didn't start from the beginning of the 1990s. Actually, deflation started after the banking crisis. So once you get into the deflation, we are made more strictly deflation of mindset. It's extremely difficult to escape from there.
SFC Markets and Finance: How can the world work together for a better future? What will be the main engine for global growth?
Masamichi Adachi: I think this is common for a global economy that we definitely need more collaboration of each country’s effort to reduce a significant risk of global warming or geopolitical risks, or any other issues which lingering related to everybody in the earth. I think that's one thing that we have to pay attention. We have to reduce the significant downside risk. It's not for the only economy, it's for a whole society. Actually it's an issue of extinction of the human beings.
So we, not only Asia, but the whole country, whole people need to pay attention. What we have to do is to improve the productivity, we have to innovate new product, new services. And we get the better way to do the business, better way to conduct economic activities.
So artificial intelligence is a definitely area that people need to pay attention and people need to encourage to utilize in the right direction. Of course, this is a very dangerous technology as well, that's why we need international cooperation to manage the downside of this new technologies. Artificial intelligence is probably the most important driver of the economic expansion in the world. Not just in Asia, but the whole world.
（市场有风险，投资需谨慎。本节目嘉宾意见仅代表本人观点。）
策划：于晓娜
监制：施诗
责任编辑：李依农
记者：李依农 施诗 杨雨莱
制作：李群 蔡于恬
新媒体统筹：丁青云 曾婷芳 赖禧 曾昭发
海外运营监制: 黄燕淑
海外运营内容统筹: 黄子豪
海外运营编辑：庄欢 吴婉婕 龙李华 张伟韬
出品：南方财经全媒体集团
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