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If bonds are back today, why wait for tomorrow? At pjum, our fixed income strategies help investors uncover hidden value and unlock opportunities. Whether you're looking to enhance your income or diversify your portfolio, our broad range of strategies bring together local expertise and deep credit research to help you achieve your long term goals. PJUM Our investments shape tomorrow.
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Today you can join me, Katie Martin, with Chris Giles and Claire Jones, my colleagues from the ft, but also with former Fed Vice chair Lyle Brainard and Fidelity International's Salman Ahmed on October 23 for a subscriber event. All the details for you to register and ask questions in advance are available on FT.com/edge pushkin there was a bit of political argy bargy there for a bit, but Japan has a new prime Minister after all, in the form of Sanai Takeichi, the first woman ever to hold the role. And one of her first moves, appoint the country's first ever female finance minister. Markets have sat up and taken notice. We've got a new record high in stocks and that's all good fun, of course, but investors are also bugged by the idea that the new Prime Minister might lean on the bank of Japan not to raise interest rates, despite unusually high levels of inflation. That points to a drop in Japanese government bonds, which have already had a tough start to the year. So today on the show we're asking, is the Takechi trade on and is this mix sustainable? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a columnist and FT desperately trying to make sense of markets in London. And I'm joined by the magic of the Internet today by a special guest, one of my favorite colleagues, our man in Tokyo, Leo Lewis. Now listeners, it is midnight in Tokyo as we sit down two this poor man has been on the go for hours. Leo, you are very good police. Thank you for coming on the show.
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C
Thank you for having me.
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B
You must be kind of reeling, right? You've been our man in Tokyo for a really long time. This is the biggest outbreak of political drama for a very long time, right?
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C
Yeah, absolutely it is. And you know, there is a quiet pride here that Japan has its first female leader before the Americans got theirs. So that's been very exciting. There was the drama that you mentioned earlier, you know, of whether it would actually happen. There was a sort of slight wrinkle at the towards the end and whether the opposition would be able to sort of gang up and make make it not happen. But today it did and it happened pretty Straightforwardly, in the end. And I've just come from the press conference, it's her first press conference as.
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B
Prime Minister and how did she seem, you know, prime Ministerial, like ready for.
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C
Business, ready for action, 100% ready for business. It was a very impressive performance. And what was interesting about it was I think the point about her is that she's self made. And unlike a lot of people in Japanese politics who have come from grand families of politicians, she made it on her own. And she made it on her own in an environment that was not set up for people like her to make it on their own. And she has finally succeeded. And she made this kind of mention at the beginning, she said, you know, I've tried several times, I failed several times, I kept trying. And it was just this kind of moment of look, whatever we make of her going forward about what her politics are like and so on. This was a very important moment for Japan. It was very important moment for her. And I think it was a very important moment for the idea that things have changed quite substantially in the whole kind of setup. You know, it was a great moment.
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B
And as you say, she's a self made woman. Am I right in thinking she used to be a TV presenter?
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C
Yeah. And of course that is part of the skill set actually, that she is a very, very fine presenter of her ideas and her thoughts. So it just came across very strong, you know, by contrast with her predecessor Ishiba, who'd been a politician for a long time, is a smart guy, but just never managed to convey any of that. And it was just, it was just a, it was a slick performance. And a lot's been said about she's sort of ultra conservative, that she's this big nationalist. All of that could be true, but she certainly presents in a very charismatic way, actually.
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B
And so what are her priorities? I'm thinking like mainly in terms of the economy. You know, she's described as a hardliner. She's described as kind of, you know, a capitalist through and through. She models herself on Margaret Thatcher as, as you say. But she's also made some quite weird noises about what she wants the central bank to do and not do. So let's start with what markets have done in response to her coming in. We've had a big rally in Japanese stocks pretty much all year. We're up what, 25%?
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C
Yeah, thereabouts. And at about 11 o' clock this morning, I got a call from the press guys at Nomura because the Nikkei 225 was at I think it was 49, 900 and a little bit, yes. And 50,000 was sort of inside. There's a lunch break and there was a possibility it was going to happen in the afternoon session.
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B
I love that Japanese markets take a lunch break. Yeah, well, I mean this is extremely civilized.
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C
You gotta have your ramen. You've gotta have your ramen. And they were inviting me along with other journalists to be on the trading floor if it went through 50,000.
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B
Right, cool.
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C
Right. And the last time this happened, by the way, that they invited us to trading floor was when the Nikkei went through a couple of years back. Now would you remember when it went through the 80s bubble peak, which seemed unattainable for decades, Seemed completely unattainable. And you wrote about it at the time. We all wrote about this sort of going through that moment, you know, and since then, obviously it's come another 10,000 points up from there.
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B
And this 50,000 level is so tantalizing.
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C
It's so tantalizing. It's an odd index, but it's the one that people watch. And anyway, so Nick said, Nomura said, come to our trading floor. It didn't go through. It doesn't matter. It closed at an all time high on the day that Japan got its first female Prime Minister. And as you reference there, the Takaichi trade was the phrase that when we spoke to the brokers and the investors, that was one they were using. Now it's a broad phrase, but that was what they were saying. Yeah.
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B
So get ready for a rush of Nikkei 225 at 50,000 stories. Because journal, look, we like round numbers. They're very easy stories, but also people love them. Anyway, I guess my point is, so Japanese stocks are already up by about 25% so far this year. Is the Takechi trade already done? You know, is she capable of pushing it further and does she care? Is she using markets as a kind of benchmark, a measure of her success in the same way that like Donald Trump does?
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C
We still don't know is the answer to that question. She has not made reference today or in sort of the last sort of couple of weeks since she became leader of the lldp. She hasn't talked about the stock market in that sort of way as a gauge of success, as you say. On the other hand, it has been going up effectively on her watch. In this press conference I just came from, for example, she, she was very clear that the economy was her priority. And, and she, you know, she highlighted several parts of that. Obviously there's a cost of living crisis. And that cost of living crisis in Japan feels more burdensome.
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B
It's the price of rice. Right. This is what a lot of all.
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This is about.100 and so food prices going up have this kind of strength. So when the bank of Japan is looking, as it is, at inflation expectations, you know, the sort of the, the food and the rice that you mentioned there, it's a big factor because people are just talking about it. It's just a subject of conversation. Yeah, so she mentioned that. And obviously when she talks about the economy, she's also. I mean, this is what the market is getting excited about is the idea that, you know, like the late Shinzo Abe, of whom she was an acolyte, there's this idea of a kind of reflationary stimulus for the economy and so on. And so she didn't hold back from that today. And I think that's what's getting the market excited.
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B
Yeah.
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C
Or the equity market. The equity market, yeah, yeah, yeah.
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B
So that's on the stock side, but what we do have is, is a much weaker yen than we had certainly like a year or so ago. And we have pretty weak, by historical standards, Japanese government bonds. Now. I guess this goes back to like, you know, Japan for like the longest time had no inflation or it had sinking inflation, or it had, you know, flat out deflation. And finally we have inflation in Japan. And at first everyone's like, great, I can go to my boss and ask for a pay rise. But now it's like, hang on, this joke is wearing off a little bit here. I'm bothered by the price of rice, I'm bothered by the price of beer, you know, all of this stuff. So all things equal, the bank of Japan should be raising interest rates to try and pull inflation down. But there has been a suggestion that the new Prime Minister might not kind of be down with that and she might put pressure on them to stay pat. How much is this, like, you know, people in London and New York misreading the situation, and how much of it is a genuine threat that she might interfere directly or indirectly?
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C
There are two things. It's not just the market running away with it. There was a stage in the earlier phase of the bank of Japan's what they're calling the normalization process, which is. It's a bigger phrase than the word alone. Kind of like you mentioned the decades of falling or flat prices. There was zero interest rates, negative interest rates. And normalization means a lot more in a context of Japan than it Perhaps does or would do in another country because you're undoing decades really of, of economic abnormality. And so she's come in at this point now in the early stages. The bank of Japan, you know, began this phase which left it at 0.5 on the short term interest rate, the policy rate as that started. And she was obviously not Prime Minister. This was, this was some time ago. She said it was stupid. She used the word stupid, a Japanese word for stupid. And so people have latched onto that and I think that is driving what you just described there, which is this idea that is she now going to use this position she's in to lean on the bank of Japan. It coincides by the way with there is a Bank of Japan meeting, there's a monetary policy meeting next week and I suspect along with the market generally that it was pretty unlikely that the bank of Japan would come straight out of a period of political turmoil, a brand new Prime Minister and the very next week do something that has in the past proved disruptive. Right. The Japanese household can stand to wait another couple of months before, you know, a BOJ decision made. So I think over the last few weeks there are sort of analysts who've been pushing the economists who've been pushing their expectation for a rate hike back to January 26th.
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B
Oh really? That's quite, quite a bit, yeah, it's a big pushback. You know, I think people had a couple pencilled in for this year.
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And the other thing was she was asked today in this press conference, she was asked about Bank Japan and I think every country that has an independent central bank also has to acknowledge that there is quite a nuanced political relationship between the central government and the Prime Minister's office, the Finance Ministry and that whatever that central bank is. And I think she's referencing the fact that there is quite a high level of cooperation, I mean the discussion and cooperation between central bank and the government. And so under Abe, you know, the Coroda bazooka and that one, what the bank of Japan was doing to stimulate the economy. Yeah was part of a bigger plan. You know, it was playing its role.
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B
In a three arrows thing that Abe came out with in was it 2013 and it was about monetary policy working together with economic policy. And can't remember what the third arrow was now but you know.
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C
Well, the third arrow was structural reform. So that was the bits that, you know, corporate governance code, all those sort of things that came under that. So you know, it has been a cooperative relationship and so it's not far fetched to sort of say, well look, if she, you know, she's called, she's previously expressed, you know, in quite strong terms her, let's say, skepticism about what the Bank Japan was doing and the normalization process. It's not far fetched to say, well look, when she starts the discussions that lead to her administration's cooperation Bank Japan, she might say, well, are you sure about this? Are you sure about. However, I will say that actually she has become markedly more measured in the language that she's used over the last four or five weeks. You know, she's strident on certain subjects, but on that she's been much more cautious, actually, much more measured.
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B
The closer people get to actually coming into office, the more they kind of try and play nicely with their central bank. Leo, three letters for you. JGBs. Right. Japanese government bonds. People have been warning since the dawn of time that Japanese government bonds are going to blow up and they never blow up. What is the danger that they blow up under Sanae Takechi?
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C
Well, first of all, congratulations for not using the phrase the widowmaker trade, which is what always gets applied to the fact that shorting or, you know, selling short Japanese government bonds has, has always failed.
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B
Betting against JGBs never, ever, ever works until it does. And they have weakened quite a bit recently.
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C
That's right, they have weakened. And the other thing that has happened is that there is a liquid market. So what you have to remember about the way that Japan has been is that during that period, 2013 to the end of the Abenomics era, let's call it 2020, the bank of Japan was right in the market for JGBs, dominant.
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In that market, buying, buying, buying all.
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Day long to the point where there were entire desks of bond traders who were twiddling their thumbs. There were days that went past where.
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Mini golf on trading floors.
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Yeah, it was a glass at one end of the trading floor and putting into the glass.
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B
Yeah.
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C
So to give you a sense of what has happened in the last, let's say 18 months, is that the market is reviving, there is liquidity in there, there are things happening. And I think that because there is just more activity, we as observers, we as you know, journalists covering all of this, are simply looking more closely at moves in a market that is finding its feet, it's finding price in a way that it didn't have to for a long time. And so yes, the risks are there. There is a possibility that this new administration will attempt to use stimulus, use government spending to get the country through.
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B
The worst case scenario is that she uses stimulus, she uses spending, and she pushes it too far. And we have another Liz Truss moment. Except in Japanese government bonds. Except rather than UK government bonds. That's your nightmare scenario because the Japanese government bond market is huge. It could send ripple effects kind of everywhere. But Takechi, she knows what she's doing, right? She knows about Liz Truss and she knows not to do that.
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C
She knows about Liz Truss. She knows not to do that. And also, as you referenced at the beginning, she has appointed a finance minister who also is steeped in Ministry of Finance. You know, that's what she was. She was a career bureaucrat before she became a politician. Serious person who knows where the dangers are and, you know, fiscally hawkish, you know, having come from the Ministry of Finance and so, you know, certainly alive to those risks. And anyone who has been in Japanese politics for as long as she has is also aware of this massive.
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B
Yeah.
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Gross debt to GDP ratio that Japan runs and where the risks are in that. And so, like we were saying, she has come across certainly in campaigning as somebody that is quite strident and does have a lot of time for the late Shinzo Abe. And I think. I think the. The problem. The problem is that Abe was dealing with a different economy and she's got a weak yen, which he didn't have, and she's got an active bond market, which he didn't have. And so.
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B
So she will tread carefully.
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She knows that difference. And so that's why I think there is always a concern. But I think she is going to try and limit that concern. There's no particular indication to that. Right. And I think also just looking around not to dwell too much on the politics in her new cabinet, she put three of the four people who ran against her. So she is already out of the gates. She's being very pragmatic about this. She's got a party to unify. If we had seen a big lineup of people that were exactly in her image or just mates of hers that didn't have experience or just wing nuts. Right. You know, long may that continue. But on the other hand, I think it's also the case that she may end up as mired as previous Japanese prime ministers in precisely that pragmatism. In other words, if there are an awful lot of things that need doing, she may not actually have the scope to do it.
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B
Today you're feeling pretty optimistic and mostly knackered, so.
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And mostly knackered. We'll see how she gets on with Trump next week. I mean, of course, that's the other thing is that taking aside the market and everything else, she has a very big diplomatic challenge ahead of her, which is, you know, Trump and then Xi Jinping possibly at apec. You know, it's a, it's a tough old couple of weeks ahead.
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B
She really is stepping into the lion's den. Maybe the markets are the least of her worries given. Given everything else. Leo, you're a good man. It's super late for you and it's almost time for you to hit the sack. I promise. I need just five more minutes of your time. Listener going to be back in just one second with Long Short.
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A
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D
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A
Hear the full conversation on P. Jim's podcast. Speaking of alternatives, Okie dokie.
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B
It's time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Leo, all the way over there in Tokyo. What you got?
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I am going long shorts. So I have decided that I'm going to wear shorts the entire year round. I am sick of long trousers and I know it gets cold in the winter here.
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B
Yes.
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C
But shorts are the way to go and I'm glad that Rob isn't on because sartorially, I can see some problems. Also, the Nikkei building that we're in in Tokyo, they don't like shorts. However, I think that things have changed and I think I can wear shorts all year round.
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B
Well, I'm interested in this because Rob has been long shorts on this before, but not followed through and not worn them himself. Whereas I think you're more likely to put your money where your mouth is. I am long. I think everyone is long. The jewelry heist on the Louvre in Paris. So it's like broad daylight and they like rack up a mechanized ladder on the side of the Louvre and like, nobody says anything, nobody does anything. This is not caught on cctv, apparently. Whatever. They climb through a window, nick a bunch of bling, and then just, you know, take off on scooters. What is not to love about this? So the French justice minister said, we have failed and this is a terrible image. And I'm like, don't apologize. This has given us all a very good laugh. This is just what we needed in these dark days. I'm here for it here.
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C
The immediate image that came up when this story came up is of one of Japan's favorite anime characters, Lupin iii, who is a jewel thief. And you know, from their point of view, this was a dream come true. This was a real life anime happening in real. Oh fantastic. It's been absolutely brilliant to watch the world reacting.
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Leo, please don't go and rob any priceless jewelry. I am just here for the lulz of it. But you've been a very kind person. I know you're very tired. Congratulations on getting this whole story over the line. You can now go to bed listeners. I will be back in your ears on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our Executive producer is Jacob Goldstein. Topher ForHees is the FT's acting co head of Audio. Special thanks to Laura Clarke, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening, Sam.