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- [00:06]
A
Pushkin. Election fever in Japan delivered a very clear result at the weekend and Japanese stocks rushed to an all time high. In response, Prime Minister Sanae Takeichi called a snap election just a few weeks ago and her party, the Liberal Democratic Party, won a massive majority, a super majority, in fact, in the country's lower house of Parliament. With more than two thirds of the seats and the ability to override the less powerful upper house of Parliament, Takechi can now do, well, pretty much whatever she likes. Today on the show, we're going to talk about why this matters to investors both in Japan and around the world. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London where it is raining all the time. And I'm joined by the team in New York, His Excellency, Mr. Robert Armstrong from the Unhedged newsletter and his trusty sidekick, Hakyung Kim. Hakyung. You kept Rob in his place on the podcast the other day when I was not around. I like this.
- [01:17]
B
I was told I mogged him, so I'll take that one.
- [01:20]
C
That's another young people word that I don't know what it means. I'm gonna assume it means showed great respect.
- [01:31]
A
Great deference. So what I like, one of the things I like about the, the elections in Japan is that just like bish bosh done over, call an election, you do an election, it's done, it's finished. Like the US is like in a permanent state of some sort of election cycle. Whereas Japan and the UK get this stuff just done nice and quick.
- [01:52]
C
But you do it over and over again. You do it efficiently but constantly.
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A
That is also true.
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C
But yeah, this is momentous financially. I mean, for people like us, it's like Japan is one of the big centers of gravity in the world of finance and sane. Takaichi, whose name I hope I'm getting correct, has a different view of how that country ought to be run financially. I think this is a big deal. I'm not quite sure what it means, but it sure means something.
- [02:24]
A
Yeah, yeah. So Hakyung, talk to us a bit about what, what markets have done after this because there was a reasonable chance that, you know, you would have said on paper, right. Takechi wins a massive majority. She's going to go ahead with like massive spending plans. And this should on paper spook the Japanese government bond market, but like not at all. And stocks have loved it. Like tell us what's kind of happened here.
- [02:49]
B
Yeah, so takechi originally took office in October and stocks have basically hit record after record since then. And that's what they did after the snap election on Sunday. But in the bond market, which had a bit of a freak out in January after she said that she would scrap the food tax or suspend it for two years, the bond market reaction was surprisingly muted, I would say, given the gravity of her win. And likewise with the yen, the reaction was relatively muted compared to. Yeah. The scale of her win and previous reactions it had to statements that she's made on fiscal policy.
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A
But yes, stocks love it. So stocks are up something like 7% depending on which index you're looking at. They've had a massive push higher since this reelection. Why do we think that is?
- [03:41]
B
I think it's the growth prospects that her fiscal expansionary plans are promising and she's promised a lot of investment in the defense sectors and also in the tech sectors too. So to kind of make Japan into this defense powerhouse and such, stocks have really cheered that. And there's always been that kind of Japan discount that's been healing for the past few years. But after her election, investors have become even more optimistic. But I think it's really important to note that a lot of domestic investors aren't quite buying it yet. They're still opting into the US Stock market more so than their domestic market.
- [04:17]
C
Yeah, I'm very interested. I mean, I think global investors, and we've talked about this at great length on the show, Global investors have been moving their chips around a little bit. Everybody was massively overweight. The US And I wonder if part of what we're seeing is global. Big money, real money. Global investors are taking a harder look at international markets.
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A
Yeah.
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C
And of course, there's just the basic fact that soninomics. Are we allowed to use that term? Sonny nomics? What am I saying? It's the Takaichi trade take is what we want to call it. That's inflationary, broadly. Right. And inflation world bonds down, stocks up ish. In relative terms at least. Stocks don't love inflation, but they hate it less than bonds do.
- [05:06]
A
Yeah. And I think the backdrop here is quite important to bear in mind. Right, so there was like back in the day, like very, very early 90s, there was like Japanese stocks went completely bananas and there was just this massive crash, like a huge crash, like a sort of, you know, generation. Yeah, a generation defining crash in the Japanese stock market. And it took literally 30 years to get back to base. You know, Japan was absolutely in the doghouse for the Longest time international investors were just not interested. They were like, no, we lost our shirt on this thing and we are not going back into it. And it took a really long time and a set of like really quite punchy reforms. Kind of. It sounds slightly ridiculous, but sort of forcing Japanese companies to make a profit and treat their shareholders nicely. All these big sort of corporate governance reforms, and that's been a really slow burner.
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C
But people buy the story now.
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A
People buy the story. And as you like, as even you are admitting, Rob, people are looking for opportunities outside the US now. And Japan is a pretty good bet. If you like AI and tech, but you don't like the US for some reason, then Japan is a good place to go. Same story with Korea, which has had an incredible run in its stock market too. So it just feels like a lot of stars are aligning. I take Hakyong's point that there are still some investors both in Japan and elsewhere, that are a little bit nervous about it. But I feel like this could be a bit of a moment for the long term in Japanese markets.
- [06:49]
C
I guess we should also talk about the incredible change in the yield environment in Japan. I mean, just like the stocks were dead for 30 years, Japanese bonds yielded plus or minus nothing forever. Until about four years ago.
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A
Yeah, the Japanese bond market was the place where fun went to die for the longest time. Like the like, bonds simply did not move in price, which meant that yields didn't move around at all. And a big reason for that is that the bank of Japan, the central bank, just like owns a massive chunk of all the outstanding Japanese government bonds. So even though you've got a debt.
- [07:29]
C
To GDP ratio of, last time I checked, 227%.
- [07:34]
A
Yeah, something in excess of 200%. The reason why that does not spill over into a huge bond market crisis, which it would in the US or the uk, you better believe it, if you tried to borrow that much money relative to gdp, is that the central bank owns a lot of the bonds. A lot of big, serious domestic investors own a lot of the bonds. They're not going to torch their own bond market. But we have seen it move in the past few years, as you say, Rob, partly because, like, we've just finally got a bit of inflation. And some of that is like the long tail of COVID and some of it is the long tail of, you know, these efforts to make companies more profitable. But there is an idea out there that the bank of Japan has been a little bit too slow to raise rates to deal with this so you have got like, really like for Japan, pretty high bond yields at the moment and that I think over and above the move in stocks. That's the thing to really watch here.
- [08:33]
C
I reckon, just to give listeners a sense of the scale of what has happened here. As recently as 2022, the five year Japanese bond yielded a round zero. Now it's 1.7%. You earn the 30 has gone from like a bit over half a percent, 30 year, half a percent to three and a half percent. And in bond market terms, these are massive, epic generational moves.
- [09:04]
A
They are. And a lot of the pressure is what you call the long end, right? It is in the sort of 30 year segment of the market. And I think like 10 year Japanese government bonds is now yielding about 2.3%, which again doesn't sound like a huge amount, but for Japan that is huge. So I was talking to a European asset manager just earlier today actually and he was saying look at those sorts of yields for Japan. Like this is a European asset manager. He was like, even we might have a bit of that. That sounds okay. Like you get decent money out of Japanese government bonds now. But more importantly for domestic investors, and there are some really huge kind of pension and life insurer kind of investors in Japan, they look at the yields that they can get on their domestic government bonds now and they think, huh, why would I bother going to the U.S. why would I bother buying U.S. government bonds when I can get this much at home? And even maybe why would I bother bother buying European government bonds if I can get these rates at home? So here's a plausible path forward that this investor was sketching out to me earlier, which is, okay, stocks are doing well, but the Japanese yen has been like quite, quite rubbish for quite a long time. But there is a world in which that repatriation thing happens, right? Japanese investors stay at home in their bond market and overseas investors stop buying Japanese government bonds. For some of them, for the first time ever, that pushes up the yen. And so if you are buying Japanese stocks, if they keep performing as they have been doing recently, which is very nicely, you get a double whammy, you get good stock market performance and potentially you get a pickup in the Japanese currency. Keqing. Happy days. Why would you take on all the kind of US risks when you've got what looks like a much cleaner picture over here?
- [10:58]
C
And the worry, there's a kind of generalized worry among bears about the American stock and bond markets that there will be an enormous sucking sound as capital, both Japanese and possibly American or European moves from west to east. Listeners will remember a few weeks ago that Scott Besant, the US Treasury Secretary, made a kind of performance of maybe considering intervening in the yen dollar market. And part of the reason for that may have been he's worried that the big spike in Japanese yields will make US yields follow, which is the last thing he wants. He wants yields down, mortgage prices down, whatever. So there is this general worry that all this money will rush east and that will have implications for US and European assets. However, I would just note that, and I should know this number, but I don't. The size of the Japanese bond market is quite small, a fraction of the US Bond market. I mean, it's a bit like an elephant trying to go through a mouse hole for all the money that's in the American bond market, or even a good portion of it, to try to get into the Japanese bond market. It just only so much of that can happen because there's not enough of the Japanese bonds around.
- [12:16]
A
It's certainly true that the Japanese bond market is less of a kind of. It's not in the driving seat of the global market in the way that the US is. But here's another thing. If you're looking for reasons to be worried about this whole situation. Do you guys, Rob and Ha Kyung, remember where you were at the beginning of August 2024?
- [12:37]
B
Oh, I had just come back from Japan, actually.
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C
Oh, very good, very good.
- [12:41]
A
Well, maybe it was Haekyung's fault. I was lying on a sun lounger in Turkey and the markets, do you remember, just very, very briefly and kind of out of nowhere, just absolutely lost it. Like there was a big move higher in the Yen. There was a bit of a disappointment on like a sort of, on a, on a US economic data release. And lots of like Japanese money came out of the US stock market and came back home and the Yen went screaming higher and everything just went terrible for a little while to the point where there I am on my son lounger in Turkey with people texting me, saying people are talking about an emergency rate cut in the States. What the hell is going on? And Japanese stocks fell like 12% in a day. So there is this possibility that I think we need to be aware of that there are kind of global flows of money that when they get quite rapid, that can get really destabilizing really quickly. I'm not saying this is going to happen this time around, but I am saying, like, this is why we bother talking about the Japanese stock market and about, you know the effects of Japanese elections on markets is because all these things are connected. And this is one of the little Jenga pieces that you can take out and things can fall over really quickly.
- [14:00]
C
It's kind of what you just described has kind of been the theme of the show in a way, or like one of the long arc plots of the unedged podcast over the last year or so has been, you know, since Trump's election, some big geopolitical and if I may, geo financial pieces are being moved around and Japan is one of them, Europe fiscal is one of them, U.S. policy, monetary and fiscal is another. And we're all kind of groping for what the implications are. But it's a genuinely new world. I mean, we don't know how to price this stuff right now, is what I would say.
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B
No, but I think to Rob's point earlier about the JGB market just being so much smaller than the treasury market, I think the much smaller scale of the JGB market is also what makes it more vulnerable to any sort of fiscal concerns. Like what we saw in January. I think the sum of trading that kind of destabilized the market back in January. It was a much smaller sum than what would kind of trigger volatility in the US treasury market.
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C
That is the flip side. That's a good point.
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A
Yeah. What do we think? How does this pan out from here? Does this become some sort of macro disaster? Or actually is there a kind of long, slow process of money flooding into Japanese government bonds from at home and overseas? That's kind of what I think. I think this is a positive result for stocks and I think don't see the Japanese government bond market blowing up. It's notable that the number of people who've said for the past 20 years that the Japanese government bond market is going to blow up is very large. And they have always been wrong. And I don't really see how that's different this time. Obviously I could be wrong. But like, what do you reckon, Hak Young? Does stocks, for example, just like keep on pushing higher as more people get convinced to jump in?
- [15:58]
B
I think the stock market certainly could say so just because the discount has been so severe for four decades. And then you have the corporate government's reforms like we were talking about. That's certainly bullish or just to even get on a level playing field. Right. With so many other global markets. I do think with the bond market, something that we haven't talked about yet is BOJ independence. That's been another concern since Takechi got elected in October because she's spoken out before about how she thinks rate hikes are stupid and that's not really confidence inspiring. Right. So I think that's a really big part on investors minds.
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C
It's familiar for some reason, I can't quite put my finger on it.
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A
That reminds me, I gather Trump says that his nomination for the next head of the Fed, Kevin Walsh, is going to take US economic growth to 15%, which awesome.
- [16:53]
C
It's going to be awesome. I mean we joke, we joke about this stuff. But to answer your question, Katie, which I think is a good one, there's nothing per se about what Sanae Takaichi represents that should throw a monkey wrench into the recovering Japanese stock market or create significant instability in the currency of the bond market, although the currency seems likely to weaken more and the bond market, the yields tend to go up. But the problem with what we have going on right now is there's so many things globally going on at once.
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A
Fighting against each other. Right.
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C
The overlap between these things makes the result really unpredictable. So to use your Jenga metaphor, we're pulling a lot of the little blocks out all at the same time. So good luck to all of us.
- [17:43]
A
And we just don't want one of those summertime blow ups like we had a couple of years ago because we've already had too much news. So if the people in charge can make sure that doesn't happen, that would be great listeners. We are going to be back in just one second with Long Short. Okey dokey. It is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you saying?
- [18:20]
C
I'm going to go short Google's 100 year bond which they plan to sell by the way. I think they're going to sell it just fine. I think there'll be a market for it, especially if they don't try to size it too large. I just think taking a lot of duration risk, you know, this is going to be a very rate and inflation sensitive instrument at a time of great uncertainty, not only in tech but but in rate policy. Like I'm just a boring person who's frightened by markets and I'm not touching that thing with your money fair.
- [19:00]
A
Ha Kyung, what you saying?
- [19:03]
B
I am going to go short on streaming services, I think with the Olympics going on. But you have streaming services in every country just kind of cannibalizing the coverage of it. I think they're shooting themselves in the foot and they're creating a situation where they're overestimating, I think, viewership demand. And it's already an industry that has so much M and A that I think it's just going to reach a point where they all just start eating each other all over again.
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A
Yeah.
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B
So short streaming services.
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C
Wow. Bold.
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A
I'm gonna go short. Like, I don't want to be mean, but some of the Winter Olympic sports are very boring.
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C
Like, come on, I'll take the other side of this trade. I love the Winter Olympics.
- [19:49]
A
Yeah, but like, the luge, I don't get it. Like, you win or lose this thing by like a few hundredths of a second and it's just like a bunch of people barreling down. Like, you watch a couple and you're like, oh, look, they're barreling down this ice tube at a million miles an hour. I hope they're okay. And, like, there's lots of peril, but when you get onto, like, the 20th one, you're like, okay. I think I get the idea they're going down a tube.
- [20:11]
C
Katie hates fun. That's the moral of this story.
- [20:14]
A
I liked the snowboarding, the big air, the women's big air. Yesterday was very good. But the luge, the greatest of respects to all of our lugey listeners, was just not my cup of tea. I'm sorry. So that is it for today. We are going to 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. We had additional help from Topher Forehead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedged offer I'm Katie Martin. Thanks for listening.
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C
Sam.