Under the Banyan Tree – Anomaly economy: Japan
welcome to HSBC Global Viewpoint the podcast series that brings together Business Leaders and Industry experts to explore the latest Global insights Trends and opportunities make sure you’re subscribed to stay up toate with new episodes thanks for listening and now on to Today’s Show [Music] welcome to under the B entry where we put Asian markets and economics in context I’m Fred Newman Chief Asia Economist here at HSBC on today’s episode we’re zooming in on the unique economy that is Japan it’s a story that’s evolving on several fronts from going against the grain on interest rates to ushering in what you might call a manufacturing Renaissance what makes this one-of aind economy tick and where does it go from here joining me to help answer those questions is Jun takazawa from our Asian economics team here in Hong Kong from hspc Global Research you’re listening to under the benyan [Music] tree welcome to the podcast June it’s the first time we have you here under the Banyan Tree hi Fred thanks for having me so June you’re looking at obviously a number of Asian economies uh including Japan and and we really wanted to delve a little bit deeper into the Japanese economy because it’s so interesting right still one of the largest economies in Asia and uh what we have here is actually an economy that’s a little bit out of sync with the rest of the world if you think about the Federal Reserve is lowering interest rates uh the Chinese Central Bank is lowering interest rates everywhere we’re seeing lower interest rates but Japan is going to raise interest rates already has this year and actually next week we expect him to raise interest rates again um now why is there suddenly this this out of cycle kind of movement by the bank of Japan surely must be because inflation is still pretty sticky in Japan what have we’ve seen on the inflation front lately right so Japan is out of sync with a lot of the other central banks because um I think it’s important to put some context here in the sense that Japan has been seeing significant economic changes that it has not seen in years if not decades and inflation uh primarily has been running above the 2% Target for more than two years now now let me just stop you there because you say two just above 2% inflation Target for most people that sounds like pretty low inflation um but we should remind ourselves that actually Japan had what 20 years of almost consistently falling or almost negligible inflation it was T I mean there was no price pressures whatsoever so suddenly we’re talking about just over 2% inflation that’s enough to then get the bank of Japan to ultimately raise interest rates uh yes because for Japan for for a long time it has experienced what you would call a deflationary mindset uh what this does is that it leads to households expecting prices to not change um in the future and that has implications on economic growth so that and that’s an important point so we have actually a a whole generation in Japan that is used to seeing prices fall and suddenly prices are actually increasing and that must be a big psychological kind of wakeup uh if you will for people who are not used to that seeing suddenly the supermarkets prices increase um now the the first reaction to this increase in price increases was actually a decline in spending is that right yes we have seen um household spending very weak um after the pandemic and this is primarily because of as you said the the price shock that has not been accommodated for by a proportionate increase in wages so people are worse off then uh if prices increase but wages don’t keep Pace then obviously they have less money uh in addition to psychological shock there’s a real reason why they’re pulling back is it just that purchasing power is down now but that is changing I think this is the key probably new thing in Japan which is that suddenly we see also wages rising and importantly if you look at the last few months wages are now suddenly Rising faster than prices again which actually means that you see households suddenly seeing an improvement in their income relative to prices and that should then encourage them to start to spend again is is you I mean is that a fair expectation yes in theory real wage growth should uh provide some support for households to spend more um going forward um but we have to keep in mind that Japan has experienced many many months after the pandemic of negative real wage growth and so that is why the bank of Japan has been very cautious in terms of adjust in normalizing monetary policy because we still need to see this wage hike momentum continue uh for a sustained period of time and that still has question marks surrounding it so so that that that’s to say that actually Bank of Japan will be very cautious in raising interest rates I mean after all we’re talking about interest rates they’re still well below 1% whereas of course in the US we talk about interest rates of about 4% so there’s some very small minor changes but even there the bank of Japan is moving very very cautiously from essentially what was negative interest rates to then now positive interest rates um but there’s one interesting aspect here and that is uh we have this phenomenon that wages are suddenly rising in Japan and they haven’t for a long time why is it that suddenly wages are rising I mean if they why didn’t they rise five years ago 10 years ago what is it in the last probably two three years that suddenly leads to this increase in wages do you have an explanation for that I think part of it is structural um and this comes from the fact that Japan is experiencing labor shortages that are increasingly more severe and what do I mean by that um a lot of the companies and corporates in Japan have been facing greater and greater challenges in attracting and retaining Talent simply because uh the population is declining and the labor force particip a rate of prime age females and older age population has already exceeded 80% so so yeah let me let me just stop you right there because I think that’s a very interesting point we knew that the population Japan had actually been shrinking already for decades but in a way labor shortages didn’t really appear until very recently because Japan sort of had over the years very low participation of women in the workforce but that increase and increase and increase providing extra labor even though the population was shrinking and the same happened with all the workers but now we’re at the point where actually the labor participation that is female workers and from older workers is now is now saturated that is there not millions of of female workers on the sidelines who’s still looking for a job everybody’s employed in Japan and so suddenly then there is labor constraints and you actually I guess you see that when you go to Japan right you see fewer workers around is that is that have you ever experienced that uh yes especially when you uh go into restaurants or hotels you do see uh this uh increasing lack of Labor being more apparent in Japan um these These are Services sectors and they’re they’re clearly very um exposed to to these conditions that we’re seeing develop and so that’s of course where the wage pressures are coming from that’s ultimately we’re now in infation is coming from but uh wages are rising now faster the that’s that’s the Hope than inflation so spending should be coming back and and so actually Japan is now in a new cycle where hopefully inflation will encourage people to spend uh and they are able to spend because wages uh are going up as well and ultimately that means the bank of Japan can now raise raise interest rates at least that’s the expectation so um we talked a lot about you know Japan’s Central Bank being out of sync and being able to tighten policy when others are easing policy because of these unique features in the labor market and inflation but I want to talk about other things about Japan as well we’ve seen the currency weaken quite a bit uh in the past 18 months or so now um that’s not necessarily bad for the Japanese economy uh and you hinted at that already tourism is booming how big a sector is that really for Japan I I try to book flights to Japan and and you know it’s very hard to get a ticket these days because it seems like everybody in Hong Kong is is heading over to Japan these days um certainly when when we think about the the share or the size of uh tourism in terms of Japan’s economy it is uh a less of of a proportion compared to say manufacturing but it is still quite sizable and um that has meant that the the increase in inbound tourism has benefited certainly some sector but again as as we have talked about the the labor shortages have been a real constraint and so what we’re seeing is that uh coupled with the fact that we have this inbound tourism because of the weekend domestic Travelers have also stayed in within Japan and so that has exacerbated this demand Supply imbalance and and that is part of the reason why we are seeing these these pressures pressures but of course uh also on the other hand a growth driver right services are doing well and and that’s helped by a weaker currency um but then there is also another uh feature here of the weak currency and that is it makes Japanese manufacturers quite competitive uh of course when the currency Falls in value you know Japanese producers are able to sell cars more cheaply overseas have we seen also the manufacturing sector benefit from this very weak uh Yen that we had over the past year or so yes certainly when you look at the quarterly tonan survey this is a survey that is conducted by the bank of Japan uh to kind of gauge how businesses are are feeling about the economy how they’re experiencing the current business environment that has shown that manufacturers are indeed performing very very well if you look at their operating profits there are record highs and so to some extent yes uh the weekend has been a major Boon for for Japanese manufacturers okay uh this is a great point to take a a quick break we talked about uh wages we talk about inflation we talked about the fact that the bank of Japan is going against the global cycle and we also talked about the weak uh Yen helping actually some of the manufacturers but when we come back I want to talk uh quickly a bit more about Japan’s Ambitions in the tech space and really raise the open question is Japan back so that’s coming up right after the break so we’re back here with Jon takazawa one of our Economist here and uh Jan there’s been uh certainly many growth industries across Asia over the past year everybody talks about AI for example semiconductor manufacturing is very hot right now uh Japan has for many years been a technological leader um is that sort of do you sense this is coming back is I mean has it ever lost that what what’s happening on that front sure Fred I think there’s uh a little bit of context that needs to be put in place here Japan was an amazing manufacturing Powerhouse back in the 80s and 90s and to some extent the rise of other Asian economies have kind of superseded that uh but what the government is trying to do now is trying to revive the semiconductor industry in Japan probably because of geopolitical tensions but also because national uh considerations in the sense of supporting domestic growth drivers so during the pandemic uh Japan faced a trip shortage that severely affected its automobile sector and recognizing these risks going forward Japan has put considerable emphasis on supporting National resilience in this regard and so the government has provided extensive financing support towards the semiconductor industry bringing manufacturing back home partnering with International companies like tsmc in Kumamoto prefecture as well as establishing its own semiconductor uh manufacturing uh company rapidus does that does that mean that we’re in some sense also seeing uh a reshoring of of manufacturing Industries into Japan I mean you talked about Japan being a manufacturing Powerhouse in the 80s and 90s and then Japanese companies often went abroad invested in Southeast Asia for example a lot of production was outsourced to other economies is that really coming back so it’s not just about semiconductors and advanced manufacturing is is a lot coming back into Japan or is that too far a statement I think we do have to be careful with with these big statements um you know given the fundamentals of Japan in in the sense that the labor force is shrinking and demand as a result is also so constrained to some extent because of these forces uh the the degree of reshoring has to be very elective and the government is very well aware of this and has therefore focused on bringing back semiconductor manufacturing onshore but not necessarily others other manufacturing Goods so um you know everything we discussed here Rising wages uh kind of there’s a Renaissance of semiconductor Manufacturing in in in Japan that’s all you know suggests that kind of Japan is back right it used to be a very Dynamic economy it’s kind of lost its Mojo a little bit over the years but it’s kind of snap back a little bit um what’s what’s the biggest risk in the coming years is it still the demographics the population is still shrinking is it lack of ideas and and entrepreneurial dynamism is it uh that you know Japan hasn’t really developed an AI industry for example what sort of you think the number one constraint for Japan’s economic Renaissance I think when it comes to risks um for Japan especially in the next say two to three years it won’t necessarily be domestic it will be more externally driven in fact if I think about the domestic opportunities going forward it’s it’s actually a lot brighter we’re already at the end of the tunnel in terms of negative real wage growth um the robust wage hike momentum looks set to continue as shown in sort of the demands raised by Rango the largest labor union group for 2025 we’re we’re seeing this uh bounce back in at least we expect to see a bounce back in spending domestic spending going forward and that should revive a lot of the animal spirits and sentiment so to speak in Japan that has a lot of implications in the sense that you’re going to see spending move through the economy and it’s going to be a very interesting 2025 for Japan so they have it lots of exciting things going on in Japan it’s it’s it’s kind of counter cycle if you will and uh there are some very promising Trends uh whether it’s tourism Manufacturing Rising wages consumption bouncing back so but J I don’t want to let you go out of the studio here in the benan tree we always like to ask our guests also some other questions and that is for me the question for you would be if you go to Japan everybody goes to Tokyo and some of the big sides what what’s sort of the the secret tip do you have a secret kind of destination in Japan that you would recommend somebody go to check out I think for for people places that are like Tokyo are probably accessed way too much um and so I I definitely agree with you um other places are need to be looked at for me I think that the the best one to recommend especially would be a place called Niko it’s north of Tokyo relatively easy to access uh for for people going to Japan it’s a very beautiful place um a lot of nature in the sense that you get to see snow Lakes temples a very natural scenery that I think a lot of people would really enjoy well plenty to explore and I feel like uh we’re going to have a bant Tre special uh with Jun takazawa travel tips coming up at some point in the future uh thank you Jun for joining us today thank you for having me Fred well we’re just about out of time folks it’s been another great discussion here on the the banan tree if you’re still hungry for more macro content be sure to listen to the macro brief from HSBC Global Research available wherever you get your podcast from all of us in Hong Kong it’s by for now [Music] thank you for joining us at HSBC Global Viewpoint we hope you enjoyed the discussion make sure you’re subscribed to stay up to dat with new episodes [Music]
Fred Neumann is joined by Asia Economist Jun Takazawa to discuss what makes Japan’s economy unique, from counter-cyclical interest rates to demographics and a changing psychology on inflation. Disclaimer: https://www.research.hsbc.com/R/101/xVvCMdD. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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