Japan’s ‘whole election is about inflation’: Strategist

Japan’s ‘whole election is about inflation’: Strategist

Well, no, no, no. The whole election is about inflation. People are hopping mad about the size of the uh the inflation at the moment. Rice is up 100.2% yearonear. Um Japan has just had its uh biggest wage hike since 1991 and the whole of that has been washed away by the rise in inflation. And we’ve got this crazy situation where on the one side, the government is is arguing about what it’s going to do to push down inflation. So, it’s been trying to manipulate the markets by by giving some um some price breaks on on a number of things. But also, it’s um the the opposition is saying, “Look, what we’ve got to do is cut consumption tax.” And the government says, “Well, we can’t do that, but um we’ll hand some money out to to poor people.” Hang on a sec. our systems don’t tell us who the poor people are. So, let’s give 20,000 yen to uh to everybody, which is, you know, a dinner for two candle it without wine. Which is fine, but that I think leaves us in a position where wages aren’t catching up with uh prices and the argument to say that this is the fault of uh not enough wage increases. No, Japan’s had a 5.25% uh uh wage increase. The problem is that they uh they can’t control the uh the prices. So on the one side, the government’s trying to push it down. On the other side, the BOJ says, “We’re not sure it’s high enough yet.” And I think the view of most people is, “For God’s sake, can we have a conclave? Just lock the lot of them in one room and tell them to send up white smoke when they’ve worked something out. But this is unbearable.” So you can see the numbers. uh every time they run a poll on the the politics and Ishba’s extremely unpopular in that and um LTP is not doing at all well every time they run that they say what do you most want out of the prime minister and the answer is 49% of people saying uh get the inflation worked out that’s twice as much as talks about it’s the economy stupid yeah exactly um you know during these uh elections. I mean, the populist agenda has come to the four and immigration is now this hot button issue and this fringe rightwing party has really banked on that and one of the biggest searches on social media now is immigration, not even terrorists. But I mean, how do you see this playing? I mean, over the longer term, it always comes down, Nicholas, to rice and cars. I mean, it’s Japan is so vulnerable in all these two fronts. Doesn’t it need something that it can counter punch with whenever it comes up against these issues? Uh well, I think the the media’s been trying to get excited about a tiny party son that’s got, you know, a couple of people in um in parliament and um by Monday morning will have forgotten about them. Look, rice, you can make a big fuss about it. In the CPI basket is in total 0.2 62%. Um it is certainly a hot button issue for for housewives. The Americans are saying you’ve got a shortage. You should take our American rice. But of course I went and read through their trade impairments impediments report and what it says is when Japan does import American rice, it mostly uses it for animal feed. And we tried some um some in our family and the wife absolutely won’t touch this stuff. finished the bag uh and tried all sorts of things. You’ll find your newspapers full of of stories saying here are things you can mix in the um the American rice that’ll take away the uh the taste. So, that really isn’t an issue. You know perfectly well that uh rice is not going to move the needle on Japan’s uh trade surplus with the uh the US. It’s just something to argue about. When it comes to autos, well, of course, Japan 80% smack on 80% of its trade surplus with the US is autos. Japan’s had zero um import tariffs on autos since 1978 uh at US insistence. US has got um a tariff on it and now um now they’re thinking of raising them up to 25% against Japan. So the point isn’t uh we buy their cars, they don’t buy ours, the point is not only don’t Japanese people want to buy uh US cars, US people don’t want to buy US cars either. And certainly they don’t fit the the US markets, they’re um they’re too wide for the roads. They won’t fit in parking spots. They’ve got the uh wheel on the wrong side and so on. Yeah. Yeah. Indeed. That’s been the case for a while, right, Nick? Listen, uh let’s get to the here and now. rather focus on Sunday the elections and the outcome and what the market is is priced for or not. I want to play you a sound bite from Rob Subaraman over at Numeraz. Take a listen to this and then we’ll continue talking. The markets are already moved to an extent and are pricing uh that an outcome of the leading coalition LDP uh losing a small a majority by a small margin. uh I think that’s largely priced. Uh so the risks are the two sides are really that uh either they lose lose by a very large margin and and then the opposition parties are a lot more powerful and will come into the coalition or they actually surprise and actually keep a majority. That would be the biggest surprise I think and could cause um the uh long end JGB yields to rally quite a bit. Nick, you heard that? Are you agree that the market is already priced for a loss but a marginal one but you know if it ends up being a real drubbing or if you know Ishiba gets the boot or uh the other side if he manages to actually hold on to his majority by by some miracle uh that’s going to that’s when we’re going to see some uh pretty violent reaction. Yeah. Yeah, I mean for the the 40 years I’ve been been in Japan, the um usually politics doesn’t really move the needle for the uh for the market. So that’s the the first thing to to say. Unless you’ve got someone uh very successful like Abbe or Kisumi, the chances are that um the um the LDP is going to just come short of the number it needs to have a majority in the uh in the upper house. The upper house is after all effectively the rubber stamp for the the lower house and it’s already lost the the lower house. So remember on the 27th of October um Ishba called an election that he didn’t need to call and then he lost it. So I think the problem is that the support for the LDP is sliding. It’s sliding as much as I mean it support started to fall when Abbe sat down but then in came Ishiba and between Ishiba and Kishida they’ve been trying to knife the the Abbe faction the Zoken and so there’s less and less of what the voter wanted in the in the LDP um whichever way things go on uh on Sunday and certainly the the story in my household and many others is really don’t want to vote for the LDP, but there is nothing else. Uh the the important thing there is that the constitutional democrats and and DPP and so on, they all hate each other so much um even more than they they help hate the LDP. And I think the result is that they’re not going to get their act together. Um and that is what’s going to save the uh the LDP from an even greater dropping. I think the the conversation Monday morning is that we’ve got to stab Ishiba on the way to the forum that um that really the guy is is toast and going to look for somebody else. And the whole um political um battle that’s been going on is um is Kishida trying to set things up that so that he’s brought back in as as prime minister. Uh I don’t think that’s going to happen. Uh but probably Ishbah is out and almost anyone else would be better. Yeah, Nick, you know, you’re an old Japan hand. 40 years there, right? And let’s uh keep the uh the charts up so we can uh look at it and talk about the Japanese 10 155. A couple of days ago, we were up at 159. Those are levels we haven’t seen since I think 2008. That’s about 17 years ago, right? Let’s not even talk about the long end record numbers, whether it’s their 30 or even 40-year paper. My question to you is regardless of whether uh Ishiba gets the boot or manages by some miracle to hang on to power and his majority, is it almost a foregone conclusion that with Japan’s economy in the shape it’s in, overshadowed by tariffs, US tariffs, long yields have nowhere to go but higher. And if so, that doesn’t sound like good news for for stocks, does it? Um, Japanese yields are very very low indeed. And so uh US 10 year is about 2 uh 290 basis points higher than than Japan. Yeah. I mean Japan had been on uh on life support. The BOJ is in the process of letting uh yields drift upwards. Uh and I think the market’s prepared for that. Is that going to kill uh kill the stock market? Well, I do think it’s important to remember that corporates are a wash with cash uh and so would quite like um interest rates to be higher. Uh households are um are a wash with cash uh and would like yields to be higher. And the only one that’s um that would like yields to stay down is the the government. But uh keeping government short of money is is probably a good way to go as far as I’m concerned. But um the the government’s hardly about to go bust. I mean after all the the BOJ owns half the uh the bond market and uh net uh debt is about half of uh of gross jet debt. And most people don’t seem to talk about that. They they tend to take the story from the Ministry of Finance and and run around like like headless chickens. But uh the truth is everything that Japan earns on its assets gets a higher yield than what it pays on its debt with the result that net interest paid is very often uh negative. So I I I don’t see problems coming very soon. And then for the JB market the foreigner owns about you know six 7%. Uh which is utterly different from most other markets. So it’s not under strain from flighty foreigners.

Nicholas Smith of CLSA discusses the upcoming Japanese upper house election, saying it will have little impact on markets. He adds that despite the unpopularity of the ruling LDP party, there is a lack of a credible opposition.