Yen Gains as Japan’s Ishiba Vows to Stay Put; The Fed’s Path Ahead | Bloomberg Daybreak: Asia…

Yen Gains as Japan’s Ishiba Vows to Stay Put; The Fed’s Path Ahead | Bloomberg Daybreak: Asia…

[Music] Bloomberg Audio Studios, podcasts, radio, news. Welcome to the Bloomberg Daybreak Asia podcast. I’m Doug Krer. So, we know that Donald Trump has been pressuring the Fed to cut its policy rate. And in a moment, we’ll look at the outlook for US rates with Clayton Trick. He is head of portfolio management at Angel Oak Capital. But we begin in Japan where Prime Minister Shiguru Ishiba says he is intending to stay on despite his ruling coalition suffering an historic setback over the weekend in the upper house election. The ruling Liberal Democratic Party and its longtime ally the Kato party failed to retain a majority in the upper house. Bloomberg Asia Economy editor Yuko Teo says this outcome may complicate ongoing trade talks with the US. Japan is set to face across the board tariffs of 25% from August the 1st borrowing a deal with the US and so far there’s been um nothing concrete to show after Japan’s chief trade negotiator Akazawa has been to the US seven times already. So now the ruling coalition will have to continue negotiations from a weaker domestic position with the deadline for higher tariffs coming up. That is Bloomberg’s Yuko Teo in Tokyo. for a closer look. Now I’m joined by Shuntaro Takayuchi, portfolio manager at Matthews Asia. Shuntaro, thank you so much for making time to chat with me. Let me just begin by getting your reaction to the outcome of the election in Japan over the weekend. Yes. So over the weekend, um LDP Come uh lost his majority on the upper house election uh which is basically another loss because they lost the uh uh another election last autumn. So both houses uh they have lost the majority and uh going forward it would be tougher operation of including the US tariffs negotiations and also uh internal domestic policies uh for as they will need to uh negotiate with multiple parties going forward. In terms of the initial market reactions, obviously the equity markets has closed on Monday, but the currency has basically uh been flat or stayed basically uh the same. This is because over the past few weeks there has been a lot of media reports that the LDP Comey coalition is going to lose the majority. uh but given that the final outcome has only been they lost the majority but only by a couple of seats uh is basically saying that it is in line with market expectation uh ahead of the uh election itself. So can we expect a lot more in the way of government spending as the result of this? Yes, of course, Japanese government uh debt to GDP is is at a elevated level, but many of the opposing parties who have called for many tax cuts and basically have their voices heard and um increase their seats by quite a margin. Uh so these are all negotiations going forward, but in terms of the directions um I think these kind of budgets will need to be um a little more bit more expanded. It’s kind of interesting because inflation in Japan for a while now has been well above the BOJ’s 2% target. Where do you think the BOJ kind of fits into this story now with the upheaval that we’re talking about in the diet of the Japanese parliament? Where does this leave uh the governor ua and BOJ policy? So current market consensus is about 5050 in whether the BOJ will raise rates by another 25 basis points within this calendar year and maybe another 25 basis points uh next spring. Um the BOJ we think that is focused more on the wage growth uh the real wage growth happening. So the spring negotiation of how how much the wage growth will be seen uh from uh Japan corporates and its employee is is the data uh that BOJ is looking very carefully on. So we know that recently the equity market in Japan up until this year had been doing very well. I mean we’ve seen a struggle recently. Are there still opportunities in the Japanese equity space in your view? Yes, we think so. Um despite the very anemic uh GDP growth for Japan as a country for multiple decades um it is important to note that uh we’re Japanese equity markets is investing in Japanese corporate profits and uh half of the profits actually come from growth in overseas. So there has been a steady uh earnings growth over more than a decade uh for Japanese corporates and on top of this especially over the past few years you have seen many meaningful improvements in the corporate governance and also uh leading to higher payouts buybacks and dividends and um currently Japanese markets are still trading at a substantial discount to European and US markets primarily due to uh lower return on equities. But finally, the Japanese corporates are making actions to uh improve that on that front. Shentaro, I’m I’m curious as to how much of your optimism is tied to a successful outcome in trade negotiations with the US and if that is your point of view, can you give me a sense of what you expect the effective tariff rate with the US to be? So in terms of the tariffs um I have to admit that negotiation between US and Japan around tariffs have been taking longer time than we had anticipated. Uh you know export sector especially automobiles has been a victim of the uncertainty and impact of tariffs and you know the amount of the percentage of the tariff itself. Uh when we look at how Japan puts tariff on its US imports uh there’s barely any except for a couple of uh agricultural products. So I I don’t have like a set number of what is the optimal uh tariff rates but as an investor as a long-term long only investor what we look for is to look for companies that actually uh weather through the storm and will actually come out stronger after this. So are there industries you mentioned the autos I’m thinking also of steel when I’m thinking about trade with the United States. Are there industries that you’re focused on primarily? So currently uh over the near term uh we look for subsectors and areas that are not impacted uh by the tariffs uh namely in like domestic industries uh within Japan uh that actually benefits from labor shortages uh such as constructions basically commanding a higher margin as a result of that. also in in software and IP such as you know games and other areas those uh have relatively uh limited impact to the uh US and tariff negotiations. Uh so that we are focusing on right now. However, uh we’re not alone thinking the same same thing. So we are also looking for these kind of impacted sectors um being underweight by the widest margin in a couple of decades. So, we’re focusing and taking a lot look in these um outcomes of the negotiations. Uh but we don’t we’re not setting any calendars of when this will dissolve and it’s it’s it’s taking a little bit longer than we had anticipated. So, let’s move away from Tokyo and Washington and the tension that may exist on that front and I’m curious about Japan’s relationships uh with some of the other trading partners it has in the Asia-Pacific, principally China. Is this something that you’re also taking into consideration that maybe that relationship becomes a little bit more meaningful from the Japanese side? I think overall uh I wouldn’t say I I would not say that the globalization trend has reversed but we think that the trend of globalization has at least slowed down uh meaning to a lot of uh capital expenditure being more diversified globally and uh our view is that that actually benefits uh many Japanese companies that make critical components and services uh in the capital of expenditure especially in the manufacturing sector. So because of these tensions you can no longer consolidate every single manufacturing in a single country rather uh you you have to make things in the United States you make things in China you you make things in elsewhere which means that there will be a duplication of capital expenditure across the globe and uh we look for opportunities that benefit from that trend. So Shintaro, just to put a button on it, when you look at the dynamics between Japan and China, strengthening that trading relationship, that would be something that you would look for in terms of trying to find opportunity, right? Correct. Okay. Shentaro, thank you so much. Shentaro Takayuchi, portfolio manager at Matthews Asia, joining us here on the Daybreak Asia podcast. [Music] Welcome back to the Daybreak Asia podcast. I’m Doug Krner. So, we know the impact of the trade war on growth and inflation differs across economies globally. Now, here in the US, the potential for tariffs to be inflationary is keeping the Fed in this wait and see mode. Policy makers are now in a blackout period ahead of the Fed’s July 30th rate decision. Now in the US last Friday, Governor Chris Waller reiterated his case for a rate cut and Waller hinted that he would dissent if his Fed colleagues voted to hold rates steady this month. For a closer look now at the rate outlook, I’m joined by Clayton Trick. He is head of portfolio management and public strategies at Angel Oak Capital. Clayton is on the line from Atlanta, Georgia. Clayton, thank you so much for making time to chat with me. Is there a case to be made for cutting the policy rate as soon as this month? Doug, good to be with you again. Yeah, we we do think so. This meeting is obviously definitely on the early end, but if you do look across developed economies, thinking about where the current Fed funds rate is in the United States versus inflation, you know, it’s definitely on the higher end, i.e. that, you know, the real policy rate is is one of the highest levels. So, there is an impetus to, you know, cutting rates potentially at this meeting. We think the likelihood is extremely low given the Fed doesn’t like to surprise the market and the probability is, you know, almost 0% for this meeting. But that being said, you know, we we do think that, you know, rates could definitely be lower. That was our expectation, you know, a few months ago going into the year and in our mid-year outlook, you know, we do expect that the Fed funds rate, you know, will most likely be moving lower, you know, in the next couple months. I’m wondering about the tariff story because Bloomberg Economics is estimating that the average US tariff rate will have risen to above 13%. It was at a little more than 2% back in January. Isn’t there a risk that tariffs really create much higher inflation and that argues for at least keeping rates on hold for the foreseeable future? We do think that you could see, you know, some bumps in the road here on inflation. You know, that being said, kind of the overall tail risk that you would get a significant rise in sustained inflation and core inflation over the next, you know, 3 to 9 months, we think is is a much lower risk today than it was just a few months ago. So overall, u we think we could see some some bumps. You know, the last time we saw higher tariffs, you know, that was a one-time pass through. If you look at what’s driving inflation, you know, over the intermediate term, you know, housing prices, rent prices continue to move lower. Actually, in some places, you’re seeing falling home prices. That’s 30% of PCE and 30% of poor CPI is shelter. And with those headwinds there in the economy looking to lose momentum, we do think overall core inflation should not be surprising that much higher overall and gives the Fed the ability to kind of look through to the longer term and potentially, you know, move rates lower even if there’s some bumps in the road modestly with inflation. So let’s look at the tariff story from the other side of the equation that it begins to hurt growth. Obviously that would argue for lower rates, but do you think the growth story is going to suffer a little bit as the consequence of tariffs? Yeah, we do. Um, you we think growth uh is definitely continued to slow. The economy has been losing momentum. We put this in our outlook, you know, illustrating the GDP growth the last few years has continued to decelerate. You know, you look at the labor market, we’ve also seen a fall in average payrolls. So, last year in 2024, we had average payrolls over 150,000 per month. You know, now you’re about 130,000 with last month’s beat. So, you know, all eyes will be on the labor market overall. But with the economy losing momentum here and tariffs most likely will end up being higher even if they’re not as high as the initial fears after liberation day that is negative for growth. And so that sets up the well for what I think Waller’s kind of pointing to. So in the week ahead we’re going to get two reports on the housing market. Sales of previously owned homes is one. I think that data arrives Wednesday. Thursday new home sales. How are you understanding the housing market right now and what the rates environment is doing, particularly the mortgage market, the impact it’s having on uh the real estate sector? Yeah, it seems like consumers are are continuing to be surprised that you mortgage rates are staying this elevated, right? You you’re still seeing 30-year mortgage rates, you know, between 6 and a half to to 7% at a time and home prices are still very elevated. So overall affordability is quite negative you know overall and within the you kind of in the micro level for housing we’ve had such low inventory that only a little bit of demand has been able to clear these levels but we have really seen a significant rise in supply. You know, we saw supply rise over the last 18 months, almost every single month. And we actually see today as kind of more of a buyer market given there’s so much more sellers in the overall housing market than buyers uh right now. And so home prices should continue to be, you know, softer. We don’t see new home sales or existing home sales really surprising to the upside right now. you know, we actually think that the housing finance markets are in great shape, but as far as uh thinking about home prices are going, you know, most likely they’re going to be flat or potentially negative, you know, next year on the margin. I’d like to get your take on the MUN market, particularly in the wake of the passage of the big beautiful bill. this could end up putting a lot more stress on revenues for state governments and I’m wondering whether or not you have to be a little bit more cautious when you begin to identify opportunities in the MUN market going forward. You know, overall we do think that the the short-term kind of changes um for for munis and for revenue and as you mentioned the the big beautiful bill, you know, that’s really just kind of setting up buying opportunities in the short term. you know, over the long term, um, you we’ve seen a lot of, uh, you know, budgets, you know, kind of being fixed and a lot of the asset liability mismatch mismanagement and pensions have improved so significantly with stocks up so much. Um, so we actually view anything kind of short-term um, ball and munis is actually a pretty strong buying opportunity. We saw that earlier this year and if we see that again in the second half, we think that could continue to be another buying opportunity as well. So, broadly speaking, when you look at the fixed income space, Clayton, where do you want to be positioned on the curve right now? Yeah. So, we see ex really attractive opportunities in the short to intermediate term. Um, on the long end of the yield curve, you know, while the average, you know, 10-year real rate is around 200 basis points and that only averaged about 80 basis points the last 20 years. You know, it does look really, really attractive. That being said, um, with the, you know, unsustainable level of the fiscal side of the picture, we think there could be a lot involved in 10ear yields and 20 and 30-year yields. And so, we see much better opportunity in short and intermediate term fixed rate bonds. Um, you know, the easy money’s kind of been made when it comes to investment grade corporates and high yield corporates, but fixed rate bonds within mortgage back securities, asset back bonds, and selective areas of corporates actually look really, really strong right now. We saw that through the first half of the year uh returns have been right in line with our expectations and the VA has been so low for those that portion of the market versus if you look at the standard deviation of the S&P it was around 30 the first half of the year. So great returns and fixed income so far. We think that most likely will continue for the second half of the year. Clayton, we’ll leave it there. Thank you so much. Clayton Trick there. He is head of portfolio management and public strategies at Angel Oak Capital on the line from Atlanta here on the Daybreak Asia podcast. [Music] Thanks for listening to today’s episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia-Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I’m Doug Krer and this is Bloomberg. [Music]

The yen recouped some of last week’s losses as investors weighed the extent of the defeat suffered by Japan’s ruling coalition in the weekend’s upper-house election. Asian stock markets edged down. Japan’s currency had dropped for two weeks and bond yields spiked ahead of the vote on concern a poor showing by Prime Minister Shigeru Ishiba would open the door to more spending and tax cuts. While the ruling Liberal Democratic Party and its partner lost their majority in the chamber, their final tally may be enough to keep Ishiba in the job. We get reaction from Shuntaro Takeuchi, Portfolio Manager at Matthews Asia.
Plus – Donald Trump is struggling to get the Federal Reserve to cut interest rates, but policymakers around the world won’t need so much convincing. The US president’s tariff onslaught is likely to force further measured easing in coming months by most of the 23 central banks featured in this quarterly guide on the global monetary outlook, according to Bloomberg Economics. Federal Reserve Governor Christopher Waller hinted he would dissent if his colleagues vote to hold interest rates steady at their July meeting, making his case for a rate cut to support the labor market. We take a look at the Fed’s path ahead with Clayton Triick, Head of Portfolio Management, Public Strategies, at Angel Oak Capital.
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