Japan Edges Higher on US Trade Negotiation Hopes
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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. In Asia today, the spotlight is going to focus primarily on Japan, China, and South Korea on the final trading day of the week. That's because former Commonwealth countries will be closed for Good Friday. Volume, I think it's fair to say, will likely be lighter than usual across global markets, and that could produce some exaggerated moves.

In a moment, we'll look at the price action here in the U.S. with James Demert, CIO at Main Street Research. But we begin this morning in Singapore. Joining me now is Bloomberg MLive strategist and friend of the show, Mary Nicola. She's on the line from the Lion City. I want to talk about Japan first, and we can focus in a moment on trade talks between the Trump administration and

and members of the Japanese delegation that happened to be in Washington this week. But can we talk about the latest inflation data for Japan? What are you seeing right now? Yeah, there's obviously price pressures that are still there. So if you look at inflation, ex-food and energy, you're seeing that the numbers are around 2.9%. For Japan, that seems quite high, especially given the route of deflation that we've had for so many years. And now we're seeing inflation pick up.

the problem is for japan is that the tightening cycle is likely delayed uh for some time especially because of the trade uncertainty so boj governor ueda has repeatedly said that you know there's a lot of uncertainty and the markets have almost completely wiped out expectations of further tightening so for example

a month ago, we were looking at 90 basis points of hikes over the next year. And now we're looking at 16. So it just shows you the expectations that traders are seeing for the Bank of Japan. And that's

and obviously a lot of that just still hinges on trade policy. Yeah, and I mentioned the fact that the Japanese trade delegation was in Washington this week. Obviously, the primary objective is to come to some type of understanding, maybe to strike a deal in the near term. That would alleviate a lot of the concern about economic weakness, particularly when you look at companies that deal in steel and...

and in the automobile industry. Is there a sense, if these tariffs were to remain in place for a while, is there a sense of how damaging that could be to the overall economy? Yeah, I think the key thing for what we're seeing with Japan, and that is going to remain under scrutiny, is that Japan is obviously a close ally of the United States. So

how the U.S. deals with Japan will be indicative of how it deals with other allies. And I think that's the key thing. So if we're looking that they're going to remain punitive, then I think market sentiment is just going to worsen as a result because Japan isn't getting a good deal. And if an ally isn't, then who exactly will, which worsens the

potential implications for what is happening between China and the US. So even if you get, let's say, for Japan, a good deal, there's still some broader implications of a slowdown in growth, just because you have tensions between the world's two largest economies.

the US and China. And as long as that remains in place, that does have broader implications on the rest of the world. And specifically for here in Asia, where a lot of these economies are more export oriented. So you would know better than I. Yesterday, we learned that as a part of the meetings that were taking place between the Trump administration and the Japanese trade delegation, there was no mention of the currency. What would the Trump administration ultimately like to see in dollar yen, do you think?

Yeah, they would love to see dollar-yen a lot lower from here, even though we've come a long way. We're hovering around 142. And if you remember, just a month ago, we were in the 150s or so, and we were talking about it reaching back to 160. Now the market chatter is all about moving to 130. And granted, there is this whole focus on

moving in that direction and becomes part of the deal. And I think a lot of it has to do with if you look at it from a real effective exchange rate basis and how it is performing against its trading partners, the yen is quite undervalued on a number of different metrics. So it does warrant

and it could allow for some appreciation that's quite evident with where it stands from the valuation perspective,

But at the same time, it's very punitive. So if you have tariffs on top of it and then you have an appreciating currency, that's not good for the economy. One of the stories that we were talking about here in the States today, Mary, is President Trump saying that he could force Jay Powell from his position as Fed chairman. And it didn't stop there. Trump rebuked the notion that the Fed is independent. Can you give me a sense of the reaction that you're hearing in Asia to these remarks?

I think it would definitely spook markets in the sense of what we saw in the bond drought earlier, I think it exacerbates it because it's always been seen as the Fed is independent from the administration. Once you start calling the Fed independence into question, that just puts greater stress on the bond market and bond vigilantes are likely to come out in full force as a result. So I think it

It's quite a tricky situation to highlight some of these things out in public because it does spark fear of how policy and the policy credibility comes into play. And, of course, we've already seen a transition away from U.S. assets because of policy credibility, because a lot of the policy uncertainty is stemming from the U.S.

And so you're seeing the impact of coming through on U.S. equities, on U.S. bonds as a result. And that shift that we're seeing into, let's say, for example, the euro, the Swiss franc and the Japanese yen as a result. So I think that notion, especially if the Fed's credibility comes into question, is only going to accelerate that.

shift away from U.S. assets into the likes of the euro, the yen and the Swiss franc. Before I let you go, I want to just get your thoughts on China, the degree to which this tariff policy is going to have an adverse impact on the economy and what the government in Beijing is prepared to do to support the economy. Do we have any more detail on that?

Not really. So we've had a lot of sound bites and the equity markets just at this point needs a lot more than sound bites. So Q1 GDP was strong, but a lot of that you can accredit to front loading on exports ahead of the tariffs. And of course, now it's just seen as backward looking. So now the focus is on what is happening to the Chinese economy, especially with very punitive tariffs in place.

And I think unless we see some sort of actionable policy in terms of whether it's fiscal or monetary, I think you're going to see pressure continuing on Chinese equities. But I think also the other thing, too, to focus on, and that's been a big focus here in Asia, is on the CNY and the ongoing depreciation in the currency. And I think you'll still see that

orderly decline nothing too drastic there have been um some speculating of a 30 devaluation that is obviously would spark greater instability greater volatility not something that policy makers want and nor have they ever wanted any sort of

significant instability that would cause outflows in particular. So I think what you'll see is a gradual decline in the CNY to continue. All right, Mary. Good stuff. Thank you. We'll leave it there. Enjoy the weekend. Mary Nicola there, Bloomberg Markets Live strategist, joining us from Singapore here on the Daybreak Asia podcast. Want to understand trends shaping the global investment landscape?

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where money means more. Welcome back to the Daybreak Asia podcast. I'm Doug Crisner. It was a mixed day for the U.S. equity market before Good Friday, when American markets will be closed.

And the benchmark seems to have settled into an uneasy calm after a period of high volatility. Now, some of the market have sensed a bit of foreboding that this calm will not last. Let's take a closer look. Joining me now is James Demert. He is the chief investment officer at Main Street Research. James, thank you so much for joining us.

I think it's obvious that market psychology has been dominated by Mr. Trump's trade war. The big question, one at least, seems to be on the degree to which this tariff policy has undermined confidence, not only in the American economy, but in risk assets as well. What is your sense right now of where we are?

- John Maxfield: Good to be with you again, Doug. And our sense is that the market was way overdue for normal correction, which turned into something much worse when those tariff announcement came out much more dramatic than anyone expected. And that's why you saw the S&P 500 tumble to a level of 5,000. And that did spark a lot of fear. And in our view, probably the kind of bearishness that you see at market bottoms

So since we bounced off those levels, there is definitely an uneasy feeling amongst investors. I think a lot of people are worried that we're going to go down to that level again and maybe much lower. In our view, the worst is probably behind us relative to the tariffs anyway in the market level, but we may retest those levels. But most importantly here, I think investors should recognize

From wherever the market gets stable and starts to go up again, it's probably going to be led by a different group of stocks than what we saw last year or the year before. What is your sense about recession and whether or not we're going to have an inflationary shock and maybe a combination that leads to stagflation? You know, stagflation is really the buzzword. And we think that because it's so talked about, it's probably a lower risk situation.

And then there's always the possibility of a recession. And in our view, when we really look at tariffs, I think this is important for investors to consider, even with the extreme level of tariffs pre-negotiating, that would shave, in our view, about three quarters of a percent off of GDP.

Now, right now we're growing at 2.5% annually. So that takes us down, let's just say, to 1.5% or 1% growth. It really doesn't take us to stall recession levels.

So our view is that, A, yes, this will slow U.S. growth, but not to recession levels. And even if it got near there, Doug, let's say the labor market really starts to crumble, the Fed has got more than enough ammunition to do things with the balance sheet or cut rates. And I think they would to avoid any sort of recession. So that's why I think investors want to be careful here of getting completely liquidated from stocks.

Because the idea of recession is probably out of the game as far as we can see. So you're talking about leadership changing, and I'm curious what that looks like. I mean, are there areas of the market now that you feel are more attractive, let's say, than they were prior to this corrective phase that we were in?

Yes. And, you know, I consider it a new world order. You know, you've got tariffs that are not going to come off certain industries and sectors. And I think those are things that investors need to avoid. And that where it's really acute is in the industrial stocks.

such as Caterpillar that sells products all over the world, or the autos. I'm sure those are going to be very difficult. But if you think about it, at least in the U.S., and we're also big advocates of investing outside the U.S., and that's another thing that'll be different than what we saw in the last couple of years. But in the U.S., you look at companies like in the financials, they

They are pretty much immune to tariffs, and that would be anything like a JP Morgan or Berkshire Hathaway. Look at companies in the telecommunications space like T-Mobile. There's a lot of companies out there, McKesson and the drug industry, that are completely not affected by this. So unlike some of the bad markets you and I have gone through, where it's a full-blown recession, everything falls, we think this is really a tariff-related situation. And if you're selective,

You can find companies that will benefit or do fine through this, and that's kind of what we're seeing. And then, of course, we think investors should be allocated outside the U.S., which I'm happy to chat about as well. So, before we go there, I'm curious,

to get your sense on the period of time where the market can tolerate a level of uncertainty as these negotiations get worked out. What's interesting is whether or not there's a point when the passage of time becomes problematic, when no resolution has been brought about. I'm not sure. And one of the things that I would consider is you look at it as a market of stocks, not a stock market. During the last...

let's say, few weeks, you see companies like McKesson acting gray. You see companies like Netflix, which reported, obviously, tonight and had great numbers and stocks up 6% in the after hours. We think that that is a microcosm of the next six months if there was still uncertainty. You've got to be...

not a passive investor, I don't even think an index investor, but maybe a stock picker, which is kind of our kind of market. And there are great opportunities because a lot of these stocks that are immune, as you know, have been sold off pretty dramatically. And that spells opportunity to step in. Yes, it takes courage when the news in general is so negative. But if you look at some of these businesses, they're pretty much immune to this and they're presenting great opportunities.

Okay, so let's circle back now and talk a little bit about the opportunities that you see offshore. Talk to me about Asia first. Which markets or jurisdictions do you favor? Well, we like developed markets because of liquidity, particularly when you're in an uncertain world. So that draws us to Japan. It draws us to China.

And I know some people think, well, gosh, China, well, that's right in the crosshairs. But if you look at individual companies, particularly those that are well-developed and have a liquidity like BYD, the electric vehicle operator,

you know they don't sell uh those those automobiles in in the u.s and but they have significant market share in china and in europe which will probably continue to trade so that's a great example there i also would look at you know great companies in japan as another way to find liquidity in great brands companies like hitachi now there could be uh

tariff issues with some of those stocks, but many of them have fallen way further, certainly discounting whatever tariff implications there may be. I want to get your senses to whether or not you feel because of this trade war that's been happening, particularly between Washington, let's call it Asia more broadly. It's not just Beijing. I mean, Tokyo was in the crosshairs as well. And the Japanese trade delegation was just at the White House the other day. Do you think this kind of

The way in which the Trump administration has approached this has damaged those relationships beyond the point of maybe a trust level that was there pre-tariff?

I do. And I also think that it's created a distrust amongst investors outside the U.S. And I think that's something as investors in general, we want to consider. What is the excitement about investing in the U.S.? I think that shine has worn off. And I think that exceptionalism that people talked about may be a thing of the past while this goes on, at least. Are you fully invested right now or you're sitting on a little bit of dry powder?

We're about 20% underinvested, and we're using that as an opportunity to find value in the continued volatility. I would expect, though, that we'll probably be fully invested over the next coming weeks, probably not months. Okay, we'll leave it there. James, thank you so much. James Dembert there. He is the founder, also the CIO at Main Street Research. Joining us here on the Daybreak Asia podcast.

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 Krisner, and this is Bloomberg. There are presentations.

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