LUCKNOW, India: At least 96 people died in two of India’s most populous states over the last several days, officials said Sunday (Jun 18), with swaths of the country reeling from a sweltering heatwave. The deaths happened in northern state of Uttar Pradesh and eastern Bihar where authorities warned residentsContinue Reading
Thailand is planning to promote premium silk products to target young buyers in Japan, South Korea and Italy, government spokesman Anucha Burapachaisri said on Saturday.
He said the aim of the Thailand Textile Institute’s Premium Thai Silk project is to introduce newly designed silk products to export markets. He said Prime Minister Prayut Chan-o-cha is confident the quality of Thai silk fabrics will boost the country’s soft power standing in the textile market.
Since the government began promoting Thai silk with new designs among domestic buyers in 2019, there have been 112 new Ikat silk and over 108 new products, including clothes, bags, shoes and accessories, he said.
The products brought 6.6 million baht to 1,618 silk entrepreneurs in the Northeast, Mr Anucha said, with some eyed for the export market.
BEIJING: US Secretary of State Antony Blinken began meetings in Beijing on Sunday (Jun 18), the first top American diplomat to visit China in five years, amid frosty bilateral ties and dim prospects for any breakthrough on the long list of disputes between the world’s two largest economies. Having postponed aContinue Reading
BEIJING: US Secretary of State Antony Blinken began meetings in Beijing on Sunday (Jun 18), the first top American diplomat to visit China in five years, amid frosty bilateral ties and dim prospects for any breakthrough on the long list of disputes between the world’s two largest economies. Having postponed aContinue Reading
Israel has unveiled a hypersonic missile interceptor concept, a pioneering bid to toughen its defenses against Iran’s reputed hypersonic threat and win access to emerging European and US counter-hypersonic defense markets.
Breaking Defense reported this month that Israel’s Rafael Advanced Defense Systems unveiled its Sky Sonic hypersonic interceptor missile at the Paris Air Show, with an eye toward securing European missile defense contracts.
The report notes that Sky Sonic, which has been under development for several years and not been tested, uses hit-to-kill technology and is designed with open architecture for maximum flexibility.
It also mentions that Rafael has presented the project to the US, with the latter apparently giving positive feedback.
In a company statement, Rafael said, “Successful defense against hypersonic threats requires a multifaceted approach that involves not only countering their speed but also effectively tracking, detecting and intercepting their unpredictable flight paths.”
The pressure on Israel to develop counter-hypersonic defenses has likely become more urgent as its arch-rival Iran has claimed to have developed a hypersonic weapon.
This month, Asia Times reported that Iran publicly revealed its first hypersonic missile, the “Fattah,” or “opener” in Farsi. Iranian state media showcased what appears to be a maneuverable re-entry vehicle mounted on a ballistic missile body.
Iranian state media also claimed that the Fattah could travel at up to Mach 15, has a 1,400-kilometer range, uses solid propellant technology and has a moveable nozzle for high maneuverability.
However, there is cause to doubt Iran’s hypersonic claims, as the Islamic Republic is known to exaggerate its military capabilities for propaganda purposes. For one, current hypersonic missile technology supports designs flying up to Mach 5-6, so Iran’s claims of Mach 15 would appear to be an exaggeration.
Further, established hypersonic technology pioneers such as China, Russia and the US, all with greater resources and expertise than Iran, have faced various difficulties in their hypersonic weapons programs, casting more doubt on Iran’s claim.
Israel isn’t taking any chances. Besides its planned Sky Sonic hypersonic missile interceptor, Israel is also investing in alternative missile defense systems including the use of lasers.
Lasers have several advantages over missile-based defense systems, namely instantaneous hits, low cost per shot and scalable power. However, they face drawbacks such as huge power requirements, decreasing power over distance and sensitivity to atmospheric conditions.
Asia Times reported in February 2022 that Israel plans to build a “laser wall” in its southern regions to defend against missiles, rockets, drones and other long-range threats from Iran and its proxies.
In 2014, Israel unveiled its Iron Dome missile defense laser. However, at the time, Israeli officials concluded that the technology was not yet mature, with its limited range meaning it could not replace missile-based defenses but could be effective against very short-range targets.
Despite that setback, lasers might be the future of missile defense. Asia Times noted in May 2022 that future missile defense concepts might emphasize terminal point defense rather than wide area coverage.
While global and regional missile-based defense systems won’t become obsolete overnight, they can be complemented by numerous directed-energy weapons such as lasers to destroy rockets, missiles, loitering munitions and possibly hypersonic weapons in their terminal stages of flight.
However, as missiles destroy their targets instantaneously on impact, a laser must be focused on the target for a few seconds to destroy it, which may not be feasible for hypersonic targets moving at Mach 5 or faster.
Despite Israel’s missile defense prowess, it faces larger systemic challenges such as disjointed systems, limited capacity against a saturation attack and a tendency to incentivize military rather than diplomatic solutions.
In a May 2023 interview for the Center of Strategic and International Studies (CSIS), Moshe Patel, director of the Israel Missile Defense Organization (IMDO), noted that the biggest challenge for Israel’s missile defense is to integrate diverse systems to intercept a variety of airborne and ballistic threats.
Asia Times noted in May 2023 that disjointed air and missile defense systems might not be effective against an adversary deploying a wide array of improvised and advanced armaments such as homemade rockets, suicide drones, ballistic missiles, cruise missiles and even hypersonic weapons.
Unlinked air and missile defense systems are a recipe for failure against an adversary with a diverse arsenal.
No missile defense system is 100% foolproof, and Israel’s famous Iron Dome is no exception. In a May 2021 Forbes article, David Hambling notes that the Iron Dome has a high but unknown “saturation point” – the maximum number of rockets it can handle at a time. Hambling notes that excess rockets will get through once that unknown limit is exceeded.
Hambling also notes the disproportionate cost between the Iron Dome’s finite supply of Tamir interceptors, which cost US$50,000 per round versus $500 to $1,000 for Hamas and Hezbollah’s homemade rockets, and $20,000 for Iran’s Shahed loitering munitions.
Hambling also notes that the high effectiveness of missile defense systems may be a strategic liability, as missile attacks on Israel inflict relatively minor damage, often making Israel’s military responses seem heavy-handed and disproportionate to international observers.
He notes that Israel’s overreliance on its missile defenses such as Iron Dome, David’s Sling and, in the future, Sky Sonic means that their failure could be perceived as a dereliction of duty by the Israeli government to defend its people.
That potential failure could force the Israeli government to launch large-scale military offensives to take out enemy missile and drone launch sites or even dare pre-emptive strikes on Iran, with potential serious implications for escalation as Tehran pursues a nuclear bomb.
It’s been an interesting week for Siemens and China. In a meeting with China’s Minister of Industry and Information Technology Jin Zhuanglong in Beijing on Wednesday, Siemens AG’s Chief Executive Roland Busch said the company will strengthen cooperation with China in areas such as advanced manufacturing and digital transformation of SMEs.
On Thursday, Siemens said it will also spend €140 million (US$153 million) to expand its digital factory in Chengdu to serve markets. It will set up a new digital R&D Innovation Center in Shenzhen to speed up development of motion control systems with its digitalization and power electronics technology.
Prior to this, Busch had told the Financial Times On May 24 that it was “not an option” for Siemens to pull out of China’s market, which accounts for 13% of the company’s revenues. On Thursday, however, the company said that it will build a new factory in Singapore for €200 million.
Wirtschaftswoche, a Germany magazine, reported that Busch had originally favored China as a location for the new factory but he faced resistance from Siemens’s supervisory board, which had concerns over the growing geopolitical tensions.
There’s a larger trend here: Due to those rising geopolitical tensions combined with a sluggish economic recovery in China, only 55% of German companies plan to invest further in China within the next two years, compared with more than 70% that did so in 2020 and 2021, according to a survey conducted by the German Chamber of Commerce (DIHK) in China.
Like Siemens’s Busch, not a few Western technology gurus have visited China in recent months to try to figure out how they can continue to stay in Chinese markets and make money – in the end meaning, ideally, geopolitical-risk-free money.”
Contributing to the geopolitical tensions, G7 leaders said in a joint statement on May 20 that they have a common interest in preventing a narrow set of technological advances from being used by some countries to enhance their military and intelligence capabilities to undermine international peace and security. They said G7 countries will seek to de-risk from China.
And China has not hidden its dissatisfaction with Western companies that are seen as following their countries’ policies too closely, to China’s disadvantage. On the same day, May 20, the Cybersecurity Review Office, a unit of the Cyberspace Administration of China, banned the country’s key national infrastructure operators from purchasing products from Micron Technology, a US chip maker which has downsized its China business since 2019.
But China is walking a fine line. In recent weeks, Beijing has encouraged foreign technology bosses to visit.
On Friday, Chinese President Xi Jinping met with Bill Gates, founder of Microsoft and co-chair of the Bill & Melinda Gates Foundation, in Beijing.
Calling Gates an “old friend,” Xi said China is ready to carry out extensive cooperation with all countries on scientific and technological innovation.
In late May, Tesla’s Chief Executive Elon Musk departed for Beijing and hoped to meet with Chinese Premier Li Qiang. But he could only meet Vice Premier Ding Xuexiang.
On June 8, 36Kr, a Chinese IT news website reported that during his China trip Musk had asked Chinese suppliers to move to Mexico to support Tesla’s flagship factory. It said some Chinese suppliers are told that they will miss some big orders if they do not take action to react to Tesla’s requests now.
A Shanghai-based columnist on June 12 published an article titled, “Is Elon Musk fleeing from China? Tesla builds a factory in Mexico, and demands Chinese suppliers to go with it.”
“At present, China is not only a world factory but also the world’s second largest consumption market,” he writes. “American companies cannot leave China’s productivity and consumption markets.”
The columnist says that while Tesla is building a factory in Mexico, it cannot abandon the Shanghai one. He says that for a very long period of time in the future, Tesla’s Shanghai factory will stay put, going nowhere.
Tesla’s Gigafactory Shanghai commenced production in October 2019 with a production capacity of 500,000 electric vehicles per year. It was shut down for two weeks in early 2020 due to the Covid-19 epidemic. Its production was disrupted again between March and May last year due to Shanghai’s lockdowns.
In March this year, Tesla announced its plan to build a gigafactory in Mexico with an annual production capacity of one million vehicles.
“The growing Sino-US tensions and intensifying geopolitical risks have prompted the leaders of multinational companies to adjust their investment plans,” a Hunan-based writer says. “Most multinational firms have chosen the ‘friend-shoring’ or ‘China + N’ model to rebuild their supply chain.”
He says more and more Chinese capital will go overseas to get close to their customers or they will lose orders. He says this is why China’s foreign direct investment (FDI) is falling while overseas direct investment (ODI) is growing.
In the first four months of this year, China’s FDI dropped 3.3% to US$73.5 billion while ODI increased 17.1% to US$52.8 billion.
Meanwhile, some commentators said the G7’s call for de-risking is not very meaningful. They said the so-called re-shoring and friend-shoring merely substitute Chinese exports of intermediate goods for exports of assembled products to the US.
They said China is shifting capacity to Southeast Asia and some other countries while foreign investors in China are following suit.
In recent months, China has attracted some foreign technology firms to set up factories in the country.
In March, KMWE, a supplier of the Dutch chip-making equipment maker ASML, said it will build a new factory in Sichuan to produce robot arms for chip packaging machines, which are not covered by the US sanctions.
On June 7, STMicroelectronics, a Sweden-based chipmaker, said it had signed an agreement with China’s Sanan Optoelectronics to create a new 200mm silicon carbide (SiC) device manufacturing joint venture in Chongqing.
Sanan will build the new fab, which will commence production in the fourth quarter of 2025. STMicroelectronics will contribute its technology to owe a 49% stake in the JV.
On Friday, Micron announced that it will US$603 million over the next few years in its chip packaging facility in the city of Xian.
Western companies doing business in China generally don’t go out of their way to be precise about the tradeoffs both sides find themselves needing to make.
Take Siemens’s Busch. Here’s what he said about the week’s bidirectional investments: “The investments underpin our strategy of combining the real and the digital worlds – as well as our focus on diversification and local-for-local business. We are clearly doubling down on our strong global presence to support growth in the most relevant markets in the world.”
The non-Chinese recipients of new investments, however, are not hesitant to express their pleasure. Ping Cheong Boon, Chairman of the Singapore Economic Development Board (EDB), exulted that “Siemens’s new high-tech factory in Singapore will leverage our trusted hub status and strong advanced manufacturing capabilities to meet rising demand across Southeast Asia’s high-growth markets.”
Read: China, US move closer to high-level official talks
Follow Jeff Pao on Twitter at @jeffpao3
WHY WERE THE DEALS NEEDED? The poorest in the world were hit worst by the rising global food prices. The UN World Food Programme (WFP) warned in March last year that its ability to feed some 125 million people was under threat because 50 per cent of its grain cameContinue Reading
HANOI – Vietnam’s once-thriving real estate sector is under stress as developers default on their bonds, a market downtrend set in motion last year by a government crackdown on dubious property deals. That, in systemic turn, is putting new strains on the banking sector.
With economic growth projected to fall from 8% in 2022 to 6.3% this year – a figure that could be optimistic with rising economic uncertainty in Vietnam’s top global export markets – property sector troubles could deteriorate before they ameliorate in the months ahead.
The property market clampdown was launched in part to curb land speculation and slow the rampant construction of luxury condominiums, where the returns are higher for developers but largely out-of-reach to average Vietnamese investors and buyers.
The market turned last October when Ho Chi Minh City-based property tycoon Truong My Lan, chairwoman of the Van Thinh Phat Holding Group, was arrested on charges of bond market fraud. Her arrest sparked a run on the Saigon Commercial Bank (SCB), where Truong allegedly has a close lending relationship.
A State Bank of Vietnam (SBV) intervention, which guaranteed to cover all SCB deposits, prevented a potential systemwide run on banks. But the central bank intervention did not, however, stop an eventual rout on Vietnam’s nascent, property-oriented bond market.
Truong was arrested due to her company’s alleged abuse of a bond issue, which banking sources say diverted funds away from its designated capital-raising purpose for land speculation.
Truong was not the only high-profile victim of last year’s anti-corruption drive, which saw the sacking of former state president Nguyen Xuan Phuc and two now ex-deputy prime ministers.
The timing of the clampdown couldn’t have been worse. The SBV was forced to raise interest rates by 200 basis points shortly after Truong’s arrest, a monetary tightening that sought to contain galloping inflation, bolster the falling dong currency, and replenish sagging foreign exchange reserves.
The interest rate hikes were a further blow to property developers and buyers and added pressure on banks. Local banking sources say there was near zero credit growth in the first three months of 2023, a reflection of enduring trouble in the property sector.
Faced with declining sales and uncertainties about the legal status of several projects (the corruption campaign targeted questionable deed titles for urban land where several high-rise, luxury condominiums were built), property companies have defaulted on their bonds as cash flows have dried up.
In February, Novaland Investment Group, Vietnam’s second-largest property group, defaulted on a 1 trillion dong (US$43 million) bond issue.
According to a S&P Global Ratings report, as of March 17, 2023, at least 69 Vietnamese bond issuers were unable to meet their debt obligations on maturity, with a total default value of 94.43 trillion dong, representing 8.15% of the bonds’ outstanding value.
“By sector, 43 issuers are enterprises in the real estate industry with a total value of defaulted corporate bonds at 78.9 trillion dong, accounting for 83.6% of the total default value,” said the report.
Unless the tide somehow turns on the property sector, many more defaults could be on the horizon. “The real estate sector has the largest outstanding bond value of 396.3 trillion dong, which accounts for 33.8% of the total outstanding bond value,” noted S&P.
The bond market slump – new bond issues fell more than 90% year-on-year in the first quarter and there were none issued in May – has hit Vietnam’s stock market, which has underperformed the region. There are some 20 listed private property firms on the two stock exchanges, some among Vietnam’s top companies.
To be sure, credit rating analysts see upside to the government’s actions.
“Government policies were to discourage property speculation and support the affordable segment of the market,” said Fiona Chan, an assistant-director at S&P Global Ratings.
“This approach may help the Vietnam property market progress towards a more sustainable growth in the long term, but the market will need to sustain some short-term pain. For pre-sales, we estimate that aggregate sales will decline by 15-20% this year,” Chan told a recent webinar
The wave of defaults also reflects regulatory failings in the bond market, which has only taken off in the past five years, driven to a great extent by the fast-expanding property sector. All bonds are sold domestically in dong currency to mostly private investors and local banks.
“I think the bond market got ahead of the regulators, a bit,” said Barry Weisblatt, an investment strategist at SSI Asset Management Company. “They hadn’t really developed the rules so people were gaming the system,” he said.
Realizing they had been too lax on bond issuances, authorities last September issued Decree #65, which suddenly tightened regulations and required more disclosure for the private placement of corporate bonds.
The result was dramatic with a more than 90% reduction in bond issuances thereafter. In March this year, authorities essentially retracted Decree #65 and replaced it with Decree #8, which postponed the tighter regulations for at least a year.
While the delay was welcome, in the longer term authorities will need to more vigilantly regulate the bond market, analysts say.
“The government has responded in a way which I think is conducive for the long-term development of the bond market,” said Xavier Jean, senior director/corporate sector for S&P Global Ratings. “It is a process that can take years, but I think it is a necessary first step,” he added.
Meanwhile, Vietnam’s corporate sector and small and medium-sized enterprises (SMEs) have over time become even more reliant on banks, which are suffering from their own constraints this year.
Vietnamese banks have grown their assets at 15-30% over the past decade, with a high percentage of the system’s loans going to real estate – one of the few business sectors in which the local private sector has taken off in a still largely communist-controlled economy.
“Exposure of state banks to real estate is about 27% of their books, compared to 37% for private banks – developers, construction companies and residential mortgages,” said Tamma Pebrian, an analyst for Fitch Credit Ratings in Singapore.
Vietnam’s four largest state-owned banks, which account for more than 40-45% of the banking system’s assets, have the advantage of being the exclusive source of funding for the country’s still numerous and powerful state-owned enterprises (SOEs).
Many of the more successful private banks have cultivated close ties with private property developers over the years, which allowed them to grow their books and profits in tandem with the property boom.
As developers sought more funding, and because banks face strict single-client lending ceilings, banks and their affiliated security firms helped many developers issue debt on the bond market, acting both as buyer and agent for selling the issuances to the public. There are no institutional investors such as endowments, funds or insurance companies in communist-run Vietnam.
The banks then helped real estate companies by issuing mortgages to investors interested in buying their condominiums and other property developments. This bank-client relationship was a win-win until the government intervened last year.
In March, Moody’s Credit Ratings downgraded its outlook on Techcombank, one of Vietnam’s most profitable private banks, from “stable” to “negative.” Moody’s said the downgrade reflected an expectation that negative impacts from the real estate market will affect the bank’s “independent credit strength.”
Techcombank is one of the main creditors to VinGroup, whose affiliate Vinhomes is the largest property group in Vietnam with developments in over 40 cities across the country. VinGroup has not defaulted on any of its bonds, yet.
SBV, instead of forcing defaulted bond issuers to pay up or go bankrupt, leaving the public out of pocket and the banks with massive non-performing loans in the form of bad bonds on their books, has taken a softer approach.
Issuers and holders have been encouraged to restructure bond repayment periods, or in some cases accept condominium units in lieu of payment.
Earlier this year, the central bank also allowed banks to lower their interest rates by 100 basis points while raising the system’s credit growth ceiling to 16%, which is still low by Vietnam’s historical standards.
After years of rapid growth and impressive profits, this year is expected to be a comedown for Vietnam’s banks. That said, most analysts do not foresee a systemic collapse in the cards.
“Vietnam’s domestic banks benefit from their external net asset position, with still-limited linkages to global markets,” S&P said in a May press release.
“However, thin capital buffers, elevated indebtedness in the economy, cross-ownerships, connected lending, and the current property market, including the wider impact on upstream construction and downstream services, could affect the banks’ asset quality,” S&P said.
Many of the better-run private banks boosted their capital adequacy ratios during the boom times, and while the big state banks still need to do so, they are in little to no danger of going under, analysts say.
“Last year the banks saw 30% profit growth, so it was a real boom period,” said Fitch’s banking analyst Pebrian. “This year we are expecting about 13% profit growth for the sector,” he said – a fallback, to be sure, but not a collapse.
In January, the WHO named four other countries it was working with – Timor Leste, Cambodia, Senegal and the Philippines – to track whether any of the tainted syrups had reached their markets. There is no current risk to the population in the countries the WHO has named, Kuwana said,Continue Reading
TOKYO — Japanese stocks are having quite a moment as waves of foreign capital drive the benchmark Nikkei index to 30-year highs.
The common explanation for this year’s 30% gain is that a decade of efforts to tighten corporate governance are finally gaining traction.
There are signs indeed that companies from Canon to Toshiba to Citizen Watch are showing signs of actually listening to shareholders’ demands.
Add the fact that Japan Inc has been comparatively cheap valuation-wise during that decade and it’s not hard to understand why Tokyo shares are on a winning streak. Just ask Warren Buffett, whose 2020 bet in five Japanese trading houses is paying off handsomely.
Yet some sobriety is warranted, lest punters allow irrational exuberance to get the better of them once again. The question is whether government reforms are keeping sufficient pace with the bulls racing around Tokyo. The answer: not by a long shot.
An argument can be made that Japan Inc’s return to favor is as much a reflection of global events and domestic liquidity levels as bets on a renaissance in corporate attitudes.
Take the Bank of Japan, which is the ultimate outlier among top monetary authorities. As the US Federal Reserve, European Central Bank and Bank of England hit the brakes, the BOJ continues to gun the monetary engine.
For now, “the economic backdrop remains fragile,” says Stefan Angrick, senior economist at Moody’s Analytics. “Although Japan’s belated recovery has found some better footing, GDP is still below its pre-pandemic peak. Industrial production and exports have struggled as the global economy has flirted with recession.”
From a liquidity-differential standpoint, Japanese stocks — long undervalued by global investors — are gaining converts. Japan, meantime, looks like a welcome haven from the US-China trade tensions that are unnerving global markets.
Trouble is, it’s highly unclear that the underlying state of Japan’s economy warrants continued rapid stock gains. It follows that Japan, circa 2023, is a more complicated calculation than meets the eye.
In a nutshell, the market remains vulnerable to a macroeconomic backdrop less conducive to surging shares than many punters might realize.
Not to dismiss the ways in which corporate boardrooms are modernizing. They are indeed. The common analysis — and frankly the lazy one — is that the supposed reform Big Bang that then-prime Minister Shinzo Abe launched in 2013 deserves all the credit.
The late Abe deserves certain kudos, of course. In 2014, his Liberal Democratic Party enacted a UK-like stewardship code to encourage companies to give shareholders a bigger voice. The LDP prodded companies to add more outside directors, increase returns on equity and boost dividends.
Credit where it’s due, those upgrades are playing a role in today’s Nikkei rally. But the bigger catalyst here is China.
It was just before Abe took power in 2013 that China surpassed Japan in gross domestic product (GDP) terms. And it was around that time that Japan Inc chieftains realized that circling the wagons was no longer an option.
A similar pattern played out a decade earlier, when Japanese banks finally addressed the bad loan hangover from the 1990s.
Pundits rushed to credit then-prime minister Junichiro Koizumi for fixing the mess. In reality, it was the realization that China was remaking the financial playing field in Asia that sparked reform — and the urgency for Japan to get back in shape.
In both the early 2000s and early 2010s, there was nothing new or innovative about policy shifts under Koizumi and Abe. Other than Koizumi’s bold privatization of Japan Post, most steps by their governments were obvious ones Tokyo should’ve taken decades earlier.
This gets us back to today’s stock surge. At some point, stocks long deemed as “cheap” will cease to be considered as such.
As the market becomes less cheap, investors will begin scrutinizing a macroeconomic backdrop that’s far less vibrant than to be expected after 10 years of so-called “Abenomics.”
Already, “the gains of the past month have taken Japanese equities from cheap to neutral,” says strategist Luca Paolini at Pictet Asset Management.
When Fumio Kishida rose to the premiership in October 2021, a year after Abe resigned, he called for a “new capitalism.” Kishida did so cautiously, knowing that the still-powerful Abe was looking over his shoulder.
The thrust of Kishida’s plan was to increase innovation and do a better job of spreading the benefits of growth. It was, at its core, an admission that Abenomics was less a Big Bang than a series of modest pops.
The more Kishida talked of plans to loosen labor markets, reduce bureaucracy, increase innovation and productivity, empower women and restore Tokyo’s status as a global financial center, the more he was admitting that Abe hadn’t got the job done during his nearly eight-year reign.
It was the worst-kept secret in Nagatacho, Japan’s Capitol Hill, that Abe was seething at the implication — and mulling a return to power for a third time (he was assassinated in July 2022). Now, Kishida is mulling calling an early snap election to consolidate power.
Chatter that Kishida might announce an election this week didn’t pan out. But with his approval rating in the mid-40s, Kishida could call an election at any moment.
Pundits agree Kishida’s sudden rediscovery of economic reform buttresses the early election talk. In recent days, Kishida’s government unveiled a wide-ranging package of measures to reverse a falling birthrate in the developed nation with the globe’s worst debt burden. The plan is to double childcare expenditures.
Here, too, when Kishida says “the low birthrate is a massive problem that concerns our country’s society and entire economy and can’t be put off,” it’s a tacit reminder of the to-do lost Abe’s 2012-2022 reign ignored.
This burst in childcare spending comes as Kishida is also angling to hike military spending by more than 50% over five years to around 43 trillion yen ($307 billion) to keep pace with China. The daunting bill for all these outlays will entail tax increases, including on Japan’s biggest corporations.
Another complicating factor for Nikkei bulls is that the BOJ’s decades-long quantitative easing (QE) policy is on borrowed time. Though new BOJ governor Kazuo Ueda’s team demurred this week, the clock is ticking as the worst inflation in decades becomes more ingrained.
At just over 4%, Japan’s inflation rate has been well above the 2% target. The BOJ hasn’t ended QE in part because upward price pressures reflect rising import costs of energy and raw materials, not strong demand trends. These supply-side price pressures are best addressed with steps to increase competitiveness.
Ueda’s team is in do-no-harm mode with regard to the macroeconomic scene and corporate profits. In the past, premature BOJ tightening derailed economic recoveries. One example: two rate hikes in the 2006-2007 period that had to be reversed when national growth faltered.
The legacy of such episodes might prevent Ueda from taking steps to keep inflation from embedding itself in the economy. At the same time, this year’s 3.8% average wage gain — the highest since the early 1990s — is less than the inflation rate.
“This,” argues economist Carlos Casanova at Union Bancaire Privée, “puts a damper on domestic consumption via negative real wage growth. Therefore, the BOJ will be in no rush to tweak settings.”
Of course, it’s more complicated than that. As Casanova explains, Ueda’s team at the BOJ has “flagged that a shift in corporate price-setting behavior was showing changes that could work to push up inflation, suggesting the economy was making steady progress toward hitting” preferred pace of price gains.
Yet the US Fed’s failure to act quicker to tame prices is a cautionary tale — and a warning against BOJ complacency.
As Kelvin Wong, analyst at Oanda, sees it, “overall, the improving economic backdrop in Japan with accelerating sticky inflation coupled with a buoyant stock market that is supported by foreign net inflows has opened a window of opportunity for BOJ to normalize its ultra-easy monetary policy.”
Wong notes that it would mean “at least via a further widening of the yield curve control band in the first step, perhaps in July when it publishes its latest quarterly outlook report that comes with its latest projections of inflation and economic growth trend.”
For now, though, the BOJ’s ultra-loose policies are a giant tailwind for stocks.
Strategist Yunosuke Ikeda at Nomura Holdings adds that “we see the recent strength of Japanese equities as arising from a combination of an accumulation of longer-term bullish stories, the evaporation of some short-term worries, and buying by nonresident investors.”
Goldman Sachs strategist Kazunori Tatebe notes that recent corporate earnings trends provide “additional fuel for investors’ bullish stance on Japanese stocks, providing some reassurance on the earnings outlook.”
Low price-to-book ratios continue to turn heads Tokyo’s way, Tatebe argues. “If progress is made in accordance with investor expectations,” Tatebe says, “Japanese stocks could see a prolonged advance over the medium term, and we continue to see risk to the upside.”
Nicholas Smith, strategist at CLSA Japan, agrees. “Japan went from bubble to anti-bubble. Its superior earnings-per-share growth and bargain-basement valuations over the last decade went unnoticed” into earlier this year.
That, Smith notes, “prompted massive buybacks that cash-bloated Japan can easily afford. That, in turn, woke up foreign investors who remain heavily underweight.”
Yet there is a risk that the BOJ might stop acting like a 24/7 no-limit ATM for global investors, which would be a devastating blow to Nikkei bulls.
“Japan is in its own virtuous economic cycle, with GDP growing solidly thanks to healthy domestic demand,” says Paolini at Pictet Asset Management. But, he adds, “the Bank of Japan might, however, start to temper this if, as we expect, it winds up its ultra-accommodative monetary stance.”
As such, “Japan is the only developed government bond market in which we hold an underweight,” Paolini says.
Stocks are another story, of course, as the bulls run Tokyo’s way from all directions. For now, at least, as the BOJ keeps filling the proverbial punchbowl as peers drain liquidity. The question is whether government upgrades catch up with enthusiasm about Japanese shares – and that’s anyone’s guess.
Follow William Pesek on Twitter at @WilliamPesek