Moody's Talks - Inside Economics - Approaching Shutdown, Asian Flip-Flop

Episode Date: September 29, 2023

The fast approaching federal government shutdown is top of mind on this week’s podcast. Mark and Cris consider how the shutdown may play out and the economic consequences. Two other colleagues, Steve Cochrane and Stefan Angrick, then join the conversation to assess the all important Chinese and Japanese economies. Are the economic fortunes of these two massive economies flip-flopping?For China and Japan: Facing History, a book outlining the strained historical relationship between these two countries, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris Doridis. Hey, Chris. Hey, Mark's just us. I know, Marissa's AWOL again. I think she's hiking in Japan. Yes, or cruising or...

Are cruising? Somewhere around Japan. I'm not sure exactly. I guess it is an island you can cruise, I guess, from place to place. I'm sure. There must be. Yeah, I think so. Yeah.

Well, we'll miss her. I think she's gone for a couple of weeks, so she's going to miss a lot of the action, but it's good for her to get away and decompress, so that's really good. And is there some action in the economy? Yeah, I know. It's been kind of boring, right? It's like nothing going on. It's crazy.

Well, Japan's kind of apropos to the conversation, because we're going to talk about, what's going on in Japan, China, Asia Pacific, APEC more broadly, and to help us with that conversation, which we'll get to in a few minutes, but I want to bring in our colleagues that focus on Asia. Steve Cochran, Steve, how are you doing? Hey, good morning. I'm fine. Thanks, Mark. Good to see you. Steve. I heard, I think you told me this. Have you not ever been on inside economics? Is that possible when you've been on before? This is my first time. No way.

Really? Yeah. Yeah. I blame on Chris. That's definitely an oversight. That's definitely an oversight. Because you were, you've made your way back to the United States, but you were over in Singapore for, I don't know, five, six years. I was there for five years.

Just came back three weeks ago. Right, right. I would blame the time zone on not being invited, except that you haven't introduced him yet, but Steph on my colleague in Tokyo is on our call today as well. Yeah, but he's a young man. to get up at all hours or stay up at all hours. Unlike you, you're, you're a little prima dama. I don't, I only, I don't get up at early in the morning or late tonight. No, that's actually the exact opposite. I don't think that's true at all, Mark. It's actually opposite of the truth. And Steve, you've been with this for, I don't know, since the beginning of time, right? How long are you

almost? Yeah. So in February, it was my 30th anniversary. So it wasn't quite founding days. But But what actually became known in Singapore is that I was the seventh hire, and so I was 007. That's good. You're double-o-seven. So Carl, my brother, Paul, my best friend, I started the company, and we were three. And Celia, she must be. See you came just after.

There were a couple of other research assistants, junior people that were on the staff. They were helping out. Yeah. Yeah. So funny. Yeah, number seven. Very cool. Yeah, I remember I had to work really hard to convince you to come at the time, I think.

No? My memory's a little bit different. Okay. I remember having it. I remember having an interview and I was excited to come and you called me or somebody called me. But we're not quite ready to hire at this time. And I'm like, that was amazing.

Okay. Yeah, must have been Carl. And then about six months later, again, maybe Carl called me back and said, I think it's time to have a serious talk. And then things worked. And your PhD regional economist from the University of Pennsylvania, right? Back in those days, there was a program, a regional economics program, right? That's right. That's right.

There was a program, the Department of Regional Science, basically took economic concepts, economic theory to model the spatial distribution of economic activity. And it was a perfect fit for me because my original degree as an undergrad was in urban and regional planning. So I had that mindset of where things go in space. And it was only when I worked overseas. After my undergrad, I did a Peace Corps stint in the Philippines and then a consulting stint in Indonesia. and really got interested in development economics.

That's when I went back to Penn and did the regional science economics study. Well, we're glad to have you on board, and so sorry about this being the first time. I find that surprising to be on inside economics, but good to have you. No problem. Indeed, good to be with you today, Mark. And we got Stefan, Angric. Good to see you, Stefan. Mark, how are you?

I'm good. I'm good. Stefan is hanging out today in Tokyo, I believe. That's right. Yep. And you're a newbie, though. I mean, how many years have you been with us? Relative terms, I suppose.

A bit more than two years now, I think. It feels like longer than that. Is it only two years, really? I think so, yeah. Okay, very cool. Yeah. Well, you've done a lot in a little over two years. And you're an interesting fellow, right?

Because you're a German background. You'll hear that in your accent. But you speak flawless Japanese. And the thing that surprises me every time I visit Japan, and I spend time with you and other Moody's colleagues and revisiting clients, everyone is so amazed at your Japanese, how good it is. Am I mischaracterizing things?

No? I think there's probably a good element of people being polite in that as well. No, no, no, no. You are amazing. Yeah. I mean, even the, these people are in, and Japanese is a tough language, right? I mean, that's one of the tougher languages out there, I believe. I think it's okay. I mean, I had more trouble studying French in high school. So, so you know French too? Well, I don't, which kind of goes to the point about how that I found that a little bit more difficult. German is already a tough language, right? Yeah, I find German tough too. Yeah. Very much so. Very much so. But a reminder, Mark, that Stefan also has some Chinese as well. Oh, I forgot about that. All right.

You know some Mandarin? Yeah, I kind of came to Japanese by way of Chinese. I studied China studies in computer science, economics, and undergrad. Went to China for a year to improve my Chinese. And it was right during the global financial crisis. And I wanted to get a bit more into economics, do a PhD in economics, on central banking in East Asia. and I figured what's the next best place to go because I've been to China, right?

And figured, okay, Japan seems like a good place to go. So that's how I ended up here then and picked up Japanese. Very cool. Very cool. A roundabout way. It's just an amazing, you know, for an American who can't speak anything about English and doesn't really do that well either, you know, it's just amazing to me, folks like you who can master multiple languages.

I just, it's like unfathomable to me. It's just amazing. So, and you do it so, so, so gracefully. I mean, it's just really, really fun to watch. But anyway, it's good to have you aboard. And you are a very astute observer of the Japanese economy. So I'm really glad to have you here to talk about this. But we'll come back.

We'll come back. You know, we've got this a little bit more parochial view here around the U.S. economy. And there's a lot to talk about, as Chris was joking about it. about. And Chris, I guess here we are sitting Friday, September 29th. Does that date mean anything to you? Anything important going on in the next couple of days when it comes to the economy? Not your birthday. I don't think it's your birthday or anything. You know, you asked that question. I immediately think anniversary. My brain already starts to, you know, turn on the anxiety switch. The day the Beatles broke up in 1969? No, no, no, no, no, I'm thinking about. No.

It's a government shutdown. Government shutdown. Government shutdown. October 1. I think that that would be what? Midnight, Saturday. Oh, in Japan. Oh, in Japan.

No, isn't October 1st Sunday? Yes, it is. Oh, okay, fine. Okay, very good. So we've been doing a lot of thinking around the government shutdown. Maybe I'll let you go first. what's your sense of what's going on and how it might play out and what kind of economic impact it might have. I mean, I've got some pretty strong views. I'll interject, but maybe I'll let you just

go first. If you have a view, if you have a strong view. I always have a view. I knew you do. Of course. Nothing good, right? This is, yeah, just another series of the, another unfortunate series of events here, right? Just like the debt ceiling earlier this year. Here we go again with a U.S. Congress that is showing an inability to govern. These are the basics, right? So I just worry about the image we're projecting around the globe. So I'd love to hear what Stefan thinks of all this, everything that's going on here. But in terms of domestically, I mean, this is not a, this is not helpful, right?

This is going to, even if it lasts just a brief period, we can come to some. agreement in short order here, it's still disruptive, right? It might not have a direct economic and might not cause a recession if it resolves very quickly. But, you know, people depend on these services and we can go through the wide range of effects here. And I'm failing to see what the benefit is or what the other side is trying to accomplish. Yeah. So, you know, there's been, I think, 22, maybe 23 shutdowns, since shutdowns became a thing.

And they'd actually, interestingly enough, it became a thing based on a 1980 ruling, court ruling, that said that that the government had to shut down if they hadn't had, if they didn't have funding for the operations of the of the government.

And of those 22,3 shutdowns, I think 10 or even 11 have involved furloughs of government employees. That's the most immediate casualty of a shutdown, the government employees that are non-essential, deemed non-essential go-on furlough, and they're not paid. They will ultimately be paid retroactively

when the government reopens, but they're not paid. And historically, the shutdowns are short. They tend to be a week two or three because the political pressures intensified, pretty rapidly, you know, people think just the way you talked that, you know, what are you guys doing? This makes no sense whatsoever. Is this really going to shut the government down over some kind of political statement? That's, that makes no sense whatsoever. So the pressure is so intense that lawmakers, you know, back down and they come to terms and we move forward. The longest shutdown was back in

2018-19 under President Trump. And that lasted 35 days. That you may remember that was over the border wall. And someone reminded me that one of the key reasons why the president ultimately relented in the government reopened was that air traffic control workers who are essential, you know, who have to go to work, we're threatening that they, well, we're not going to work. We're not being paid. We got bills to pay. And so, you know, you're going to have to figure this out.

And as soon as that happened, I think President Trump really, realize, well, this was not going to work out and, you know, back down and the government reopened. I think they were calling in sick, right? Yeah, but I think TSA workers were already calling in sick. I don't know if the air traffic. They were getting close if they hadn't already started to do it. So they tend to be short. And so the economic consequence, the macro consequence tends to be small.

But, you know, I have to say, you know, I've seen a lot of shutdowns. And in previous shutdowns, when you talk to folks in Washington, they kind of sort of have a clear path towards how this is going to get results, how the thing will get resolved. This go around not so much. I mean, there seems to be complete confusion as to how this might get resolved. So therefore, it feels like this could go in for a while, you know, more than a few weeks. Is that your sense of things? Yeah, that's my view too.

Yeah. And in terms of the economic consequence, I mean, you know, a couple three weeks, maybe even a month, not great. And obviously for the furloughed government employees, it's really very painful. But for the macro economy, not a big deal, but much beyond that, it feels like lots of things could start to break. Yeah. Yeah, especially, as we've spoken about before, there are just a number of headwinds, right? This is not the only thing we're confronting, right?

You layer this on top of the higher oil prices, student loan repay, you know, all the risk factors and this- All the things we talked about last week on the podcast, right? Exactly. The-loaning things. Oil prices, higher interest rates, student loan more. Mortatorium ending, debt payment moratorium ending, you know, so for the UAW's truck, yeah. Yeah. And this does have real consequent, right?

If you can't get your business application through or you're waiting on inspections, right, there is fallout, right? That goes beyond just the direct government worker not being able to, not getting paid, right? And there are economic consequences that will start to build more and more as this drags on. Yeah, two things. One, on that point, one is the thing that from this very parochial perspective, no economic data, right? I mean, the Bureau of Labor Statistics, the Bureau of Economic Analysis, census, they're not essential. They don't go to work. So we don't get the employment report.

We don't get the inflation report. which, you know, you might say, well, what's the big deal? I mean, we could live without the data for a while. I guess the answer is maybe. Well, now you have a data-dependent Fed. Yeah, okay. Right, maybe in the past we had theory. They were a theory dependent and now it's data-dependent.

So it matters more, perhaps, now than before. You're right. Not perhaps. It matters more, doesn't it? Absolutely, absolutely. Right. I mean, because the Fed's sitting here, should I raise rates one more time? or not in the month of November when they meet again at the FOMC.

And they base those decisions on data, their data dependent. The key data point is the employment report they get every month at the beginning of the month. And then the CPI report, the consumer price inflation report they get in the middle of the month. They don't get those data points and all the other data points. Then they're kind of flying, they're already flying in a fog, right?

Because the data is not precise. It's based on surveys. And as we've talked about, there's all kinds of issues with that. But now they're flying with no. No data. So the potential for mistake here seems to be elevated, you know, high. Yeah.

Yeah. Definitely agree with that. Yeah. So, you know, that's a big deal. Any other, oh, here's the other thing I wanted to say about that. I wonder, you know, we all kind of have certain things we can point to that might not get done if the government shut down. You mentioned a few things like, you know, EPA not being able to. you know, certify EPA Environmental Protection Agency, certify a chemical plant or a utility and

it disrupts production or food, food and drug administration. FDA can't, you know, inspect a food processing facility or a pharmaceutical plant and they get disrupted. The SEC, the Securities and Exchange Commission, I wonder, you know, they can't get their work done. So if a company wants to go, a privately held company wants to go public, that might get to. But here's the thing, you know, I suspect there are a lot, there's stuff out there, things that happen that rely on the government ultimately. We just don't even fath, we can't even fathom until it actually breaks. It's one of those things, you don't know, unless you stress something, you don't really know where the stress points are. And, you know, the, we haven't really

stressed a shutdown for any length of time, you know, if it goes beyond a month, then we're kind of uncharted territory and we might see more disruptions than anticipated. Yeah, absolutely. I think that, I think that's the largest risk is that uncertain near the unknown impact of all this. Yeah, do you have any things that you can, there's little kind of disruptions like the ones I just mentioned, anything that I didn't mention that you've heard that might become an issue? Well, so Social Security payments will continue, right? There's always a lot of concern around that, but other related Social Security matter.

will stop, right? So if there are any issues, people have problems with their checks or whatnot, they may not be able to get a response right away. And then I believe, and there's, I guess one other thing to point out is this concept of who's essential and who's not. There's, is nebulous as well. So the president actually has some authority here to make that determination. But one thought It was just employment verification, right, that the social security office might be providing as well. That may not move forward. So if we're talking about labor market impacts, hiring impacts, that certainly could be an

issue potentially. Well, needless to say, we're watching this very carefully. We've run different scenarios for folks to use if they want to get a sense of, you know, what's the worst thing that could happen here? We've kind of tried to model that out. Hey, Stefan, do folks in Japan pay any attention to this stuff at all? Are they completely oblivious to this? Are they paying attention?

Very much paying attention, yes. Very much. Okay. And what do they think other than the obvious thing? What are they? I suppose just general concern around the whole thing. I mean, the Japanese economy and the U.S. economy, they're tightly linked with one another, not only at the real economic level, but certainly also the financial level.

So whatever happens with the US government is of great concern, I would say. Like you, as you said before, you know, it's not the first time that we're going through this, but the view you laid out earlier about how this time around it might not resolve itself as quickly as it used to in the past. That's something I've heard before as well. So that certainly factors into the general sense of concern and the risk around that whole scenario. Yeah, I guess in China, I don't know, maybe there's a bit of shot and frowd there.

I'm not sure. Oh, good German word, right? Schottenfride. Oh, shot and frode. Yeah. How do you pronounce it, Chris? Do you say shot and fronde or do you say shattenfroud? I like Stefan pronounce it for me.

Okay. Chatenfrade. If I say that, though, it's like my kids, they give me all kinds of grief when I say croissant. they want to say me they want me to say croissant or something i don't know so dad classant are they so pretentious you know now stick with your philly accent no i don't have a philly accent do we we had a listener right in you remember our listener or i wrote in said you had a nice philly accent so really gosh i'm not so sure alana has a philly accent no only kidding alana only kidding alana only kidding alana so so

What do folks in the rest of APEC think about all this? Just a silly American thing or how do they think about it? Well, not silly American thing, but certainly an unusual American thing. I think there's in many ways a lack of understanding how this can even happen in a country like the U.S. You mentioned in China. I think they are looking at the U.S. saying, you know, we may have troubles, but, you know, if you can't even govern, our troubles may look small. But I think the fundamentally economic worry is that if this were to be a primary factor of pushing the U.S. economy into recession, then it's going to be that much longer of a weight for demand for goods and services from the U.S.

to feed back into the Asian economy and help keep the Asian economy going. I think this is fundamentally the biggest worry. Yeah. Okay. All right. We'll come back to some of these things when we get to Japan and Germany. But before we do that, and of course, we're going to play this distance game at some point in time. I don't quite know when, but we'll play it by ear.

So we move along here. But Chris, turning back to you again in the U.S., this week has been chock full of economic data. And we got a lot this morning. Again, this is Friday, September 29th. GDP, GDP revisions, income, spending. more inflation statistics, housing, trade, investment spending. You know, it's one of those weeks where, you know, chock-pull of data. Of all the data series that came out this week, which one would you call out?

And why? I suppose to be the PC deflator just because it is important for the... PCE being personal consumption expenditure deflator. The Fed's preferred measure of inflation. Not terribly surprising. I mean, I guess good news in the sense that it's kind of where the, where we were expected to be. Cora came in at 3.9% year every year,

so some improvement there. 0.1% on a month to month basis. That's right. That's right. So even better than expectations on that front. So. And I didn't have a chance. Is there something special going on there?

Because that feels like a, Because we had been getting 0.2.2 in the last several months, 0.1, anything special that you're aware of? You may not have had time to digest it either. I didn't digest it. Yeah, okay. Didn't have time, but I didn't see anything jump out. I think services prices were not as strong as strong as perhaps expected. Okay.

Again, I have to have to take a closer look. But 0.1, you annualize that, that's, no matter how you annualize, it's less than 2% per annum, right? And that is below, that's the target, the 2% fed target. So if you just take that month, and that obviously can't do that because that overstates the case. But it is making a case that inflation is moving back towards target. Yes, the only issue as usual is this is looking in the rear view of mirror. This is for August. So, you know, oil prices, we know they've continued to go up.

And there's fear that those prices may be filtering their way through other parts of the economy. So this was a good, good trend that we're on, but, you know, we know that the more recent data is, you know, troublesome. Let's put it that one. More recent data is troublesome. You mean, you know, the oil prices have been rising. Gas prices have been contained to rise, right? So that's certainly something that's going to show up in the headline, right? Whether or not it's going to continue, it makes its way into the core next month. We'll see how much impact. Yeah, that plays out.

Yeah. Yeah. Okay. And, of course, if the oil price hikes bleed into inflation expectations, which then impact wage demands or the willingness, ability of businesses to jack up prices for everything, then, you know, causes interest rates arise. You know, that would be an issue. That's right.

Yeah. So far that doesn't seem to be having, but obviously, this run-up in oil prices is recent, so we'll have to see. Exactly. Exactly. Yeah. Yeah. So the report is good one, but again, it's lagged, right?

Right. What about the GDP revision? So we got GDP for Q2. This was the third, so-called third print, meaning this is the third time that the data for Q2 was released. No revisions there, but it's part of this revision. We got these so-called comprehensive revisions, which are. revisions that can be quite substantive, at least historically, they happen every, I think, every five

years. And the revisions go way back in time, years, even decades back in time. My general, I haven't had really a really good opportunity to dig deep, but my sense of it is that nothing really changed all that much. The revisions were kind of modest in the grand scheme of things compared to other revisions we've had historically. Is that your sense of it as well? Yeah, that's right. I didn't see anything huge. The one factor that did jump out at me was the GDI, gross domestic income. I don't know if you saw that was actually revised up. It had been...

Oh, really? The gap, there's still a gap between GDP and GDI, but it's not as wide as what we were seen previously. So there had been some concern that the GDP would be actually revised down closer to the GDI. It looks like instead GDI has been revised up closer. to GDP. So positive news there. And just for the listener, GDP, GDI, what are they? Gross domestic product and gross domestic income. Okay. Two different ways to measure the economy. One on a production basis. That's the GDP measure. One on an income basis, right? And in theory,

the two measures should be equal to each other, right? One person's production should be another person's income, right? They're not because there are statistical issues. There are lags in how things get measured. But these are two measures that economists have been paying attention to because they had been diverging. And did I get it, did I see this correctly that the GDP numbers, particularly if you go back pre-pandemic, because again, these are revisions that go all the way back in time.

If I go back pre-pandemic, the GDP growth rates were actually revoked. up a little bit, I believe, weren't they? Do I have that right? Historical Historical? Yeah, historical. I believe so. Yeah, a little bit. Not a lot, not a lot, but a little bit. And then you're also saying the gross domestic income. More recently. You're more recently, which had been very weak. It's still weak, but it's not nearly as weak as it was. What you're saying is when you take these revisions in their totality, it seems to suggest the economy might be on a bit firmer, ground than we thought in the last couple of years.

That's right. That's right. Okay. Okay. Okay. All right. Any other, I have one series I'm going to call out, but any other series you want to, any other data series this past week, do you want to call out?

I'll save for the stats game, but. Okay. Go ahead. Oh, you might want to just mention the house price data that, you know, we construct, we just got the August house price data based on repeat sales. What did that show? Yep. So that's the movie's answer.

House Price Index, it's showed strength. House prices continue to rebound here. It was, let me see if I can remember, I believe, 0.8% on the month, month over month. Positive year over year. I can't remember the exact number at the moment, but yeah, showing some renewed strength in house prices, right? We had been decelerating for a while. while, but then over the last two, three months, we've seen prices firming up and actually rising on a national basis. I guess one interesting statistic I just calculated is that 47% of the markets that we track, the 400 plus housing markets, hit a new high this last month.

So, you know, we talk about the overall national picture. It shows one thing, but there are plenty of markets where they have not peaked. They continue to rise at a very aggressive rate. But I assume given this recent surge in long-term interest rates, mortgage rates back over 7.5%, that's going to hit demand and presumably house prices. I think it has to. Yeah. We've been forecasting it. We've been surprised so far.

Yeah. There's still quite a bit of underlying demand. people do have, there are cash buyers and whatnot, but at some point, these higher rates have to have to bite. And I think that'll be soon. Yeah. Okay. Let me, one other statistic that came out this morning on trade, and this is a good segue into the conversation around what's going on in Asia, the trade deficit on a nominal basis declined pretty substantively in the month of August. exports declined, imports declined, the whole trade volume declined. And I don't want to read too much into it because some of that's just price, you know, because of the disinflation that we're saying

or deflation and some of these, you know, on energy and goods and that kind of thing. I think that was significantly part behind the reduction in trade volumes in the month and over the past year, but even abstracting from that, you know, the feels like the U.S. trade deficit has peaked, at least for a while, and it's starting to narrow again. And that, you know, the deficits narrowing and trade volumes are weakening. And that has implications, you know, obviously for Asia, because Asia, China, Japan, the rest of Asia depends pretty heavily on trade. Do I have that right, Steve? I'm just turning to you. Is this, you know, an issue of? for the Asian economy, for the APAC economy?

It is an issue for the APAC economy. The entire region, to a certain extent, is export dependent. And given the weakness in Europe, the slowdown in the U.S. economy, of course, the weakness in China, exports have been down, in many cases, by double digits, so over a year ago, because of the slowdown in global trade. And in fact, global trade, not on a value basis, but extracting from price effects peaked last September and continues to fall globally. So it's still a waiting game in Asia for global trade to pick up and to really add a little extra juice to the economy. And it's not just Southeast Asia waiting for China or China waiting for demand from the U.S.

It's the whole system that has slowed down and it really needs to, it's going to have to, we're still waiting for it to pick up. How much of this do you think is to simply pandemic effects, right? I mean, during the teeth of the pandemic, you know, back in 2020, trade, we all shifted to goods, right? We couldn't, we were sheltering in place. We couldn't spend on travel or restaurants or ball games. We were buying stuff. and that's what we're talking about here in terms of global trade. The exports and imports of everything from automobiles to consumer electronics to

text to apparel to furniture, those kinds of things. And, you know, since the economy reopened back in 21 and 22, we've stopped buying as much stuff and we're bought, we're now purchasing services. We were traveling and doing all those things we couldn't do when we were sheltering in place. And that, of course, when we were buying all that stuff, trade took off, boomed. And one reason why we had all those supply chain issues was because there was a lot of pandemic-related impacts on the pandemic, but also the fact that demand was so strong. But now we're on the flip side of that and demand is weak. Is that a big part of the story, do you think?

Oh, I think that's helped develop the way this cycle has gone. We looked at exports pretty closely during the pandemic, and one of the comforting factors of the Asian economy was that exports remain strong. And so regardless of the supply chain issues, the inflation, which actually was more limited in Asia than it was in the U.S. or Europe, as long as exports remained strong, we felt pretty confident that Asia would get through the pandemic-related. problems pretty well. But then, as you said, you know, the patterns of consumer spending changed both in North America and in Europe. And it could be seen very quickly. And we saw it in the semiconductor cycle of the drop in demand for semiconductors hitting directly South Korea, Taiwan, indirectly, other electronics exporters. And that's just beginning to tick up. If you look at the a global semiconductor index, it's turned a corner, but it's got a ways to go to actually

pick up, but at least it's a signal that there's a little bit of improved demand, maybe filtering through from the, from production of goods. So you're sensing that we're getting to the other side of these pandemic effects, then? I think there's a good chance that we are. Yeah. We're not seeing it in the actual IP data. In fact, IP is quite industrial production. Industrial production, exactly.

Yeah. So industrial production and trade are two data series across the region that I'm looking at very, very carefully right now. Hey, Stefan, in Japan, same deal. Has trade been off? And is it related to these pandemic effects we were just discussing? Yeah, I would say so. I don't know when I picked this up, but what I was right is that U.S. consumers are looking for holidays rather than goods to explain why, aside from a few categories, goods exports are not doing. well, but services exports are doing pretty well. And I think that's similar across the region more broadly. Maybe one other area where you see this is in car exports. You've spoken about this on the podcast before as well, right?

Car production, car exports in Japan, when doing so well for quite some time, mostly on account of the chip shortage, supply disruptions related to semiconductors. So that's mostly run its course now. Supply is stabilized. and that brought us a bit of a rebound in car exports in Japan now. But that's about the only category that's doing really well. Everything else is mostly going sideways or down a little bit. So I think that speaks to these pandemic effects still working the way through this system.

Has Japan's auto production gotten back to pre-pandemic typical? Yeah, I guess it depends on how you measure it. I also look at the look most closely at the industrial production data, and that's still mostly going sideways. As opposed, it might look differently when you look at it on a vehicle number basis, et cetera. But a lot of Japanese auto production doesn't really happen in Japan anymore anyway. I mean, Japan is producing close to the U.S. in Mexico or in the U.S. itself, produces in Europe, you know, the companies, right? So part of it certainly gets exported from Japan, but that might not be that informative with regard to how the sector more broadly is doing.

Steve, sticking on trade, could another reason for the kind of weak trade be the so-called decoupling between the U.S. and Chinese economies? You know, this is the idea that, you know, when China entered into the World Trade Organization in 2001, up until President Trump and the trade wars, China boomed. a lot of because of his advantageous cost structure global production moved aggressively into China and they became a powerhouse. And, you know, since President Trump and now with President Biden, there's just a lot of angst around the relationship between U.S. and China. And the U.S. has been, at least from my perch, moving away from China and China moving away from the U.S. Do you think that's also playing a role here in terms of the weakening in trade? First of all, do I have that characterize that right?

Do you think that's what's happening? De coupling, is that the right word or is there some other way to describe what's going on? And is it resulting in helping to explain the weakening in trade? I'm not so sure that you can say that decoupling is happening right now. You might say that de-risking, reducing the concentration risk of having all your eggs in one basket in China might be a better way of saying it. But I think it's also a bit too soon to have that as a factor driving the shift in exports. I think it's really more the weakness in global demand. And then there's also a weakness in domestic demand as well

that's pulling down just manufacturing activity across the board. If you look at the purchasing Managers Index for China. It's both total production and export production that are both down. So there is a weakness across the board. I think you can see that also nobody's really leaving China in terms of foreign manufacturers. They're staying put. There's simply, there is a slowdown right now in new foreign direct investment into China. You can see that There's this pause right now. And I think that's related a lot to some of the regulatory uncertainty in China of what new investors may face as they move into China and do business in China. Those who are there, well, they're there.

There's a big market in China. They continue to manufacture for the Chinese economy. But there is a slowdown in investment. The last numbers that I saw was that foreign direct investment had fallen. back recently to about the level it was in 2009. So quite a, quite a, quite a change. So the potential for decoupling is there. And we certainly see investment, some investment moving to other countries. But I don't think you can blame that for the weakness in exports right now. I think the whole downturn and global trade just overwhelms the rest of

these other factors. But having said that, if I'm speaking from members, So I may have this dead wrong. But if I look at bilateral trade, goods trade between the U.S. and China, you know, adding up all the imports and exports that are going back and forth. And there's all kinds of measurement issues, obviously, because of the supply chain, you know, the trade is much broader than bilateral trade. It's all the supply chain's involved. But just abstracting from that, if I can, if you tell me if I can't, let me know.

But I think trade is down quite a bit, isn't it? But you're just saying that's demand. That has nothing to do with decoupling or, as you put, de-risking. Yeah. Well, in a sense, when you break out the trade, you can see a little bit of a shift in these trade patterns that could indicate the beginning of de-risking or decoupling. And that is that when you look at imports into the U.S. from China of final goods, they're pretty strong. And, of course, Americans buy a ton of stuff from China. When you look at intermediate goods, you know, the goods that go into the production of other goods in the U.S., there has been a measurable decline in intermediate inputs.

And that, I think, goes to the point you're making that there is some evidence of decoupling or derisking at the moment. And this is more, in a sense, more of the high-tech components, some of those that are being affected by some of the Western sanctions and also, some of the policies to try to attract reshoring of manufacturing. Oh, that's still in the beginning, beginning phases of the impact from that. When I say decoupling and you say derisking, are you just being PC? I mean, what's the difference? I mean, bottom line, it just means less investment, trade, travel, you know, data transfer. Everything is less.

Is it, yes, maybe Risking, isn't that decoupling? What's the difference? Well, maybe there's not much of a difference and maybe it's that we're... You know, you've been in Asia too long. That's what's going on. I know.

And you're very PC. The way I look at... But tell me I'm wrong. Tell me I'm wrong. I think it's too soon to say that there's going to be an outright decoupling. Of course, I'm not quite sure

what outright decoupling even means. But there will certainly be a broader distribution of foreign direct investment around the world. Our economies are less engaged with each other. We're doing less trade. We're investing less in each other. We're traveling. Travel is definitely down. You know, the number of Chinese students that came to U.S. that have been coming to American universities, that's correct me if I'm wrong, but I think that's way down as well. Isn't that that that feels like we're, okay, let's let's let's pick a neutral role.

We're disengaging. I'd go with that. Yeah, that sounds like a good term, actually. Because the points you make actually are really important in terms of the reduction in trade, which could lead to higher costs, longer term, because we're not producing in the lowest cost location. And I think there's a huge risk in terms of the point you make of fewer students coming to the U.S. and the other way around and sharing research and sharing knowledge and so forth. that's got to slow down the pace of research and knowledge and new products and such.

And I worry about that quite a bit, actually. Stefan, do you have a view on this whole decoupling, disengagement, derisking? You've probably got another German word you can use. Good gosh. No. I agree with Steve. It's just very hard to see evidence of this happening in the data yet because you got all of these bigger effects. that have to do with the pandemic, the surge in global inflation that is throwing the nominal trade data one way and the volumes might be going the other.

Then you've got these changed consumption patterns, goods services, certain types of goods, right? Traveler coming back, rolling back in a couple of places, but still not being quite back in other places, that it just makes it very hard to say what is due to what when you've got these big shifts in global trade like FTAs and whatever. Ideally, you have a long time series with a... a well-established trend and then you can think about a counterfactual, but right now, good luck trying to get that out of the data, right?

It's just very hard to say. I think the investment numbers Steve spoke to there are perhaps the clearest evidence so far that you have some sort of disengagement happening, you know, investment into China's just down quite a bit. And if that's the way things go, then maybe decoupling isn't a sort of big bang type event that happens suddenly, but might be a little bit more of a slow burn. where companies just sort of don't reinvest in China and then capital depreciates. And then that goes on for some time.

And in that way, you decouple or whatever term we want to send on. Hey, Chris, you may not have you on this, but do you? Of course I do. Of course. Far away. Yeah. Is it consistent with mine or with these other two fellows? I'm going with the crowd this time.

Far away. De coupled, right? I think coupling is two binary, right? You're either coupled or you're not, right? It's on or off. You're either together, linked together, or you're not. And that doesn't describe the situation here. We are, we're going to continue to be linked with China to some degree, right?

It's just going to be less than it was in the past. Okay, fair point. I think that's the reason why I think the coupling may not be the right term. Okay, well, let me, let's take it to the next step. And let me preface this by saying, you know, I, and I've said this before, I believe, on the podcast, I do think I am guilty of what is known as home bias. Home bias, meaning you think your economy, you know, where you live is better than everywhere else. You know, it's just better. And, you know, I don't think that's universally true, by the way.

We've talked about this in the past, you know, culturally Americans tend to have, I think, more at home bias than probably a lot of other cultures. That's just my observation, you know, traveling the world, just nothing scientific there. Just a different kind of worldview. So I am, I'm sure I'm guilty of it. I'm self-aware of it. I don't know that I correct for it. But anyway, with that as a preface, my sense is that China's best days are behind it, at least, you know, for the foreseeable future, not forever.

You know, I'm not making that kind of grand statement, but, you know, for the next decade or two, I mean, the last two decades for China had been just meteoric, parabolic, you know, kind of growth. And that's over. And the next 10, 20 years are going to be more difficult. You know, much more of a slog. And one of the reasons for that is, in my view, the U.S. and China, they'll never decouple, but they are decoupling that, you know, we are moving away from each other. We're, we are definitely reorienting our economies in a pretty rapid way. And that hurts everybody. It's no good for anybody. The U.S., China globally, but it hurts China a lot more because China. is a much more open economy. China feasted on the globalization of the economy and with de-globalization, given that their domestic economy is still struggling to figure out how to get going

for lots of fundamental reasons that it's going to be a bit of a slog. And then you've got a range of other issues that just add onto that narrative, the high leverage. I mean, China has used a borrowing. in the household sector, corporate sector, local government sector to help, you know, drive economic growth through, you know, tougher times. You go, you know, the poster child for that, it's the real estate market, which is now vastly overbuilt, you know, built on a lot of debt and a lot of that debt is now going bad. You've got, you know, issues with a lot of activity being

pushed into state-owned enterprises, you know, kind of a move away from the, you know, the efforts and by previous Chinese administrations to push it into the private sector. It's now coming back into state-owned enterprises, and they tend to be highly bureaucratic and very unproductive, and therefore it's going to be a problem in terms of generating innovation, entrepreneurship, and so forth and so on. You've got a government that is, and then I'll say one more thing, and I'll stop and turn it back to you and get your reaction.

You know, you've got a government that is, you know, I think it's fair to say, inclined to kind of autocratic rule. I mean, it's one guy, you know, kind of running the show. And, you know, that I don't think is conducive to a well-functioning economy in the long run. And I understand there's reasons for that, but that's kind of sort of where we're headed, where it feels like it's headed. And, you know, there's the demographics and the decline in the working age popular. I can go on and on and on. Okay, I'll stop.

Steve, am I completely infected by home bias here or what? You know, obviously acknowledging you're an American as well. But you know, you've been there for many a number of years and you've, you know, observed a lot what's going on there. How do you, how do you feel about all that? Yeah. So all these factors you mentioned, they're absolutely true. and I think one, you need to separate the near-term imbalances in the economy,

if you can call them that, with separate those from the longer-term trends. I mean, there are very, very serious imbalances. And the fact that there are multiple imbalances really weighs on the economy right now. You know, we often talk about when we look at the risks of the U.S. economy going into recession, we look at potential imbalances that need to be righted. And we've often said that, well, there aren't that many imbalances in the U.S. economy at the moment. So even if we fall into recession, it may not be, you know, long-lasting. But, I mean, I can think of five big imbalances in which there's no certain answer to the outcome right now.

And you addressed, I think, all of these actually. One is the property sector. And that's probably the biggest. balance in terms of the huge amount of debt and the lack of demand now for housing. The second is the lack of household spending. China is trying to shift to become more of a domestic consumer-oriented economy, but households continue to save a ton, partly because there's not much of a social safety net in China, either in terms of unemployment benefits or in terms of benefits for the elderly.

And that's a big impact from the aging of the population in China. The third is the regulatory uncertainty. I mentioned that in terms of a factor that's causing foreign investment to falter. But even the technology industries or something as simple as the after school education program, which a year ago government came down with a surprise policy that no one can work, no for-profit company can actually engage in after-school education. Of course, these are huge. Every kid in China does something after school. And so all of a sudden, thousands and hundreds of thousands of mostly young people lost their jobs. And that industry

was actually an entry point into the labor market for many recent college graduates. So that avenue of getting into the labor market has almost. disappeared, at least on the surface. And then you've got high unemployment. It kind of relates to this factor of recent grads, college grads having difficulty finding jobs, the youth unemployment rate, the ages of 15 to 24 is, we think, above 20 percent, although China has dropped that piece of data from their monthly stream of data, which illustrates sort of the opakness now of what's going on in China. And then there's the export weakness, just the broad decline in the economy. So five big weaknesses that need to be righted. And some of these aren't going to happen overnight at all.

And indeed, the property sector, I think, is going to be the most difficult one to set. So that means, you know, this year, next year, the year after actually could continue to be very modest growth, perhaps nothing no better than what China is experiencing right now. But then you look longer term, right? And I think you laid it out pretty clearly that China has gone through at least three phases of growth during its modern era. You can go back to the first phase was started by Deng Xiaoping. He came into power in 1978. The 1980s were the period of opening up to the global economy that led to ultimately the entry into the WTO and also more of a market-based economy.

rather than a centrally driven economy. That was the beginning of the boom. Then the first hiccup was the global financial crisis in 2008, right? When export demand faltered, so this export model seemed to be at risk. And this is when debt became a primary instrument in terms of continuing to push growth in the economy and the rapid rise of household debt and the rapid rise of corporate debt to keep the Chinese economy going and it seemed to work beautifully, of course, until it didn't. And that's the more recent time. If we look at the trade war and then the pandemic and the economy slowed, but debt was very high

and this became then an issue in terms of how is debt service and how can, if we don't continue to, if debt isn't continued to be issued, how do you keep the economy going? So now we enter this sort of maybe the post-debt-driven era, if you can say that, although I must say debt-to-GDP ratios continue to rise, at least for households and for corporates, so we haven't completely exited that yet. But how do you shift from that to a more self-sustaining economy and an economy that doesn't rely as much on external demand, but relies more on internal demand. How do you do that if households are not willing to reduce their amount of savings? Well, you know, you sound more pessimistic than me.

No? Well, all it means is that if we're probably never likely to see economic growth above 5% going forward, unless there's simply a, you know, a surge or, you know, a temporary turnaround. But it feels like though, you know, right now that the kind of consensus view, I guess, if there's a consensus, is GDP growth around five. That feels 5% per annum. For context, the U.S. potential growth rate is two.

And the 5% is, this feels like to me that that's too high. You know, maybe they get a 5% year, but on average over the next 10, 20. Now, to some degree, that's simply because they're a lot much larger. economy, you just can't continue to grow at that pace given the, you know, the size of the economy. But it feels like more than it feels like it's headed, it is headed to two percent or something closer to our kind of growth rates here pretty fast. Is that overstating the case? No, actually, that's not overstating the case. As we get into the, uh, the next decade, we could, we could well see a growth of something between two, two and three, three percent.

We're, we're just below five percent right now for this year. We're just below five percent. We're just below 5% next year. And that's sort of accounting for a little bit of a turnaround in consumer spending next year. So a cyclical balance, but longer run. But lasting a year. So longer run than the pace of growth will slow as the economy transforms in a sense as it should be from a huge manufacturing economy, you know, based on global trade to a more domestically driven economy. Or maybe a better way to say it as a more balanced economy between. domestic demand and foreign demand.

Okay, we're on the feels like we're on the same page. Chris, any pushback there? Are you kind of in the same? No, I'm kind of in the same camp. Stefan, you two?

Yeah. I, you know, we discussed this a lot with clients, prospects, webinar attendees, et cetera as well. And the difficulty in coming up with a sensible medium term forecast

is always that you could conceive of a scenario where policy does, you know, recognize the problem and react in a way that is more forceful than what we anticipate now, because this is not an unsolvable, unsolvable issue, that lack of demand that you spoke about earlier, that is something that you, you know, we know that that's a problem and we know that we would, for China to continue growing, it would have to have stronger domestic demand. So it could make that happen, but it just doesn't look like that will happen. And to the extent that politics plays into that, right, that's just harder to call than

for the mental economic factors. Good. Okay. All right, let's play the game. I want to go, we're going to come back to Japan because Japan feels like, almost like a flip story.

You know, Japan's been in a funk for, well, I'll go to it and to a minute. Let's play the game. This is this game. You guys are going to play, right?

I didn't even ask you. Oh, yeah. We're ready. Sure. Stefan, are you playing? Yeah,

absolutely. Do you play fair? I've never played, you know, with you, are you, are you, you play fair?

I'm too afraid of this game not to play fair. I was very worried about the statistics game. Okay, very good. The stats game, we perform a statistic. The rest of the group tries to figure out what that is through cues and deductive reasoning and clues. And the best stat is one that's not so easy. We get it immediately. That's hard to do when Maris is in town.

Maybe it's going to be a little harder. I think that will be okay there, I'll give them she's traipsing around Japan somewhere. and not too hard that we never get it. And if it's apropos to the conversation at hand, all the better. Steve, you want to go for it? Sure, I'd be happy to. All right. So my number is minus 38%.

That's a big number. Is it related to what's going on in Asia? Yes. China specifically. Yes. Okay. It's a trait related? No.

That has got to be housing starts. or house house house home sales uh getting closer property property prices can't be down 38 percent actually uh it's close how it is house prices no it's not house prices but this is house prices are down by about 25 percent right now really i didn't know that aggregate oh yeah huge so it's not it's not construction it's not sales it's not prices Well, so it's a broad measure. So I'll tell you, it's the decline from peak, which was in April 2020 of real estate invest, total real estate investment. Okay. So it's kind of like construction. It's like the value. Yeah. It's not a number, it's not a unit. It's the value. That is correct. Okay. And is it real, is that real or nominal? Do you know? This is nominal. Nominal dollars. Nominal one, I guess. Yeah. Yeah. Yeah. Okay. Oh, interest down 38% from the peak.

Okay. Do you want to explain? Well, and that's when the housing market began to falter that back then in 2020, one or a bit before that was when policy changed. The so-called three red lines were put into place that limited mortgage borrowing number of units that one could buy, limited, you know, second home purchases, third home purchases and so forth, and put some restrictions on property development as well. And so that was the beginning of the downturn in the housing market. That's also about when the equity market began to falter as well. The equity

market since that time is down by about 25% in China. So it illustrates my earlier point that I think the biggest problem right now in China is at least stabilizing the property development sector in China. It has such an impact broadly across the economy, both in terms of the financial side of the economy and in terms of the real economy, jobs, income, the multiplier effect that we know that construction has everywhere. So there had been some concern that the collapse, I think that's the right word, collapse in the Japanese property markets, would reverberate around the global economy, you know, come back here, haunt us in the U.S. That hasn't seemed to happen, have happened.

Should we be concerned about that? Well, it seems like, at least from the financial point of view, that much of it is contained within China, much of the financing for housing and real estate development is within China. So I don't think the direct effect, you know, unless there's something we don't know, is not so great. But the indirect effect, again, the demand, there's a tremendous amount of import demand for basic commodities that goes into the construction industry, whether it be copper or steel or cement, things like that. And that has an impact, not so much on the U.S. economy, but on the broader Asia economy, Australia and particularly. a big supplier of commodities for construction purposes in China. So there could very well be some indirect effects from the construction industry.

But this isn't going to be the thing that does the global or U.S. economy in? I don't think so. I don't think so. In fact, it could be, I'm just putting words in your mouth, but let's see if you go along with them, that it might actually be a positive thing in the near term because it's slowing things down and taking pressure off in global inflation. Is that one way of thinking? Because you mentioned commodities and other, you know, less demand, therefore lower prices?

Or am I stretching? Well, it did. And in fact, you know, again, that was one of the more positive things about the Asia-Pacific economy that was inflation didn't go up as high as in the West and it began coming down. But as Chris was noting, it in August, he was noting for the U.S. in August, about half of the Asia-Pacific economies had an uptick in inflation. and a measurable uptick in inflation, but it wasn't because of anything going on in China. It was rice prices and fuel prices.

So again, hopefully temporary. Okay, Steve, excuse me, Chris, you're up. What's your statistic? Would you like one that's relevant to the Japan-China discussion? Yeah, go ahead. Let's test these guys out. I mean, Steve, did you see how gracefully I got to your statistic? I mean, Chris helped a little bit.

You're a great MC, Mark. You manage these really very, very well. I didn't mean it that way. I was like angling for, like, you know, my prowess as the stat game player, not. Oh, well, we'll see how you do this time. Okay, very good. Okay. Chris, you're going to go ahead, far away.

I'll throw out two then. Two? I think these, I think, well, Japan and China. Oh, okay. Oh, I just gave it away. All right. 1.1 trillion and 822 billion. I know what it is.

I know exactly. I knew you would. I know immediately. I'm laying it up for you. I'm going to laud it over these two other guys because they're going to like squirm. They're going to try to figure it out. They don't know. Oh, what is it?

What is it? I can tell you right away what it is. Give them a chance. Give them a chance. Stefan, we are on a hot box here. Do you want to? I was going to pass it on to you, man. Treasury holdings?

You got it. Very good. Very good, Stefan. Very good. He's good. He's good. That's great. That's a good statistic.

Yeah, U.S. treasury holdings of the Japanese 1.1 trillion, which is the, they're the leader, the largest holdings across the globe. And China is in second place at $822 billion. Still a very large amount. And I think underscores this lack of decouple. We can't fully decouple, right? there's so much exposure between our two economies that it could certainly reduce, but getting to zero is, that's not happening. Yeah, that's a good one.

I want to come back to that, too, in the context of this run-up and interest rates, because there's a lot of chatter that what's going on in Japan around monetary policies at the root of all this. But before we do that, Stefan, you're up. What's your stat? And by the way, great. You played the game great. Yeah. I wish I had taken the statistics because I was breaking my head earlier, but what sort of statistics I should text in the chat GPT or BART or any of that kind of stuff.

I should have. Yeah, I should have. The one that I came up with, we haven't quite gotten around to that yet, but let me, let's see if we can get there. It's a number of times something has happened. Okay. So the number is 179. 179 times

Yes This has happened In Japan In Japan In Japan This is out of a total of 3991 It has something to Monetary Policy

Yeah Is it related to Interest rate moves No Indirectly You're not quite there yet Yeah I know

it's not related to the yield curve control in some way, is it? Indirectly. Given how much the Bank of Japan's sort of mandate has expanded, I kind of, you know, I suppose everything matters in some way, but it matters very directly to monitor policy. Yes, I mean, but don't. Yeah. Yeah, yeah, yeah, yeah. What do you think, Chris?

Is it a policy, some kind of policy change? Not a policy change, no. It's an economic statistic. Oh, it is. Okay. Related to. Is it the number of months where we saw deflation? Very, very good.

Very close. I'll just tell you, because otherwise we have ever, is the number of times wage growth has turned negative since the early 90s. That is cool. Yeah. Say it again. So what is it? So how many times does that happen? So if you look at average earnings per worker and you just plot the growth rate in year-on-year terms,

it's been negative for 179 of those months. So you get 391 months, so 391 data points, right? And about half of that, it's been negative. So I want to get to that later because I do think that's sort of the big thing that ties the whole Japan story together. We'll get there. but in any case. Yeah, yeah, yeah. We're going to go there right away.

Yeah. You know, Steve, do you see how that was done? I'm just saying, just see how I was done. I was examining every word coming out of your mouth at that point. Because I was actually thinking it was like a basis point change in the 10-year yield or something like that. Yeah. Yeah. Yeah.

That's pretty good. That's pretty amazing. It'll be a little more I know than what has been the case. I kept my mouth shut. All right. You know, I just looked at the clock. We've been chatting for quite some time here.

It's like, what the heck happened? So we got to get moving. I'm going to, I'm going to skip my statistic for the sake of, you know, time because I know I was, it's late in Tokyo.

It's a Friday night. So it's fine. It's Friday night. Yeah. It's Friday night. It's Friday night in Tokyo. Okay. So,

Stefan. Yes. Sort of my thing around Japan is, you know, it's been a mess for a long time. 1990 kind of is in my mind as kind of the point in time where Japan went from being this kind of boom, meteoric rise to basically going nowhere fast. And that's a long time ago. And Japan's been struggling with trying to get out of this, let's call it a funk.

Is there a good German word for funk? You know what I'm saying? Nothing I could think of that would be quite as elegant. Is there a good Japanese word for funk? What do the Japanese call it? I suppose I would say funk as well. I don't know. Okay.

It's a good word, actually. It's a really good word. It's a good word. It's a good word. It's a very good word. And, you know, meaning disinflation, deflation, you know, obviously the population growth has been declining. Growth has been very slow. You mentioned that great statistic about real wages falling on a consistent basis.

It's been really going to know. nowhere fast. But it now feels somehow, some way, and I'm not saying we're going to go back to the meteoric kind of growth we've had it, you know, back in the 70s and 80s. But it feels like Japan's kind of broken free from the funk, you know, that kind of sort of black hole, partly because of the pandemic and the policy response to that pandemic. You know, all the fiscal stimulus, all the monetary stimulus seems to like push things forward. We're now starting to see positive wage growth, you know, not, you know, consistent positive wage growth. Inflation feels like it's now back closer to target. The Bank of Japan is now even starting to

tighten monetary policy a little bit. I mentioned your Yolker of control. Maybe you can talk about that a little bit. Do I have, do I have this right? So the next 10 years, not forever, but the next 10 years of foreseeable future, Japan might have a kind of a brighter economic outlook. Am I overstating the case? Or what do you think? No, I think there's a lot of what you said is true. Japan is getting a lot of attention at the moment.

It's also something I've noticed, which I think is due to a couple of different things. We've had a pretty solid run of data over the last year, and you spoke to the GDP numbers. The other macro data has been looking pretty good as well. Stock market has done well, and weight and price dynamics are undergoing pretty big shifts, if you compare to compare them to what happened the last 30 years, right?

I think there's also the recognition out there that Japan has just done pretty well over the last 10 to 20 years even. It's sort of very hard to say when the lost decades that you pointed to there, you know, 1990s did that stretch into the 2000s? When did it start? When did it stop? It's kind of hard to say. but what I like to look at is per capita GDP growth.

And if you plot that from, I think, 2000 to now, Japan has basically done about as well as every other G7 economy, which is not something that I think is widely appreciated. Yeah. Of course, you have those challenging demographics that kind of ruin the aggregate macro numbers. So no one really notices that growth is pretty decent on that level. But I think it's big to the fact. So the funk is really demographic.

It's like the declining population. It's really the funk. It's a part of it. It's a good part of it. I don't want to overstate the role of demographics, but it does ruin your micro numbers. So there's no, you know, no, no debate about that. What I'm a little worried about is whether it's as much about perception as it is about facts because Japan is a pretty stable place.

And you've noticed this when you come here, right? It's the stability is, we say it's a feature. It's not a bug. We used to say the same computer science, when it was a problem. It's not a bug as a feature. So it's not a place. that changes suddenly. So to that extent, all of these things that I would argue our strength of the Japanese economy, they didn't just appear somewhere out of nowhere. They've been around

for some time. So I'm a little bit worried that all the attention Japan is getting right now is external and then might also evaporate very quickly. So yeah, that maybe puts a little bit of an asterisk onto the whole story. But broadly, I agree. I'm pretty positive on the long run in Japan. in this kind of improved picture kind of post-pandemic, do you think in what you're saying is that that may be overstating the case because it really wasn't quite as bad as it seems looking at the aggregate statistics because if you're in a world of declining population, it's going to be pretty hard to get big growth rates.

And you're saying that's a feature and not a bug anyway. There's, there's, people are pretty, they're okay with kind of steady as you go kind of growth, stable, low unemployment. I mean, the unemployment rate in Japan is what, 2.7, 2.8 or something. It's rock solid. 27. Never really rose during the pandemic, you know, on the margin, really. And, and therefore, you're giving up that kind of meteoric growth for this kind of stability, you know, in the economy. And that seems like a pretty good tradeoff, at least for the Japanese people.

So I don't overstate the case. it feel like Japan's got a little bit more life here, you know, going forward compared to recent decades? Or am I, it does. It does feel like that. Okay. Potentially, yeah. I think the context, of course, matters. All of that decoubling, decoupling stuff that we talked about earlier that does play into how people look at Japan. If you're, if you're decoupling, if you're trying to reduce concentration risk and you're trying to find a new place that can, that still make stuff, right? Japan is an economy that still has a pretty large manufacturing sector.

And of course, Japan will be high up on that list. The other things that are changing in Japan, much of that is externally driven as well, though. So these changes in price and wage dynamics that we spoke about, all of that is coming from abroad. It's due to higher energy and food prices. Those are commodities, Japan imports. So it's also supply driven and it's not exactly organic.

Now, it's possible that that might shake things in Japan lose and going forward, you will have a bit more demand. domestically driven, demand-driven inflation, but I'm not quite convinced it will stick yet. I think you will need more for that to happen. So maybe not a binary question, so to speak, right, like much of what we discussed today. So, yeah, that's how I would look at it. Okay.

So, again, looking at this from kind of a more global perspective, the U.S. perspective, of, you know, one of the kind of results of this improving, I use air quotes, so just not quite sure, but seemingly improving economic picture is the Bank of Japan is, in fact, kind of taking its foot off the accelerator. Certainly not putting its foot on the brakes, but taking his foot off the accelerator. One way it's doing that is it's easing its so-called YCC, yield curve control. basically bottom line, tell me if I'm wrong, but that is the BOJ, the Bank of Japan previously, it still is targeting long-term interest rates and doing whatever it needs to do to make sure that the long-term interest rates don't rise above a certain level.

They've lifted the caps on those long-term interest rates. And so Japanese long rates have started to rise. And there has been this chatter in the global marketplace, bond market, fixed income markets, that that is one of the reasons for why we're seeing global interest rates rise, why 10-year treasury yields in the United States are now 4.5%. You know, if you go back a month ago, two months ago, there were 3.5%. If you go back, you know, three years ago, they were below 2. Lots of things, obviously, lots of things going on there. But one of the things going on there is this relaxation.

of the cap on Japanese long-term interest rates. What do you think of that story? Is that, do you buy into that? Not quite, I would say. The reason is mostly because the changes on the long end are just too small, I feel like, for that, to matter to that extent. So maybe just to step back a little bit, the way you characterize B-O-J policy is 100% correct. They have this policy where they pack the long, the 10-year,

10-year government bond yield within a certain corridor and they've been increasing the range within which it could fluctuate around that 0% target they've been saying that they're not really moving away from the policy they want to maintain they want to continue to ease but that's you know you're raising interest rates so you you don't you don't make easing more sustainable by raising interest rates so it's interest rates are going up so to that extent they are tightening that's that's correct why the reason I'm not 100% convinced it's having that big of an effect on global global markets has to do with everything else that's going on. I mean, interest rates have gone up a little bit, but, you know, they're now 0.7, 0.8, starting from 0.5. So that's like 20, 20, 20, 30 bibs, right?

Before that, they were at 25. So these are pretty modest, modest changes. So I think interest rates would have to go up quite a bit more for Japanese investors really. to pull out of U.S. markets and then invest more at home. There's other factors as well. I mean, Japan has a big external surplus, a big current account surplus, and that generates revenue abroad, which will want to get invested somewhere. Last year, when Japan sort of reduced holdings of foreign securities,

that was also at the time when the current account surplus evaporated because of the commodity price shocks, because trade didn't go anywhere, right? All of these things. So unless the world economy changes, a bit more fundamental, ways, you know, where that whole decoupling thing or countries turning more inward becomes more extreme. I don't really see these things changing all that drastically. I think the view of bond markets is also a bit simplistic as always thinking that, you know, it's always about interest rates. Japanese investors might capital gains play into all of this as well, right? If you're an insurer,

you might hold on to your government bonds because you don't want to realize paper losses. On the other hand, you might move into a market ahead of great cuts to then take capital gains. So So if things were really changing, we would see that show up in financial market data. And right now, if you look at things like swaps, et cetera, they don't really suggest that investor behavior has changed all that fundamentally. They haven't changed all that drastically. So that's why I'm a little bit skeptical about the idea that that's really what's moving global markets, certainly at the margin. But I'm just not convinced that it's like that bigger factor, I would say. Just is that kind of the consensus in Japan?

I mean that it's not really that it's on the mark or is there no consensus. It's just not a matter of a conversation. I'm not sure that there's a consensus around that sort of thing. Yeah. It's probably a little bit too niche. Yeah, a little bit too niche. Yeah, in our own parochial world. One other quick question, again, from the prism of the U.S., the currency, the yen.

It's been weak, really weak. And, you know, what are we? One, I haven't looked recently. 145 yen to the dollar or something like that? 149.1 before we started the podcast. Wow. So this is almost back to the lows for the yen. So what's going on there?

And is that just relative monetary policy? You know, kind of the Japan, B.OJs just, even though it's sticking the foot off the brakes, the other countries are putting their foot on the brakes. so that interest rate differential is driving this? Is that all that is? What's going on here? That's the dominating story. That's certainly the mainstream, mainstream view.

And I think at this point, it's probably hard to argue that it's other things, because fundamentals look a whole lot better than they did last year. In Q3, when the year in last depreciated to 150. So that was October, I think, last year. That was also when the external balance was very weak, right? no exports at all, supply chain disruptions, no travel, profits not looking great. So all of that is looking better now, which means right now actually the yen seems a little bit out of whack with fundamentals, a little bit too weak.

But it wasn't always like that. I mean, this correlation between the yen and long-run interest rates that really only started around the COVID pandemic. Before then, if you plot them on top of one another, it's very hard to actually make out a very strong, very strong correlation. And there have been many periods where the interest rate differential widened significantly, but the end didn't do very much. So, you know, short run versus long run, right? Right now there's just a ton of attention on the yield spread. Yeah.

Okay. Do I have this right? The U.S. is the largest economy on the planet. China's number two. Japan's number three, right? Isn't it? Number three. I think people forget that.

It's like a massive economy. It's like huge. I think Germany's number four, isn't it? I believe. Yeah. And interestingly, might overtake Japan. Sweden. Germany might?

Yeah. Oh, I didn't know that. Okay, interesting. In nominal terms. In nominal terms, yeah. Okay, one last question. How did the Japanese view the Chinese? I'll ask you, Stefan, first.

And then, Steve, how do the Chinese view the Japanese? You know, given all the tensions in the Asia-PAC region, you know, it goes beyond economics. There's a lot of geopolitical tension. answer that however you want, but maybe Stefan first. You know, how do the Japanese view the Chinese? Gosh, there's so much I could be said about that relationship. It's very complex, I'm sure. Certainly, I mean, history, exactly.

Yeah. For sure. Sorry, I don't think you go to in a rabbit hole, but there's... I mean, that still factors into everything today as well. You know, modern devices are still very much informed by a, everything that happened 100 years ago. I would say maybe to keep it in economic terms, I think it's a difficult balancing this relationship with China

because Japan is an economy that is also deeply integrated with China. China was one of the first places where Japanese businesses invested in after the domestic economy crumbled, right? A lot of offshoring that took place in the 1990s. And Japan also benefited from Chinese growth for quite a significant amount of time exporting capital goods, exporting infrastructure, the train system in China, right? A lot of that is Japanese technology. So the business interests are deeply, deeply tied to China. But on the other hand, on the political level, things are not quite as comfortable.

You still have territorial conflicts. You have geopolitical tensions. And that's certainly increased in recent years over the last 10 years or so. So a difficult relationship, maybe. to something else. Right. And Steve, you want to what's the Chinese perspective on the Japanese economy? I think it's quite similar. Similar. Yeah.

And I think, actually, this goes back centuries, that the balance of power is shifted one way or another. There is an excellent book I would recommend for anyone to read by Ezra Vogel, who was a professor at Harvard. And he wrote a book, I think that. The title was simply Japan and China or something like that. And it traced this relationship from the beginning of time. Absolutely fascinating book at how the two countries have benefited from their relationship, but it's always been a contentious relationship since, you know, for centuries. Oh, yeah, we got to read that book.

We'll put that in the podcast notes so the listener can get to it easily. So, well, good. You know, we're long in the tooth here, as they say, say and I think we need to call it quits. Let's step on, go get some rest. And I want to thank you guys. I mean, you know, the conversation was wonderful. It just shows the depth of knowledge, you know, that you have. So, you know, thank you. And the fact that you got Chris to agree with you, I don't know that says a whole lot, but, you know, maybe. Hey, hey, what is that? I like that. You know, I love you, Chris. I'm just, you know, that. You know, that. You know,

Take that as a win. Yeah, I think that as a win, absolutely. Okay, with that, we're going to call this, I think we're going to, unless you guys object, I'm sure you're not going to object. Hearing no objections, we're going to call this a podcast. Take care, everyone.