Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Quarterly Outlook
Godzilla exits Japan = USD JPY 85-95, Tech Wars & Biden’s Asia Pivot
Kay Van-Petersen
Global Macro Strategist
Global Macro Strategist
Godzilla has left the building...
Japan’s one and only true modern-day Shogun in decades, Shinzo Abe – a scion of a powerful political family full of former PMs – resigned in Q3 citing health.
In addition to being Japan’s longest serving PM, Abe’s legacy will be centred around the orchestrated ‘Abenomics’ from late 2012. This triad of structural reforms, huge fiscal spending and Godzilla-sized monetary easing saw:
- Japan get back to inflation, growth and stability after years of deflation and rotating PMs
- More women joining the workforce (more Japanese women work than their US peers) and increased access for foreign workers
- USD JPY go from around 77-78 in late 2012 to a high of 125-126 in mid-2015, a ~62% unlevered move in a G10 currency
- The Nikkei go from 8500 to 21000 in three years
- The BoJ’s BS/GDP go from 30% to today’s 120%
- The BoJ taking ownership of the majority of all Japanese government bonds and an estimated 10%-30% of all Japanese equities
All of this is important in determining two key things
Firstly, despite what policymakers may say, with debt-to-GDP ratios of over 300% and the BoJ’s BS/GDP ratio of 120%, the bang for yen has expired way past its due date – especially considering Japan’s deflationary forces of a declining population and silver-haired demographics. Negative rates and YCC finally saw the yen cross the line.
At 106, USD JPY today is around 15% below its all-time highs, but still some 35% up from the start of Abenomics. My view (in addition to be a mega-cyclical USD bear) is that for USD JPY, the highs are over and we are more likely to be below 100 (high 90s) than back above 110 before Q4.
Could we see USDJPY in the 85 to 95 range by the end of 2021, as Abenomics unwinds?
Firstly, despite what policymakers may say, with debt-to-GDP ratios of over 300% and the BoJ’s BS/GDP ratio of 120%, the bang for yen has expired way past its due date – especially considering Japan’s deflationary forces of a declining population and silver-haired demographics. Negative rates and YCC finally saw the yen cross the line.
At 106, USD JPY today is around 15% below its all-time highs, but still some 35% up from the start of Abenomics. My view (in addition to be a mega-cyclical USD bear) is that for USD JPY, the highs are over and we are more likely to be below 100 (high 90s) than back above 110 before Q4.
Could we see USDJPY in the 85 to 95 range by the end of 2021, as Abenomics unwinds?
But the icing on the cake is that having short USD JPY exposure could potentially also be a great hedge if we run into market volatility linked to the US elections.
Secondly, structurally speaking, Japan and the BoJ are at the endgame of what everyone else (including the Fed) is doing. The only difference is that the US is four times the size of Japan, the Fed’s BS/GDP ratio is currently around 30% and the USD is a dominant global reserve currency.
All this implies that we could be in for a greater than 150% run in the S&P and a much deeper depreciation in the USD, perhaps up to -30% from the 103 highs of the DXY over the next few years.
US/China, same-same yet different under a Biden administration
A second term for Trump isn’t likely to bring too much delta for the Asia Pacific. However, a Biden/Harris win could see two conflicting changes in volatility.
US/CH relations, while unlikely to defrost, are likely to get more stable in regard to agreeing to disagree (meaning lower volatility on trade/commerce). But on the flip side, there could be an increase in volatility from a geopolitical territorial and sovereignty standpoint. A Biden presidency would likely pivot back into Asia – bringing Taiwan, Japan, Vietnam and the Philippines back into focus on their relationships with China.
What Tech Wars?
The next decade is likely to determine which nations and regions dominate the next big structural upgrade in technology globally. What potentially makes it different this time is the rate of technological advancements – like compounding interest or constantly rising ‘tech gamma’ in this case – which could lead to a scenario where no one can ever catch up to the number one.
While these leaps are always challenging to conceptualise, try to think about the upgrade of horses in the 1910s to cars, wood to steel tools, oil lamps to electricity.
China seems to be head and shoulders above most of its western peers in understanding that underlying tech infrastructure is going to set the bell curve of a multi-decade competitive edge. And with 1.4 billion people, the second biggest economy in the world and an ability to focus nearly limitless resources, in time this technological shift will be without question.
In essence, in the next decade we are likely to see a fork between a western-led consortium and a China-led consortium on the adoption of NextGen technological architecture. This is the architecture that will power Augmented Reality, Virtual Reality, Artificial Intelligence, Machine Learning and Autonomous Vehicles – in addition to bringing unlimited streaming and cloud software anywhere.
This is likely to have waterfall effects, from chip suppliers choosing sides to beneficiary countries in the likes of Vietnam and Taiwan. While complicated for multinational corporations, from a wider perspective, greater technological competition is likely to be a huge net positive for long-term productivity and quality of growth, as well as acting as a force against the climate crisis.
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