Episode Details

Live from the Morgan Stanley Japan Summit, our analysts Chiwoong Lee and Sho Nakazawa discuss their outlook for the Japanese economy and stock market in light of the country’s evolving trade partnerships with the U.S. and China.

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Lee-san: Welcome to Thoughts on the Market. I’m Chiwoong Lee, Principal Global Economist at Morgan Stanley MUFG Securities.

Nakazawa-san: And I’m Sho Nakazawa, Japan Equity Strategist at Morgan Stanley MUFG Securities.

Lee-san: Today we’re coming to you live from the Morgan Stanley Japan Summit in Tokyo. And we’ll be sharing our views on Japan in the context of global economic growth. We will also focus on Japan’s position vis-à-vis its two largest trading partners, the U.S. and China.

It’s Tuesday, May 20, at 3pm in Tokyo.

Lee-san: Nakazawa-san, you and I both have been talking with a large number of clients here at the summit. Based on your conversations, what issues are most top of mind right now?

Nakazawa-san: There are many inquiries about how to position because of the uncertainty of U.S. trade policy and the investment strategy for governance reform. These are both catalysts for Japan. And in Japan, there are multiple governance investment angles, with increasing interest in the removal of parent-child listings, which is when a parent company and a subsidiary company are both listed on an exchange. This reform [would] remove the subsidiaries. So, clients are very focused on who will be the next candidate for the removal of a parent-child listing.

And what are you hearing from clients on your side, Lee-san?

Lee-san: I would say the most frequent questions we received were regarding the Trump administration's policies, of course. While the reciprocal tariffs have been somewhat relaxed compared to the initial announcements, they still remain very high; and there was a strong focus on their negative impact on the U.S. economy and the global economy, including Japan. Of course, external demand is critical for Japanese economy, but when we pointed out the resilience of domestic demand, many investors seemed to agree with that view.

Nakazawa-san: How do investors’ views square with your outlook for the global economy over the rest of the year?

Lee-san: Well, there was broad consensus that tariffs and policy uncertainty are negatively affecting trade and investment activities across countries. In particular, there is concern about the impact on investment. As Former Fed Chair Ben Bernanke wrote in his papers in [the] 1980s, uncertainty tends to delay investment decisions. However, I got the impression that views varied on just how sensitive investment behavior is to this uncertainty.

Nakazawa-san: How significant are U.S. tariffs on global economy including Japan both near-term and longer-term?

Lee-san: The negative effects on the global economy through trade and investment are certainly important, but the most critical issue is the impact on the U.S. economy. Tariffs essentially act as a tax burden on U.S. consumers and businesses.

For example, in 2018, there was some impact on prices, but the more significant effect was on business production and employment. Now, with even higher tariff rates, the impact on inflation and economic activity is expected to be even greater. Given the inflationary pressures from tariffs, we believe the Fed will find it difficult to cut rates in 2025. On the other hand, once it becomes feasible, likely in 2026, we anticipate the Fed will need to implement substantial rate cuts.

Lee-san: