Episode Details

Recorded live at the Morgan Stanley and MUFG Japan Summit, our Global Chief Economist and Head of Macro Research Seth Carpenter led a discussion on Asia’s exposure to the energy shock and Japan’s bullish outlook.

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----- Transcript -----

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And on today's episode, we're bringing you a live taping direct from Morgan Stanley and MUFG's Japan Summit to discuss the macroeconomic overlook. And, in particular, Japan's moment: reflation, reform, and the case for a structural re-rating. 

I am joined by Chetan Ahya, our Chief Asia Economist; Takeshi Yamaguchi, our Chief Japan Economist; Jonathan Garner, our Chief Asia and EM Equity Strategist; Koichi Sugisaki, who is our Head of Japan Macro Strategy; and Sho Nakazawa, who is our Japan Equity Strategist. 

Seth Carpenter: I will say we have just collectively published our mid-year outlook. So twice a year, Morgan Stanley Macro Research puts together our forecast. We take the time to debate with each other, to pressure test our views on the outlook for the next year and a half to two years. 

And I have to say this version of the outlook process may have been the most difficult one that I can remember. And  in no small part because one of the key fundamental drivers of the outlook globally for growth, for inflation is oil, oil prices. And the swings there have been pretty dramatic. 

And so, as a result, we put a lot of effort into not just our baseline forecast, but also scenarios and the ways in which our baseline forecast could be wrong.   

But Chetan, let me start with you.  Tell us a little bit about the exposure in Asia to, to the energy shock. 

Chetan Ahya: So Seth, you're right.    Asia is one of the more exposed part of the world. But I would say that we've been surprised in the way this energy shock has been managed. One is, of course, at the global level, two big swings happened. US exports increased dramatically by 3.8 million barrels per day. Just to give you perspective, global consumption of oil is about 100 million barrels, so it's simple math in terms of how big this number was. And then China parallelly also reduced its imports by 3.5 million barrels. So, we had a 7 million barrel swing from a global oil demand balance perspective.

And, secondly, as far as gas is concerned, that is where actually we were more concerned about Asia because Asia was very dependent on Middle Eastern gas. And on that front, China single-handedly has bailed out the region. So, China cut its gas imports by about 45 percent, and that had at least avoided the shortages that we were worried about. We can manage oil prices, but shortages is something very difficult to manage. 

So that's at the global level. And within the region, what every economy did is to switch to an alternative source of fuel, whether it is electricity generated through coal or other renewable sources. And particularly that happened in China and India, which are the two big importers of fuel in the region.

And then additionally, what we also saw is that everybody managed the fuel price increase quite well. So, on an average, if I look at the stats as of today, only about 25 to 30 percent of the underlying fuel price increase has been passed on to the consumer. So, the governments are taking it, so there is a burden on the fiscal front that is building up. 

But as far as the consumers are concerned, this has been a help, and therefore you have not seen a big spike in inflation across the region. 

Seth Carpenter:  Okay. So, a lot of comments about Asia in general.