Japanese lessons

The circumstances global markets are confronting – of ultra-low and even negative rates, low growth and seemingly endless stimulus – are a way of life to Japanese investors.

DAVISON The rest of the world is coming to terms with conditions Japanese market participants have been dealing with for years – low or negative cash rates and growth, in particular. How might the global ‘Japanification’ of markets affect the environment for investors from Japan itself?

TAKEI A relevant theme here is demographics. The Australian economy is starting to reflect an ageing population. In this sense, we have some experience because Japan is the first country globally to experience this rapid ageing. The reason for this is that the baby boom after World War II lasted three years in Japan, whereas in the US it lasted almost two decades. We are the first country to experience the ageing of that population group.

An ageing economy implies that potential growth rates are heading south. This means it is very hard to see a ‘rock-star economy’ coming back to advance the situation in Australia.

On the other hand, a couple of years ago I thought Australia would join Japan’s camp of zero or negative rates. But actually Australia is still in a lucky position – there is still at least some positive cash rate in reserve. This will probably not be the final destination, though, so we have to think about a negative interest-rate policy and QE as well.

Focusing on the coupon or income is the traditional end game of fixed-income investment. Having said this, if interest rates come down further investors can still enjoy a capital gain from their bond investments.

The final stage, where Japan is now, is what I call the ‘graveyard of the bond market’. By this I mean the monetary road having run out and no more capital gains to be made.

This position may be needed in order to have a robust economy. It indicates that the role of monetary policy has come to an end and, in this environment, more fiscal stimulus is needed. Recently the so-called “modern monetary theory” has come to the market. Perhaps it’s time for Australia to think about this more deeply.

YOSHIZAKI It’s true that Japanese investors have become used to low interest rates since the bubble economy burst here 20 years ago. We have been dealing with zero interest rates and a sluggish economy for the last two decades.

Japanese banks have been suffering the results of writing a huge amount of bad loans. In other words, we continue to experience the Japanification you mention even though we have an advanced economy and have been in this monetary position for a very long time.

I would say a big institutional investor like us is still quite asset-hungry. We have been building up assets for some time but historically when we looked at alternative assets we were just looking at our domestic market.

We consider Australian-dollar investments to be a last resort. Having said this, there are benefits from investing in Australian dollars and we will continue to look at the market.


The final stage, where Japan is now, is what I call the ‘graveyard of the bond market’. By this I mean the monetary road having run out and no more capital gains to be made.