Prashant BHAYANI:
Hello, it's Prashant Bhayani, Chief Investment Officer in Asia with BNP Paribas Wealth Management. We're going to talk this week about some events in Asia, both on the election side in Japan, global FX policy and what that means for our favourable view of Asia equities.
So first of all, PM Takaichi, taking advantage of sky-high approval ratings, called a snap general election on 8 February. And also as part of the platform, pledged that the consumption tax rate on food would go to 0% from 8% for a 2-year period proposed. In short, she's running it hot, per our investment theme. Of course, she's looking to cement her majority in Japan's Diet. In addition, we saw a lot of yen weakness and JGB yields rising last week. In that light, the Bank of Japan kept the policy rate unchanged, but the press conference was more hawkish and higher GDP as well as inflation estimates from the BOJ.
As I've been highlighting, watch dollar-yen and JGB yields. It was the extreme move up in JGB yields last week, 40-year yields above 4%, 30-year yields above 3%, and the dollar-yen carry trade, which like on 24 August, that drove markets last week, not Greenland, which is inconsequential. And of course, we saw agreements between the US and Europe, and that's more in the light of reinvigorating defence spending in the Western Hemisphere.
However, the extreme weakness in yen led to a response late Friday from the BOJ, which has been behind the curve, leading to further yen weakness, of course. And since then, we've seen a five-big figure move in dollar-yen strengthening. As a result, as we neared 160, we finally got a response, both from the BOJ press conference and speculation there is intervention coming from either the BOJ and/or even the Fed. And/or even the Fed is very interesting, because this is bigger picture. Are we seeing the return of the Plaza Accord, when global central banks intervened to weaken the dollar, now called the Mar-a-Lago Accord? And this is all laid out in Stephen Miran’s paper on the restructuring of the global trading system, of course, which we're in the middle of, with higher tariffs as well.
Also, interestingly enough, as you connect the dots, the PBOC signalled last week that it was tolerating a dollar RMB below 7, signalling more Asian currency strength. Keep in mind, recently a number of Asian currencies have been weak, not just the yen, but also the rupee, rupiah, and Korean won. Hence, a long strengthening will be closely watched in line with our FX views and any potential unofficial Mar-a-Lago Accord.
However, the speculation around the Fed is relatively new. That's the interesting part. And that could be something that the markets do focus on going forward. Of course, the bigger picture, the curing of global imbalances, which is driven by an artificially strong dollar. For example, Asian currencies, have been managed by local governments to be weaker in order to boost export competitiveness. But this drives global imbalances, export and import deficits, and stokes populism. Hence, boosting re-industrialization in the US and the West, which is a key part of the platform about restructuring the global trading system, actually lowers populism, raises real wages, and boosts incomes through time. In addition, it lowers trade deficits. Of course, we have a weaker dollar view based on rate differentials. Notably, Treasuries have been the most durable and least volatile of sovereign bonds, compared, of course, to JGB yields, but even bunds and gilts. That's key. It's not at all about Treasury bond selling, another false narrative. It's all about restructuring the global trading system and reducing imbalances and re-industrialisation, which is one of our themes in 2026. Last year, and year-to-date, we are seeing in this regard as Asian equities, including Japan, which are improving corporate governance, India on longer-term growth, and also Asia Tech, which is the foundation of the build-out of AI, meaning companies in Korea, Taiwan, and China benefit from the AI capex cycle. We still see valuation differentials moving in that favour. People are massively overweight US equities because of their large outperformance in the last 15 years.
Just a small amount of that capital coming out means a gradually weaker dollar and stronger equity markets. But it's not about abandoning US assets. It's just about rebalancing from a very high level. Keep in mind, any big one-off strengthening in the yen, like we saw in August 2024, would be disruptive. Of course, that 10% to 12% had move led to a correction in global asset markets. We'll be watching that, given the yen strengthening. However, the gradual movement in terms of the disruption by design, by rebalancing trade and FX, longer-term reduces populism and boosts real incomes. Something to keep in mind. You don't get this message from the mass media or social media, but it's all about policy, not politics.
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