SIMON BROWN: I’m chatting now with Casey Delport, a fixed-income investment analyst at Anchor Capital. Casey, I appreciate the early morning time. In a note that you and your colleague sent out just yesterday, you made a couple of points. One of them is about the possible shift in Japan’s monetary policy. Over the Christmas period when I was on holiday and not really paying attention to the markets, they did make some changes and, it feels to me, probably incorrectly so, that it’s the first time in decades that we’re actually starting to perhaps see shifts in Japanese monetary policy.
CASEY DELPORT: Good morning, Simon. Thank you for having me this morning. You’re a hundred percent correct. This [possible] shift in Japan’s monetary policy stance has sort of largely flown under the radar, given, as you said, the majority of us were sort of on our festive season break. I think it’s a really, really important factor for us to consider.
We are likely to see the shift in policy as the current governor of the Bank of Japan is due to leave his office in April. He has actually been regarded as extremely dovish during his decade at the helm. His replacement could prove to be similarly dovish, but there is a really strong and fair chance that he or she will [have] more of a hawkish rhetoric and that naturally is some sort of policy change in nature.
So I think the key question for the back of that is whether such action could really cause a significant market dislocation. I think that’s a difficult one for a lot of investors to understand. And I think one reason why it could relate is really due to the fact that
the poor returns at home have led a lot of Japanese banks to be the global lenders in international lending – and I think it’s around US$4.8 trillion in international claims. To put it into comparison, its nearest rival in the US is [at] around $4.5 trillion.
So if you consider that the US economy is nearly five times the size of the Japanese economy, it becomes clear that Japanese banks are dominant in this lending space. The question after that is whether this sort of international lending will be redirected to local markets as domestic returns improve because of higher policy rates. That could really lead to some dislocation in the market. Rapid withdrawal of Japanese banks from international lending markets could really strain the financial system at large.
SIMON BROWN: Okay. So it’s something to keep an eye on after Japan has been – maybe sleepy is the wrong word – but sort of sitting quietly in the corner for a long, long time.
One of the other big things which didn’t play out last year perhaps as expected and over the winter was the energy crisis in Europe. I was having conversations from as early as mid-2021 around that. Of course the Ukraine war last year then really heightened it. Indications are that Europe has actually survived. It’s head scratching, but they’ve managed to come through the winter. Of course there’s still time to go, [but they’re] fairly unscathed and without the horror predictions that many were making.
CASEY DELPORT: A hundred percent. And again, it’s another factor that’s gone under the radar a little bit. I was one of those sort of mid last year … preaching doom and gloom on the European side. At the end of the day they get about, I think, 40% of their gas supplies from Russia. But what they have actually managed to do is really come through it more, like you said, unscathed. This is really I think due to a combination of sound judgment from [their] side, and good luck mid what have actually been unseasonably warm temperatures.
So Europe has actually managed to fill its gas tanks throughout the summer, replacing mostly Russian gas with liquified natural gas, LNG, from the US, which has really helped stock up the supplies, and then take into account some of the good fortune of a very mild autumn and seemingly mild winter at this point. Yes, it looks like they are increasingly likely to make it through this winter without resorting to energy rationing.
SIMON BROWN: Yeah, when you get some good luck, take it with both hands. Never look good luck in the face.
A quick last one. You mentioned reluctant trade partners, a slowdown in globalisation. I think the big one obviously is US-China and, and while we are not having the sort of Donald Trump tweet [on] foreign-policy planning, there are still tensions out there, particularly US-China and others geopolitically. Russia of course also on that list.
CASEY DELPORT: Definitely. And I think this will be for me personally one of the most fascinating factors – to see how it plays out to 2023. If we take a step back and we consider that several lines were really crossed in 2022 if we consider the international trade arena, of course this was primarily due to Russia’s invasion of Ukraine.
So what I feel is that this year could really be a year where countries may test new ways to sort of organise the economic advantages via trade. There are many aspects to do this if we consider all the trade disputes that weighed so heavily last year. I really feel that will be the new norm kind of going forward.
SIMON BROWN: We’ll leave that there. That’s Casey Delport. You’ll find her at Anchor Capital. Casey, I appreciate the early morning insights.