USJC 2022: Making Sense of Today’s Economic Turbulence

The moderator, Ms. Ann Teranishi (President & CEO, American Savings Bank), began the breakout session by introducing the panelists, Mr. Hiroyuki Arita (President & CEO, BlackRock Japan), Dr. Mireya Solis (Director of the Center for East Asia Policy Studies, The Brookings Institution), and Dr. Robert Feldman (Senior Advisor, Morgan Stanley MUFG Securities). Mr. Arita spoke first about how institutional investors are reacting to the market. This year has been a challenge for investors because bonds and equities are down double-digit percent points. For example, global stocks are down 26%. This is the first time this century that stocks and bonds have experienced such losses, impacting investors’ portfolios. The only asset that increased this year is commodities. Japanese investors are also facing difficulties; however, the depreciation of the Japanese yen has helped some asset owners. For example, in yen terms, U.S. equities performance is roughly flat if you owned it without hedging FX, and long-term asset owners, such as public pensions, have benefited from it. In addition, Japanese bonds have not been sold off as much as in the United States or Europe, which has also helped some investors in Japan compared to global investors who own U.S. and European bonds. Regardless, investors in Japan have suffered losses.

Mr. Arita then explained how investors in Japan are reacting to the current economic environment. There is continued concern about the Federal Reserve’s monetary policy, inflation, and geopolitical issues around Ukraine and China-U.S. tensions. However, due to repeated mini crises in the past few years, investors have been better prepared. Therefore, the degree of panic in the market has been low. Expected returns in various asset classes have changed dramatically which have implications on asset allocation for investors. Investors are being forced to actively rethink their asset allocation to build global portfolios that meet return targets and are resilient to shocks. This is challenging in the current economic environment considering high market volatility. So dynamic global allocation and adapting to a shifting market environment is vital for investors to achieve their long-term investment goals.

Then Dr. Solis first talked about three trends that she is focusing on. The first is the U.S.-China trade and technological competition. The second is what is occurring in regional trade and economic architecture. The third is how to think about emerging tracks for Japan, the United States, and the European Union on economic security, and strengths and weaknesses between Japan-U.S. alignment.

Considering the U.S.-China relationship, Dr. Solis highlighted the importance of finding a space for cooperation and emphasized the fierce, multidimensional competition between the two countries. Also, economic objectives and tools are front and center. For example, technological innovation is an economic objective and trade negotiations are economic tools that both countries are competing for. She described the current situation as managing rivalry in a context of deep, dense economic ties between the United States and China and the rest of the world. This has led to the issue of securitization of international economic relations and the weaponization of economic interdependence. Moreover, the competition around technology has resulted in new capabilities in AI, supercomputing, biotechnology, and semiconductors and chips.

The U.S.-China fallout is taking place at a time when substantial efforts for deeper economic integration are being made. Dr. Solis explained that Asia is at the forefront of negotiating large and impactful trade agreements such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP), which includes China. The United States will be relevant in the region through the Indo-Pacific Economic Framework (IPEF), which involves resilient trade, clean infrastructure, supply chain, and anti-corruption. However, it is not a trade agreement. She added that the United States is not competing with China through IPEF.

Regarding economic security, governments are looking at how to promote their technological innovation and how to protect against vulnerability. These are done through policies, such as industrial policies and creating more resilient supply chains. Dr. Solis explained that Japan and the United States are closely aligned now. For example, both countries are concerned about risks to regional stability, the direction of China, and boosting economic security. However, there are areas of misalignment, such as in the boundaries of competition with China.

Dr. Feldman spoke next. He touched on the yen-dollar relationship, economic security, the impact of climate change, the necessary investments on global interest rates, and social cohesion. Considering the yen-dollar exchange rate, the yen suddenly weakened because of the movements of global energy and food prices and U.S. inflation. The United States is an exporter of energy and food, so it benefits from higher energy and food prices because it raises American incomes. On the other hand, Japan imports both products, so the impact on Japanese incomes is negative. Also, the interest rate differential grew causing the yen to weaken.

Japan is exposed to higher energy prices and disruptions in supply. Dr. Feldman emphasized that energy is strongly connected to technology, and in many parts of the world, renewable energy is cheaper than fossil fuel energy. Technological progress has made renewable energy cheaper. If Japan could build domestic renewable facilities to replace its energy imports, then it would save 5% GDP every year. The barriers to this are vested interests, legacy players, and regulation. Additionally, technology can be used to solve Japan’s energy security issues.

Japan is also vulnerable about food. The food supply chain is more complex than that of energy, and Prime Minister Kishida recently stated that Japan has to raise production of domestic food. Japanese farms have remained small due to factors such as a lack of land, and without labor intensive production of rice and crops on these small farms, there would not be enough food. Dr. Feldman explained that the agriculture land laws need to be changed to allow consolidation of farms which would raise productivity and allow the benefits of new technology to be used on farms.

On the impact of ESG on global interest rates, Dr. Feldman explained that the energy and agriculture investments will require a lot of capital. Globally, the current account surplus is zero, so if more investment is acquired to address climate change, more saving is needed. The impact of the required investment to address ESG issues will increase world interest rates. He also said that Japan is in an interesting situation now with the weak yen. Its food and energy security issues are so critical that they may trigger Japan to respond.

Following the panelists’ presentations, Ms. Teranishi asked the panelists about their economic concerns. Mr. Arita answered that he is concerned about a sharp rise in Japanese bond yields. A gradual rise in yield must be good for the economy and currency, but if it is a sudden rise, it would be problematic for the Japanese economy. Currently, Japanese inflation is low compared to the United States and UK despite the yen depreciation and its dependency on food and energy importation. Dr. Feldman said that he is concerned about domestic polarization and complacency about what is going on in the world, mistakes in understanding each other’s views, mistrust which creates enemies, and competing in a way that does not cut off the opportunity for a relationship revival.

Ms. Teranishi then asked Dr. Solis about further opportunities between Japan and the United States. She first explained that her concerns are the fate of American democracy and the China-Taiwan tension. In terms of positive trends, the United States and Japan could consider how to boost regional stability. The United States should have a more disciplined message on what its China policy is and support Taiwan, so they do not lose confidence. Japan and the United States could also boost deterrence through contingency planning. Also, there is potential for the United States and Japan to promote rules for the economy and have a digital trade agreement. The biggest asset that the two countries could strengthen is people-to-people ties.

On opportunities between Japan and the United States, Mr. Arita explained that the need for the world to decarbonize will create demand for investment capital and rich investment opportunities, such as EV charging stations and offshore wind facilities.

Ms. Teranishi asked the panelists about the resources they use to stay abreast of the issues and areas discussed today. Dr. Solis explained that she utilizes podcasts to keep up to date on trade, politics, and economics. Dr. Feldman also utilizes podcasts and participates in online meetings, and he emphasized the benefits of reading books. Mr. Arita said that he reads Harvard Business School’s publications and books to stay relevant in the areas discussed today.


A member from the audience asked Mr. Arita about his biggest fear of a sharp rise in Japanese bond yields. In particular, he asked about which financial institutions in Japan are exposed to a sudden yield rise risk and if it is comparable to the situation in the UK. Mr. Arita explained that Japanese financial institutions are not the main holders of Japanese government bonds (JGBs), in contrast to the Bank of Japan. The government is going to suffer from a sharp hike in JGBs. The differences between the UK and Japan are the amount of foreign currency reserves. Japan still has a lot of foreign currency reserves which can be utilized to protect currencies from dropping further. However, the UK does not have that option.

Another member from the audience said that the U.S.-Japan relationship should have a more global impact for society. He asked about the best way going forward for the United States and Japan to work with developing countries and economies. Dr. Solis first said that there should be a focus on the most pressing issues in developing countries and addressing those issues with collective action. Many of these issues will require cooperation with China, which is a challenge. Dr. Feldman added that the key is for the United States, Japan, and others to work together to develop and spread new technologies and ensure that competition is strong enough that vested interests do not take over. Mr. Arita replied that a more robust agreement between the United States and Japan with regards to energy security would be valuable to stabilize the region, and it would benefit both countries.