By Rick Pitcairn, CFA®, Chief Investment Officer
March 6, 2017 – You can’t have a conversation about the future of the global economy these days without the subject of US presidential politics coming up. From trade to immigration to tax reform, the policies that Donald Trump implements could drastically impact markets all over the world – and that impact is already being felt. The challenge is that forecasting what the President might do during his time in office is nearly impossible. Trump prides himself on his unpredictability, but that’s not the only reason it will be difficult to figure out what he’s going to do. In order to enact any of his policies, he must work with Congress. Even with both houses under Republican control, we’ve seen in the past that negotiating with Congress on policies is anything but a sure thing.
But as the world waits for clarity on America’s direction, it also keeps spinning around. Make no mistake; US policies will have a ripple effect around the world. But in the absence of clear answers, we at Pitcairn are staying true to our guiding principles and continuing to look at other markets and opportunities. That’s why this week I’m heading to Japan for our bi-annual meeting with the Wigmore Association.
This year’s trip gives us a chance to do something we have done very little of in the last four months; talk about something other than Donald Trump. Here are four specific topics we hope to learn about the Japanese market in the week ahead.
- The Japanese Central Banking Policy – The Bank of Japan is at a critical inflection point when it comes to its interest rate policy. One year ago, the country imposed negative interest rates hoping to fend off deflation. It seemed to work initially, but by September consumer prices were falling once again. The bank has maintained negative interest rates, but began an effort to target the shape of its bond yield curve. It seems increasingly likely that the country will move away from negative interest rates altogether and where it goes next will be of great interest to us as we have discussions over the next week.
- Demographic and Immigration Trends – Due to its geographic location and periods of self-imposed isolation, Japan has historically had very low immigration rates. This national homogeneity has created challenges as its population has aged. It has fostered a population of savers rather than spenders leading to some of the deflation that the central bank has tried to combat. It has also had effects on businesses, with the working-age population diminishing. Japan has shown some recent shifts toward a more open and aggressive immigration policy. We’ll be talking a lot about this issue not only to understand what impacts it will have on the Japanese market, but also to see if its previous policies can teach us anything about President Trump’s tighter immigration policies. An even more aggressive effort to spur economic growth has been a push to get more women in the workforce. It has been one of the core aspects of Prime Minister Shinzo Abe’s economic policy since he took over in 2012. Despite the fact that women have had equal rights under the law since after World War II, cultural norms have kept many Japanese women from entering the workforce, or staying in it once they have children. While there has been an uptick in the number of women working in the last few years, it will be interesting to see whether or not there is enough enthusiasm to overcome centuries of behaviors.
- Trade Policy – Promotion of exports has been a central feature of Japan’s economy for decades. The failed Trans-Pacific Partnership was set to increase the country’s imports, but President Trump’s decision to formally withdraw from the deal in the first week of his presidency is forcing Japan, and many other nations, to reset. It now must consider whether it wants to explore bilateral deals with the US and others or try to re-engage in multi-lateral discussions. Given how long it took for the TPP to come together, it seems like that whatever changes may occur could be years away. Any negotiations will be further complicated by what the US decides to do next.
- Investment Culture – Every country and market has its own investment culture and unique market structure. Every time we go to a new location, I am always curious to understand that culture and how it might inform our investment decisions in that area. I suspect this trip will give valuable insight into the Japanese investment culture that will serve us well, far beyond the immediate future.
Pitcairn was one of the founding members of the Wigmore Association in 2011. Consisting of eight family offices from around the world, our goal in creating the association was to help each other understand complex global economic issues, challenges and opportunities, and use our shared knowledge to better serve the families we work with.
Our current state of global economic uncertainty reminds me of the climate around the first Wigmore meeting we had six years ago. We weren’t talking about presidential politics back then, but rather the impact of a Japanese tsunami and the subsequent Fukushima nuclear disaster. Very much like today, we didn’t know with certainty what was going to happen and what impact it would have on global markets in the short term. What we did know, however, was that whatever the changes would be, they would not change our long-term investment philosophy. We knew that staying the course with portfolio positioning would be the key to ensuring our families’ long-term success. As we head to Japan, that philosophy is still as reliable as the sun rising—especially in the Land of the Rising Sun.