Feb 6, 2023
Player Hero
The Challenge
- Nobody wants a decoupling with China, Matthes says, but Germany is looking to boost trade with other Asian partners like India, Indonesia, Singapore, Vietnam and other Asian countries.
- The strong view here in Germany from the policy side, but also more and more from the corporate side, is that diversification is the game to play
- That diversification also needs to apply to suppliers of rare earth products as well.
The Impact
Interest rates are on rapid-rise trajectories across the developed world, transforming the economic landscape for everyday citizens and impacting everything from inflation to investments.
One major central bank is bucking the trend. The Bank of Japan has kept rates near zero since the late 1990s, and is maintaining its -0.1% level. The negative rate makes Japan an outlier even among other stalwarts of low-rate policies. The Swiss National Bank, for example, ended a seven-year era of negative rates with a hike to 0.5% in September 2022.
- “You can raise the interest rate as far as you want, but you cannot lower it as far as you want,” he explains. “There is a floor even in the negative interest rate policy.”
- Japan’s rate would therefore be much closer to other central bank rates than it is today—and this shift, Yamaguchi says, would cause the yen to appreciate significantly and create challenges for the Bank of Japan.
- Even if the crisis that triggered rate drops didn’t impact Japan directly, it would still take its toll.
- . In an echo of the Global Financial Crisis, Japan’s market could hold its ground while others collapse, but recessions in the US or eurozone would drag Japan’s economy into recession, too.
For Wuttke, China’s real estate bubble and the Chinese government’s response demonstrates a shift in China policy away from economic growth and toward state control that investors and business leaders should watch closely.
- Already, Europe is seeing a slowdown in demand from China, according to Joerg Wuttke, President of the European Union Chamber of Commerce in China
- In the first eight months of 2021, Europe shipped 1.2 million containers to China.
- In the first eight months of this year, Europe shipped just 1 million containers, a 17% decline.
- And imports from China are going down, too, Wuttke says, from 4.1 million containers last year to 4 million this year.
But what if a global economic slowdown forced Japan’s outlier status to change, and all major economies cut interest rates to zero?
A recent PGIM survey found that such a slowdown—and resultant broad adoption of a zero-interest rate policy (ZIRP)—is a top tail risk for institutional investors in Japan. While the probability of such an event is extremely low, it carries outsized potential to upend markets.
“At the beginning of Covid, everyone was concerned about deflation. When former US Treasury Secretary Larry Summers said that inflation was coming, no one believed him, but it happened. That is a very good example that things can easily go in both directions.
Stephen Warren, Head of Quantitative Analysis and Rosk management, PGIM Fixed Income
The Takeaway
One major climate risk blind spot is how dependent businesses everywhere are on elements outside their own operations. PwC Global Climate Leader and Partner Emma Cox refers to these types of climate risks as ”unsighted consequences.”
Case in point: “You need to think about how your preparedness fits that of the wider environment, and work with government, the public sector, communities and value chain actors to help enhance the resilience of the entire ecosystem,” Cox says. “We believe businesses should participate in the design and implementation of adaptation strategies as well as decarbonisation transformation processes—this will not only benefit the business itself, but also society and our planet.”
A recent PGIM survey found that such a slowdown—and resultant broad adoption of a zero-interest rate policy (ZIRP)—is a top tail risk for institutional investors in Japan. While the probability of such an event is extremely low, it carries outsized potential to upend markets.
- Hi Already, Europe is seeing a slowdown in demand from China, according to Joerg Wuttke, President of the European Union Chamber of Commerce in China
- In the first eight months of 2021, Europe shipped 1.2 million containers to China.
- In the first eight months of this year, Europe shipped just 1 million containers, a 17% decline.
