"Black Monday reproducibility? "Little to no" Japanese, first rate hike since Trump's inauguration, "highly likely"

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: January 22, 2025 (Wednesday)
■ Talk: Lee Chang-min, Professor of Convergence Japan Regional Studies at Hankuk University of Foreign Studies

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.

◇ Reporter Cho Tae-hyun (hereinafter referred to as Cho Tae-hyun): We will continue with the second part of YTN Radio Live Economy. This time, we will go to Japan. The whole world is on edge over Trump's inauguration. The same will be true of Japan. In particular, we are about to decide on the base rate this week. It is attracting even more attention because it has picked the steps after Trump's inauguration as a variable to watch in the future. The last time Japan raised interest rates, global financial markets fluctuated. That's why I can't help but be more interested. Let's talk with the experts. I will connect you to Lee Chang-min, a professor of convergence Japanese regional studies at Hankuk University of Foreign Studies. Is the professor out?

◆ Lee Chang-min, Professor of Convergence Japan Regional Studies at Hankuk University of Foreign Studies (hereinafter, Lee Chang-min): Yes, hello. I'm Lee Changmin.

◇ Cho Tae-hyun: Hello. Professor, the whole world is nervous about Trump. We must have been very nervous yesterday, but we were very interested in customs duties and such. What are you particularly interested in in Japan?

◆Lee Chang-min: I wonder if there have ever been so many people from all over the world watching and paying attention to the inauguration of the president of the United States at the same time. This is because everyone expects President Trump's inauguration to reorganize the global trade order and security order unlike any other presidential inauguration. In Japan, it is expected that there will be four major shocks. The first is that if additional tariffs from China are imposed, Japan's electronic components industry, which exports to China, will be hit. The second is to impose tariffs on Mexico, which will hurt the Japanese auto industry in Mexico. Then, the third is that President Trump will ask Japan to increase defense spending, and the fourth is that some inflation triggered by Trump's policies will eventually lead to the Japanese yen's depreciation, which will lead to the rise of Japanese import prices, which could lead to Japan's inflation. There are four things that are being said right now.

◇ Cho Tae-hyun: It's different in detail, but it's almost the same as us. It seems that the whole world has similar concerns. That's why the Bank of Japan's financial policy-making committee seems to be very interested in this meeting this month. First of all, last year, last December, we decided to freeze it. At the same time, he said that he was concerned about the second Trump period. What do you think you'll do this time?

◆Lee Chang-min: Last year was a really tough year for the Bank of Japan. Last year, the super low yen of over 160 yen per dollar led to a rise in import prices, resulting in a decrease in real income and a contraction in consumption from the perspective of the common people in Japan. The reason why Japan suffered such a super low yen was because of the widening interest rate gap between the U.S. and Japan, so what the Bank of Japan is most concerned about now is managing the interest rate gap between the U.S. and Japan to prevent it from widening, but with President Trump's election now, the Bank of Japan is deeply troubled. As soon as President Trump is elected, he is talking about tariffs. If tariffs are raised, inflation will inevitably occur. If prices in the U.S. go up, the Fed will have no choice but to keep interest rates high, which in turn means that the interest rate gap between the U.S. and Japan increases, so the yen can continue to weaken. But on the other hand, President Trump is now saying that he will lower energy prices by increasing fossil fuel production. If this happens, on the contrary, it could be a situation where the Fed could cut interest rates as prices fall. So, in short, it can be seen that Trump's emergence has increased external instability and policy uncertainty. After all, in December last year, the Bank of Japan will decide the policy rate by referring to the Fed's move if the policy becomes clearer after President Trump took office, possibly in January. So, there is the first policy and financial policy decision meeting of this year for two days the day after tomorrow, and this time, the conclusion seems to be being drawn on raising interest rates once.

◇ Cho Tae-hyun: Okay. This time, the impression is expected to be a little more likely. As you just said, Japan's benchmark interest rate is 0.25%, and the U.S. is 4.25 to 4.5%, so there is a huge gap of up to 4.25 percentage points, so there seems to be a lot of such concerns in Japan. In this regard, it is known that the trend of Chun-Too is an important factor in determining interest rates, so what is Chun-Too?

◆ Lee Chang-min: Ye Chun-tu is short for Spring Life Struggle. In Japan, we now negotiate a wage increase every spring. As a representative of the enterprise, a coalition of economic organizations called K-Danren

◇ Cho Tae-hyun: A place like the Federation of Korean Industries.

◆ Lee Chang-min: That's right. And then it starts with a group called United Lengo, which represents workers. There will probably be the first meeting tomorrow, and detailed negotiations will take place over February and March.

◇ Cho Tae-hyun: But how does Chun-too play a very important role in determining interest rates?

◆Lee Chang-min: In fact, not only this year, but also in 2023, and in 2024, Japan's wage increase is now an all-time high through spring fighting for three consecutive years. So in 2023, we increased it by about 3% for the first time in 30 years. Last year, wages rose to 5.1%, the highest level in 33 years, and Japan's real wages can be converted to positive only when the wage increase continues like this. When the real wage is converted to positive, consumption will revive, so to speak, a desirable price increase will be established. On the other hand, the Bank of Japan is expected to raise interest rates to around 1% in the future because real wages can be converted to a positive level, but in that sense, wage increases through spring investment can be considered a very important issue because real income increases and real income increases.

◇ Cho Tae-hyun: But you mentioned real wages, and real wages are a concept that considers wages and inflation. But even though you raised your wage like that, your real wage is still not a plus?

◆ Lee Chang-min: Some people say that this is actually a very mysterious phenomenon, but if you look at the principle, it's actually simple. Currently, the wage increase rate through spring investment is about 5.1%. However, since the inflation rate is in the 2% range, the real wage should be positive if you simply calculate it. Nevertheless, the fact that real wages have been negative for more than 30 months now is that most of the companies in Japan can do spring training. So you have to have a union. Most small and medium-sized enterprises do not have unions, so they are not even subject to spring fighting. In the end, a 5% wage increase through spring investment can be seen as a feast only for large companies, so if all SMEs are included, the wage increase is still not keeping up with the inflation rate. In the end, it can be said that this part is now the key to how much wages SMEs will be able to raise in the future.

◇ Cho Tae-hyun: Let's point out one more interest rate issue. After the Bank of Japan raised interest rates in July last year, the global financial markets almost jumped. It's going to fall apart and the same thing will happen this time. Do you have any concerns like this?

◆Lee Chang-min: If the Bank of Japan raises interest rates again this time, the global economy will fluctuate due to the liquidation of the yen carry. Some people say this, but I think the situation will be a little different this time. When the Bank of Japan raised its key interest rate on July 31, at the same time, indicators of worsening employment statistics in the United States were announced. In the meantime, Encarry's liquidation expanded and shares plunged, causing Black Monday on Aug. 5. However, the situation is a little different now, most of all, the yen carry trade part, which is likely to be liquidated around July and August of last year, has almost been liquidated.

◇ Cho Tae-hyun: It's already been liquidated.

◆Lee Chang-min: Yes, considering the amount of funds that are likely to be liquidated in the future out of the total yen carry trade balance right now, I don't think this rate hike is enough to cause the global financial market to fluctuate.

◇ Cho Tae-hyun: I think you can worry less this time. Let's go back to Trump. I'm going to talk about Trump that Japan sees now, but in Japan, the first day of Trump's inauguration, now the next day has passed. How do you interpret this?

◆Lee Chang-min: Like us, every word of President Trump and every sentence on social media are now news in Japan. There are two things that are the biggest news right now in Japan. One is Chairman Son Jeong-ui, Masayoshi Son. Softbank, led by Chairman Son Jeong-ui, has opened AI, Oracle, and three companies have now announced plans to invest 78 trillion yen, or more than $500 billion, in AI development in the United States at Whitehouse. So now, in Japan, there are voices who expect that with this opportunity, we can still maintain strong relations with the U.S. and Japan even in the Trump era. On the contrary, there are voices of concern. It's now 25% tariffs imposed on Mexico. As I mentioned earlier, Japan is Trump 2. One of the biggest concerns of the era zero is that 25% tariffs imposed on Mexico will take effect on February 1st. The Japanese industry, especially the automobile industry, is now very concerned about this.

◇ Cho Tae-hyun: Are there many factories there? Japan?

◆Lee Chang-min: Right now, Japanese cars actually have more overseas production bases than domestic ones. About 1.5 million automakers export to the United States from Mexico per year. But not only this, but more than 300 Japanese auto parts companies are also included in Mexico. So I don't know how much trade profits will be reduced by this tariff.Ma is now saying in Japan that the entire global value chain of the Japanese automobile industry should be reorganized. However, it is said that it will be very hurt because it will cost a lot and take time.

◇ Cho Tae-hyun: What you mentioned earlier was that there was also China other than Mexico, but looking at the news that just came in, Trump is discussing 10% tariffs on China. There is also news that I think it will be from the 1st of next month. I think not only us but also Japan will be very nervous. However, if you look at the responses from the Japanese side, there are voices of criticism that the Ishiba government's response is too loose, so what are you criticizing?

◆Lee Chang-min: Prime Minister Ishiba was very confident when President Trump was elected for the first time. When I talked on the phone, I said that I could meet President Trump by the end of this year, so before December 2024. However, Trump's side was later shown refusing Japan's request, saying that he would not meet with foreign leaders before taking office. That's why Prime Minister Ishiba's face is very crummy. Since then, I have been arranging meetings with President Trump, but it didn't go well, and now Chairman Son Jeong-ui is meeting with President Trump and announcing his investment plan, and now in Japan, the photo of Chairman Son Jeong-ui and President Trump is becoming a hot topic. In the end, what's coming out of Japan is that one businessman is much better than 100 politicians.

◇ Cho Tae-hyun: I think that's a little right.

◆ Lee Chang-min: At the same time, Prime Minister Ishiba is now beleaguered in a way, and his current approval rating has fallen to the low 30% range. Some say that it is actually difficult to hold the upper house election in July this year.

◇ Cho Tae-hyun: I think the Japanese government will also be hit. Let's take a look at the US Steel issue. You were disallowed under the Biden administration of US Steel. How are you taking this from the Japanese side? Is there a possibility that it will change during Trump?

◆ Lee Chang-min: Yes, U.S. President Joe Biden really decided not to sell US Steel just before he left office. So, including in Japan's steelmaking, Japan is now saying, "How can we treat our ally Japan like this? This is too shocking," and that we will be willing to file a lawsuit against the U.S. government. However, since President Biden is an outgoing president anyway, it is most realistic to solve the problem through renegotiation with the incoming President Trump. This is the public opinion. But actually, this doesn't seem easy either. Because it was August of last year when President Trump was a candidate. That's what I said. The greatest American company 70 years ago is US Steel. I said that I would stop Japan from buying US Steel. So, even if we renegotiate with President Trump, the prospect of acquiring US Steel is not very bright, so there is an expectation and public opinion that it will be difficult.

◇ Cho Tae-hyun: But overall, Japan has a large direct investment in the U.S. and the U.S. trade deficit, which Trump is most concerned about, is also relatively small in Japan, so some analysts say that the Japanese government's card is not bad. What do you think, professor?

◆ Lee Chang-min: As you said, the countries with the biggest trade deficit in the U.S. are China and Mexico that sell the most goods to the U.S. It's first and second place. So first of all, they announced that they would impose their own tariffs on these countries. In the case of Japan, the trade surplus to the United States is not as large as expected. In particular, in the first half of last year, the rankings of Korea and Japan's trade surplus with the United States were reversed. Until now, Japan has always been higher than us, but in the first half of last year, Korea ranked 6th and Japan ranked 7th. In the end, the U.S. exports did not go well, but in a way, it became a blessing in disguise, and from Japan's point of view, it became a good card to increase bargaining power. Also, as you mentioned, Japanese companies are contributing significantly to the creation of jobs in the United States because Japan's direct investment in the United States is also very large. It seems that he will continue to emphasize this in negotiations with Trump. Chairman Son Jeong-ui's Softbank, which I mentioned earlier, is estimated to have an employment effect of more than 100,000 people in the United States due to the investment in AI in the United States. So from Japan's point of view, I'm stacking up cards one by one. That's what I think.

◇ Cho Tae-hyun: Okay. Trump is such an ally and friend that he is just a profit-first person, so there seems to be a movement around the world to look for some tools in many negotiations. So far, I have looked at various contents from Japan's benchmark interest rate to Trump response with Lee Chang-min, a professor of convergence Japanese regional studies at Hankuk University of Foreign Studies. Thank you for talking today.

◆ Lee Chang-min: Thank you.