Fresh from the Japan SEA Market Forum last November, we managed to have a quick chat with Robert Subbaraman, Managing Director and Global Head of Macro Research on Nomura, about the rest of the world’s views on the Japan opportunity, especially in AI, their role in an increasingly multipolar world, and how the Japan “revival” ties to the Southeast Asia’s growth story.

About Robert Subbaraman

Rob Subbaraman joined Nomura in October 2008 and is Chief Economist and Head of Global Markets Research for Asia ex-Japan. He manages a team of 20 economists and strategists, who forecast Asia’s economies and make market trade recommendations. Beyond analyzing the economic cycle, the team prides itself on its collaborative, thematic research. Rob chairs the Asia ex-Japan research exec committee, and is on Nomura exec committees for Global Markets Research and Global Emerging Markets.

Prior to joining Nomura, Rob was at Lehman Brothers for 12 years and was Chief Economist, Asia ex-Japan. Rob is based in Singapore and has spent the last 18 years in Asia, including living in Hong Kong and Tokyo. He has a central banking background, having worked at the Reserve Bank of Australia in the Economic Analysis Department for seven years prior to joining Lehman Brothers. 

Timestamps

(00:37) What Makes Japan Exciting Again;

(03:07) Japan’s Role in the Global AI Supply Chain;

(05:25) TechnoNationalism and its Implications;

(07:42) A Macro View of the Southeast Asia Private Market Opportunity;

Directed by Paulo Joquiño

Produced by Paulo Joquiño

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The content of this podcast is for informational purposes only, should not be taken as legal, tax, or business advice or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any ⁠⁠⁠⁠⁠⁠Insignia Ventures⁠⁠⁠⁠⁠⁠ fund. Any and all opinions shared in this episode are solely personal thoughts and reflections of the guest and the host.

Transcript

Paulo: We’re here live at the Japan Sea Market Forum where you’ve been a panelist just now at a talk about the impact of a lot of the geopolitics in terms of investments globally. You spoke at length about the opportunities in particular in Asia, in Japan, and I wanted to start there.

Rob: The room was full, wasn’t it? It was packed. There was so much interest in Japan.

Paulo: They particularly loved the whole marriage analogy that you extended even further, which is a really apt one. One of the best I’ve heard around that discussion.

What Makes Japan Exciting Again

Paulo: But maybe you can speak a little bit more to what specifically are the, from a sector standpoint, perhaps. What are some of the opportunities in Japan especially for our audience who are mostly investors in Southeast Asia, founders, or builders in Southeast Asia as well. What are some of the opportunities that they can tap into that you’ve seen?

Rob: As we were talking about during the panel, Japan is back. It’s back in a big way in the sense that after two decades, Paulo, of being in deflation, it’s out now. So far it’s not been the good type of inflation, it’s been more food prices and weaker exchange rates. It’s more prohibitive costs going up. 

Going forward, because Japan is running short of labor, there are two things. One is you’re going to see stronger wage growth going forward because labor is scarce. The second thing is Japan is really going to embrace AI and be a big adopter of it, which will boost productivity. So those two things can generate Japan nominal growth, which could be somewhere between three to 4%, which is decent growth for profits, so that’s the big picture. 

In other sectors, if the Bank of Japan has to start to raise rates, the financial sector is going to do well. From that perspective, the housing sector and property are also going to do well. And then trading companies, which have been doing well, will continue to do well. 

Stepping back from that, the interesting thing is outside listed companies, the small companies, the startups, the younger generation which are just starting to invest now overseas, they’re the ones with imagination and they’re going to embrace AI. 

So I see a lot of startups using new technologies, whether it’s for green energy, whether it’s for biotech, whether it’s just for new innovations. There are going to be a lot of opportunities. So it’s getting into the weeds and looking for these types of companies. That’s where you’re going to find a lot of opportunities.

Japan’s Role in the Global AI Supply Chain

Paulo: Regarding the whole AI point in Japan being potentially a huge adopter of it in the right way and making the most out of the dividend from that to close the gap in terms of the human capital that they need. How do you see that impacting this whole circular kind of economy or AI bubble in the US? And how does Japan playing a larger role in the AI ecosystem potentially de-risk a potential crash scenario or something to that effect?

Rob: The US is by far the leader in terms of being the enabler of AI, right? The enabler in the sense that it’s the Mag seven. It’s these hyperscalers that are building these massive data centers that are needed for large language models and AI models and agents and so forth. They’re building, if you like, the AI infrastructure. 

The next stage is who’s going to use AI? Who’s going to embrace it, adopt it, right? To get all the efficiencies and the cost savings and even the alpha out of AI with new innovations, right? That’s not necessarily the US and that’s where Japan can come in because Japan has the ultimate reason to do that. It’s running out of labor. It’s literally running out of labor and it needs labor-saving investments. And that is AI. 

There is the circular argument that maybe there’s been too much investment in AI. And it will take time to see the returns. That could be true. We’ll see. In terms of where those returns are going to come from, Japan is a good opportunity where you’ll see those returns.

Paulo: AI has really, in some ways, lacked a huge spender. A lot of the capital to fuel a lot of the investment in AI has come from other funders or investors. Having a huge spender in the form of the Japanese market might make a difference there.

Geopolitical Dynamics and Economic Nationalism

Paulo: Regarding the whole idea of technical nationalism and how, in a more fragmented world, there’s a lot more interest in developing a sort of independence. That a lot with China. How do you see that unfolding? Or is it more of a cyclical thing where, to take the marriage analogy, you’ll have kind of a realization after the long fight. We shouldn’t have been fighting all along, we should get back together. Or do you see it really being like a point of no return kind of thing?

Rob: We talked on the panel about the analogy of China and the US being married. It’s not going so well, but they can’t get divorced because they’re so interlinked. Which is very true. 

There is this strategic decoupling happening between the two world superpowers where, you can think of the US has got the chips, which is the new oil. You can think about the rare earths that are needed to build the chips. And that’s in China. So they’ve got this marriage where they can’t leave each other. 

And even more broadly, you talked about what’s happening if there is a move towards economic nationalism. In terms of everyone, all countries want to secure their supply chains. They’re becoming more concerned about the future. It used to be just-in-time inventory management. Now it’s just-in-case. There’s a lot more security concerns when it comes to economics and so that is going to raise costs over time. 

It’s not as we used to have free trade, free investment. Now it’s getting a lot of restrictions and there are a lot of clogs in supply chains. That’s not good for efficiency and costs. They will go up, costs will go up, efficiency will go down. The big savior to this, as we were talking about before, is AI. This is another big reason why AI really needs to succeed here.

A Macro View of the Southeast Asia Private Market Opportunity

Paulo: And then just to wrap things up regarding how you see the future of especially private markets in Southeast Asia. Coming from a Southeast Asia investor, there’s a lot of pressure these days to prove returns, especially for those that have a thesis on startups for the longest time. 

We see a lot of firms either expanding their geographical focus to generate those returns. Or, venturing into other kinds of multi-asset strategies to generate those returns as well. What has been your view on not even Southeast Asia alone, but other emerging markets in terms of how they’ve been able to drive returns from venture and that particular asset class?

Rob: We are seeing Paulo is more diversification and, with public markets now quite rich in some of these DM economies, there has been this move towards private markets to alternative assets. And even these alternative assets like crypto or gold prices are already high as well. The next stage is going to be a renewed focus on emerging markets. 

And Southeast Asia is a great candidate for that. Young population, low labor costs, huge opportunities in terms of infrastructure investments. Where a lot of the capital will actually come from as well is not just the west where it’s traditionally come from, but actually in its own backyard, Northeast Asia, which is cash-rich. 

Countries like Japan, Korea, Taiwan, even China. Older populations that have now reached the level where they’ve saved money, but they need to put it to work. So you will see capital flowing from north to south and that will create a lot of opportunities, investment opportunities in Southeast Asia emerging markets.