Japan emerges from recession on post-Covid consumer boom

Japan's economy emerged from recession in the first quarter of 2023 and grew faster than expected after a further easing of pandemic regulations boosted consumption and offset economic slowdown in other parts of the world.

The positive data boosted hopes for a sustained recovery, while also fuelling speculation of a possible early election and policy change by Japan’s central bank.

The world's third-largest economy grew an annualised 1.6% from January to March, government data showed on Wednesday, far exceeding market forecasts for a 0.7% gain and marking the first rise in three quarters.

The growth followed a 0.1% fall in Q4 2022, which was revised down from a 0.1% rise. The decline marked two straight quarters of contraction, meeting the definition of a technical recession.

Stronger-than-expected spending by consumers and businesses was the main driver behind last quarter’s growth, but net trade dragged on the overall figures as shipments of cars and chip-making machinery fell.

Increasing evidence of a slowdown in US, European and Chinese growth cloud the outlook for the export-reliant economy, heightening uncertainty on how soon the Bank of Japan (BoJ can phase out its massive stimulus programme.

“Consumption will continue to underpin growth as removal of Covid curbs boost tourism and service spending,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“But the economic recovery will be moderate as weak overseas demand will weigh on exports. It will be a tug-of-war between robust domestic demand and sluggish exports,” he said.

Private consumption, which makes up more than half the economy, grew 0.6% in Q1 from the previous quarter, as the country’s re-opening from the pandemic boosted service spending; exceeding forecasts of a 0.4% increase. Capital expenditure also surprised, expanding 0.9%, confounding forecasts for a 0.4% fall.

Japan's nominal gross domestic product (GDP) reached a record 570.1 trillion yen (JPY) (US$4.22 trillion), helped in part by rising prices, economy minister Shigeyuki Goto said.

However, Goto said caution was required amid emerging risks. “We must meticulously pay heed to the global economy, and impacts from financial markets and rises in interest rates on real economy,” he added.

The strength in domestic demand offset weakness in exports, which were 4.2% lower in January-March, marking the first decline in six quarters. External demand, or net exports, shaved 0.3 of a percentage point off GDP, highlighting the strain on manufacturers from slowing overseas growth.

“Demand for goods isn't strong globally, so exports are weak. Industrial production is also soft, so we can't expect manufacturers to perform well ahead,” said Toru Suehiro, an economist at Daiwa Securities.

Rising fuel and food costs, which drove Japan's consumer inflation above the BoJ’s 2% target, could also weigh on consumption unless wage hikes are sustained, analysts say.

Inflation-adjusted wages fell 2.3% in Q1 from a year earlier, more than a 1.8% drop in the previous quarter, highlighting the deepening impact on households from rising living costs.

 

Central banks make growing use of yuan via PBOC swaps

Global central banks tapped a record amount of the Chinese currency in foreign-exchange swap lines in the first quarter of 2023 reports Bloomberg, in another indication of the yuan’s (CNY) growing international status.

The outstanding balance of all foreign currency swaps was CNY109 billion (US$15.6 billion) at the end of March, according to data released by the People’s Bank of China (PBOC). That was CNY20 billion more than the level at the end of 2022, the second-biggest quarterly jump on record. The PBOC didn’t reveal which nations had used the facility.

The jump came as more countries look to settle their trade with China in local currencies in a bid to reduce their reliance on the US dollar, and also as some nations look for help to overcome financial difficulties. Argentina announced in April that it would tap its swap line to finance imports from China after the peso suffered a sell-off. Brazil also agreed to start settling some trade in local currencies and took steps to make it easier to transact with China in CNY.

It is possible that the PBOC is offering liquidity via the swap lines to support yuan internationalisation,” said Tommy Xie, head of Greater China research at Overseas Chinese Banking Corp. Currency swap or cross-border loans could be the few choices China’s trade partners have to accumulate yuan when they are mostly running trade deficits with the country, he suggested.

While China’s strict controls on cross-border capital flows remain a major hurdle as the nation seeks to lift CNY’s global status, US sanctions on Russia and other countries is helping promote the currency as an alternative for international transactions.

Currency swaps are agreements where central banks simultaneously lend and borrow each other’s currencies at an initial date, with a promise to exchange the money back and pay an agreed interest rate.

 

Since the US Federal Reserve wrapped up its latest monetary policy meeting on May 3 and left the door open to halting its aggressive interest-rate-hiking campaign, attention in the financial markets has centred on the looming US debt-ceiling crisis as investors hold out for an update on plans to resolve a three-month standoff and avoid a default on US Treasury debt. 

A team of strategists at BNP Paribas, led by foreign exchange strategist Alexander Jekov, said they expect the debt ceiling to become “an increasingly important theme” for markets, and a potential suspension may give room for the US dollar to jump.

“The US debt ceiling presents an asymmetric upside risk for the US dollar, in our view,” the strategists wrote in a note. “While there is no clear pattern as to how the USD trades into the US Treasury’s X-date historically, once the debt ceiling is suspended or raised, the USD tends to either rally or trade flat.”

When a debt ceiling is hit, or the Treasury Department spends the maximum amount authorised under the ceiling, the government can only fund its day-to-day spending with its existing cash balance deposited in the Treasury General Account (TGA) managed by the New York Fed.

The TGA is a liability on the Federal Reserve’s balance sheet, similar to bank reserves and notes. To balance the central bank’s assets and liabilities, a drop in the TGA will cause bank reserves to go up, administering an injection of liquidity into the financial system. In other words, the dollar liquidity is boosted, said Jekov and his team. 

However, once the ceiling is no longer a “binding constraint” due to a raise or a suspension, T-bill issuance tends to rise, rebuilding the TGA cash balance, which could lead to a liquidity tightening, the strategists said. 

“Tighter liquidity, in turn, spills over to the risk environment in a negative way, leading to a rally in the USD which is more pronounced versus high-beta currencies than versus low yielders,” said the BNP Paribas team.

However, if there is no debt-ceiling rise or suspension in the next few months, strategists expect a risk-off across asset classes as markets begin to discount a higher risk of technical default. Extended short-USD positioning according to a BNP Paribas’s model “could exacerbate any move higher in USD,” they suggested.
 

African fintech M-Kopa raises US$250 million

Kenya-based fintech platform M-Kopa successfully closed over US$250 million in new debt and equity funding to expand its financial services offering to underbanked consumers across Sub-Saharan Africa. “This marks one of the largest combined debt and equity raises in the African tech sector, enabling M-Kopa to continue its rapid growth,” the company announced.

The company, which launched in 2012, serves Kenya, Uganda and Nigeria, with headquarters in the Kenya’s capital of Nairobi.

Over US$200 million in sustainability-linked debt financing was led and arranged by Standard Bank Group, Africa’s largest bank and long-term strategic partner to M-Kopa. Other participating lenders include The International Finance Corporation (IFC), funds managed by Lion’s Head Global Partners, FMO: Dutch Entrepreneurial Development Bank, British International Investment, Mirova SunFunder and Nithio.

A further US$55 million in equity investment was backed by existing strategic investor Sumitomo Corporation, which is contributing US$36.5 million to the total raise and will engage closely with M-KOPA on new growth markets and products. Blue Haven Initiative, Lightrock, Broadscale Group and Latitude, the sister fund to Local Globe, also participated in the transaction.

A release issued by the company added: “M-Kopa’s fintech platform combines the power of digital micropayments with the Internet-of-Things (IoT) to provide customers with access to productive assets. In markets where individuals have limited pre-existing financial identities and conventional collateral, M-Kopa’s flexible credit model allows individuals to pay a small deposit and get instant access to everyday essentials, including smartphones, electric motorcycles and solar power systems, and then graduate to digital financial services such as loans and health insurance.

“M-Kopa’s solution embeds credit into the product through a smart digital connection, giving customers ownership instantly, which they can pay off through micro-instalments over time. The company has sold over three million of these products through a unique direct sales model that includes more than 10,000 agents.

 

Swan and Citi add embedded finance offerings

European embedded finance developer Swan has open-sourced its no-code banking interfaces and reduced the time to market of new pilots by 75%. The Paris-based company, which also has offices in Berlin and Barcelona says it is “dedicated to opening up opportunities for any type of business to embed financial features into its offering, like accounts, cards, and payments.”

The Backend-as-a-Service (BaaS) company adds that its no-code banking interfaces have enabled businesses to do this without extensive development efforts. Swan’s sandbox allows prospects to start creating products without needing to wait for a demo or speak to a representative, meaning businesses can begin creating within a few clicks.

Open sourcing its no-code banking interface goes one step further. Customers can begin a project with a fully featured banking app, with the option to customise it to suit their specific requirements. For example, Swan built and localized the entire Know Your Customer / Know Your Business (KYC/KYB) process. This system is used in banking to check identities and collect required documents during the account opening process.

“Swan is a tech company for tech companies empowering them to reap the benefits of embedded finance, whatever stage of technological maturity they are at,” says Mathieu Breton, Swan’s chief technology officer (CTO).

“We’re radically simplifying everything we can in a highly regulated, complex industry. And companies are taking less and less time to embed finance. Before, the most complex integrations could have taken up to six months. With Swan open source, that is reduced down to one month, and many products are now able to go live in literally hours or days.”

Separately, Citi Retail Services announced a boost to its embedded payments capabilities by enabling merchants to offer lines of credit and instalment loans at the point of sale (PoS).

Citi says that its research shows that 85% of Americans agree that retailers need to have flexible payment options for consumers to use at checkout. Its answer is to build a suite of Citi Pay products designed to be quickly integrated into participating retail partners’ existing payment platforms.

The first offering is Citi Pay Credit, a digital-only credit card and dedicated line of credit for customers to make purchases at participating retailers. Customers can apply at the checkout and get real-time approval.

This will be followed in the months ahead by Citi Pay Instalment Loan, which will let shoppers make purchases through monthly payments over a period of six to 60 months, based on the retailer.

Kartik Mani, CEO, Citi Retail Services, commented: “This is our next step forward in the evolution of trusted payments solutions which puts customers in control of how they want to finance their purchases and offers merchants more opportunity to drive sales of greater value.”

 

Morgan Stanley raises US$500 million for climate solutions

Morgan Stanley Investment Management (MSIM) announced that it has raised US$500 million at the first close of its climate private equity (PE) strategy 1GT.

Launched last November, 1GT is a new growth-oriented PE platform aimed at investing in climate solutions companies that will eliminate a billion tons (1 gigaton) of CO2 emissions from the date of investment through 2050.

According to Morgan Stanley, investors in the strategy include public and private pension funds and an insurance company in the Nordic region, Germany and the UK.

David N. Miller, head of Morgan Stanley Private Credit and Equity, said: “We are extremely pleased by the strong investor support for 1GT. This strategy provides our clients an innovative solution that seeks to address time-critical climate issues and brings Morgan Stanley’s considerable resources to portfolio companies to help accelerate climate impact and earnings growth to create more exit optionality.”

1GT, led by Vikram Raju, Head of Climate Investing at MSIM, invests primarily in North American and European private companies that provide products and services that enable meaningful improvements in carbon footprints, and can deliver a meaningful financial return, across themes including mobility, power, sustainable food and agriculture, and circular economy.

At the launch of the strategy, MSIM announced that half of the 1GT team’s incentive compensation will be tied to the achievement of the platform’s climate objectives.

Investments to date include supply chain insights and risk analytics company Everstream Analytics. 1GT led Everstream's US$50 million capital raise ilast month aimed at driving the company’s innovation in operational risk and environmental, social and governance (ESG) performance to accelerate supply chain sustainability.

1GT is classified as Article 9 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which requires sustainable investment or carbon emissions reduction as an objective.

Raju said: “Reaching our halfway goal is an important milestone. Our anchor investors have demonstrated a strong level of climate ambition by backing 1GT with its twin goals of investing in compelling high-growth companies in Europe and North America while aiming to deliver transformational climate impact at the gigaton level. Tying the team’s incentive compensation to both of the 1GT goals recognizes this in equal measure. We have begun executing on our pipeline at a very opportune phase in the growth equity market.”
 

Study shows Europe’s investors step up allocations to private equity

The democratisation of private markets continues to accelerate in Europe and the UK, with retail investors increasing exposure to the growing asset class according to a study.

UK market researcher Research in Finance canvassed the views of 892 European fund selectors working within both the retail and institutional channels. It found that the proportion of retail client assets currently invested in private markets now stands at 7.7% on average – just below the 9.2% institutional client weighting. However, the study did find 22% of European retail clients still have no exposure to private assets.

There are major differences at country level across the region, with investors in Germany having the highest proportion of client assets invested in private markets, at 12% on average. This is closely followed by Benelux at 11%, with France and Switzerland next at 9%. The UK is the regional outlier, with just 4% of client assets invested in the private arena.

Within private markets, private equity (PE) continues to appeal to both retail and institutional clients. Of the European investors currently investing in private equity, a net 11% of retail allocators and a net 7% of institutional have increased client exposure over the past year. Investors in Benelux and Italy lead the charge, at a net private equity increase of 16% and 15%, respectively.

Further, PE demand in the retail channel is set to remain strong in the period ahead, with a net 12% of European retail allocators poised to continue increasing client exposure. This is higher than the net 4% increase within the institutional segment. In terms of areas of appeal within private assets overall, European allocators identified PE primaries and PE co-investments as the most appealing.

“Private market strategies have long been used by institutional investors to help reduce volatility and deliver consistent, long-term performance. However, for decades, individual investors have had limited access to similar private market opportunities,” says José Cosio, managing director at investment manager Neuberger Berman. “Fortunately, the democratisation of the asset class continues to accelerate, with retail investors increasingly able to access private strategies.

“We believe the European long-term investment fund (ELTIF) market, which grew by more than 50% in 2022 year-over-year, could become the standard for providing European individual investors with access to private equity. In the UK, the industry is increasingly embracing the new LTAF structure, which will also help to reduce barriers to entry. As UK private market allocations lag European peers, this is a welcome development.

“PE has become a significant diversifier for many of our clients, so we are pleased to be able to provide a new generation of savers with access to the differentiated return profile of the asset class in an efficient way.”

 

Ripple acquires Swiss digital asset specialist Metaco

Enterprise blockchain and crypto solutions developer Ripple announced its acquisition of Metaco, a Switzerland-based provider of digital asset custody and tokenisation technology. “Diversifying into custody solutions is a milestone in Ripple's business and product strategy, bringing new revenue opportunities to the company,” a release stated.