Taiwan Minister Seeks to Cool Rising China-Japan Tensions | Insight with Haslinda Amin 12/2/2025

Key Concepts

• Risk Assets & Liquidation: Cryptocurrencies, leveraged positions, global appetite for risk.
• Global Bond Markets: Japanese Government Bonds (JGBs), Bank of Japan (BOJ) monetary policy, Federal Reserve (Fed) policy, yield curve steepening, fiscal stimulus, Treasury bills.
• Shareholder Activism: Engagement funds, corporate governance, market capitalization.
• Aviation Industry Challenges: Supply chain issues, engine problems, software glitches, fuselage flaws, aircraft delivery targets, OEM reliability.
• Travel & Tourism Trends: Forex impact on travel, secondary cities, AI in travel planning, personalized itineraries.
• AI Investment & Valuation: Semiconductor cycle, operating margins, geographic diversification, regulation, barriers to entry.
• Geopolitics & Diplomacy: China-Japan-Taiwan relations, cross-strait relations, US foreign policy, national security, economic downturn, nationalist sentiment.
• Hong Kong Governance: Independent inquiry, systematic reform, corruption, national security law, electoral system.

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Global Market Volatility and Risk Appetite

The global financial markets are experiencing a turbulent period, marked by a significant sell-off in risk assets, particularly cryptocurrencies, and rattled bond markets. Asian stocks are staging a rebound after nearly $9 billion in leveraged crypto positions were wiped out on a single Monday. This event, coupled with hints of a December interest rate hike from the Bank of Japan (BOJ) governor, has sparked a global bond sell-off, with markets now focused on Japan's 10-year JGB auction.

Japanese Bond Market Under Pressure Mark Cranfield, a market slide strategist, describes the situation as a "global bond event." Japanese yields are rising rapidly, partly due to BOJ Governor Ueda's strong indication of an interest rate hike in December, a sentiment seemingly endorsed by politicians including the finance minister. This potential hike, even to 0.75%, is still significantly below the 3% inflation rate, resulting in "very negative yields." The 10-year JGB yield is around 1.88%, heading towards 2%, a level where long-term investors might consider buying. Additionally, 30-year JGB yields hit a record high, further complicating the fixed-income market. External factors, such as massive corporate issuance in the US, are also pushing up the yield curve in America, with expectations of the Federal Reserve steepening the curve by lowering interest rates. Demand for JGBs is uncertain, with domestic life insurance companies potentially waiting for the 10-year yield to reach 2%.

Cryptocurrency Market Turmoil Subash Ghosh, a cryptocurrency reporter, highlights the "lot of pain" and "bearish and cautious" sentiment in the crypto market. The liquidation of almost $9 billion in leveraged crypto positions on Monday alone underscores the volatility. Bitcoin, after touching lows of less than $84,000, is down almost 30% since October. The "Fear and Greed Index" is at 23, indicating "extreme fear." Key technical support levels for Bitcoin are being watched at $88,000, $82,000, $85,500, and critically, $80,000. While the crypto sell-off impacted risk sentiment, its broader impact on US equities (like the S&P 500, which has made new highs) is diminishing, suggesting a more contained effect on major markets unless there's a dramatic 10%+ sell-off in major cryptos.

Market Outlook and Investment Strategies

Selina Ling, Chief Economist and Head of Global Markets Research and Strategy at OCBC, notes that while it "feels like it is risk off," ample liquidity could still lead to a year-end rally. She describes the current macro backdrop as a "Goldilocks type of scenario" with no US recession, easing tariffs, and a US-China truce. However, end-of-year profit-taking is expected. Ling cautions against "herd mentality" as retail investors enter the bond space, but suggests central banks' role as "lender of last resort" might prevent a full collapse.

Emerging Markets and China Ling advocates for Emerging Markets (EMs) over Developed Markets (DMs), particularly ASEAN, due to its "stability premium" – stable growth, renewed tourism, muted inflation, and central banks nearing the end of their easing cycles. The "China plus one, plus two, plus three" story continues to favor the region, making Asian bond markets, especially in local currencies, attractive amidst US policy uncertainty. For China, while headline growth may meet its 5% target, consumption remains weak, and businesses are cautious about CapEx. The focus is on structural reforms rather than "big bang bazooka" stimulus. Ling remains hesitant about investing in China for now, citing monetary policy and the rapidly evolving, unpredictable high-tech industry.

Japan and the Yen Ling expects the BOJ to hike rates in December, with another hike penciled in for early 2026, depending on price momentum. The monetary policy divergence between the dovish Fed (expected to cut rates faster and steeper) and the BOJ could bring the dollar-yen into sharper focus, potentially pushing it to 153-154.

Shareholder Activism in Japan

Hiromi Yamada, CEO of Japan Exchange Group, discusses the rising trend of shareholder activism in Japan. As a market operator, he maintains a neutral stance, welcoming all investors to ensure "abundant liquidity." In June alone, 114 companies received 399 shareholder proposals, with 137 from activists, though only a few passed. Activist ownership accounts for about 1% of Japan's total market cap, lower than the UK (2%) and US (1.1%), indicating it's "not so dominant... yet." Yamada anticipates more activism in 2026 and encourages management to engage directly with "reasonable" proposals.

Airbus Challenges and AirAsia's Resilience

Airbus is facing significant challenges, with its stock falling after revealing the need for inspections on hundreds of its best-selling A320 jets due to potential body flaws, complicating delivery targets. This follows a recent, biggest-ever recall for a software glitch on the same model.

AirAsia's Response and Outlook Tony Fernandes, CEO of AirAsia, one of the largest A320 operators (over 200 in its fleet), confirms Airbus provided a "heads up." AirAsia's team fixed 99% of the software glitch within 24 hours through a software downgrade (1.5 hours per aircraft), resulting in "no operational major delays." The fuselage issue is not seen as "major," with no indications of upcoming delays. Fernandes maintains confidence in Airbus, despite this being the "first time in my 20 odd years of AirAsia that we received a global notification such as this." He attributes manufacturing disclosures to increased orders, rapid technological change, sustainability pressures, and competition, urging OEMs to prioritize quality and proper testing over short-term profits. The cost of disruption for AirAsia was "negligible," mainly man-hours.

Fernandes expresses strong optimism for 2026, anticipating "incredibly strong" demand. AirAsia is expanding to a "hub and spoke" model, looking at a new order book for smaller gauge aircraft to deepen its network. He is bullish on ASEAN, India, China, Japan, Korea, Australia, and new westward routes (Kazakhstan, Uzbekistan, Turkey). Despite 15 planes being grounded, AirAsia achieved a "remarkable" 23% margin in Q3. He expects 10-15% growth and is close to deciding on new aircraft orders from Airbus, Embraer, or Comac, with engines being a 70% factor in the decision. His biggest risks are "trade wars and oil spikes," but he believes geopolitical shifts are benefiting AirAsia by encouraging more regional travel.

Travel Trends and AI's Role (Agoda)

Omri Morgenstern, CEO of Agoda, discusses the 2026 Travel Outlook report, highlighting that travelers are increasingly exploring "secondary cities in Asia" for "lower costs." Foreign exchange rates are a "major factor," with 40% of travelers planning to spend about 10% of their annual income on travel. Weaker local currencies, like the Japanese Yen, stimulate travel, while the Indian Rupee recently hit a new record low of 89.7850 against the USD.

Morgenstern envisions an "AI trip" where AI acts as a personalized travel agent, assisting with planning, itineraries, and real-time support during travel. Contrary to concerns about AI creating a "filter bubble" of mainstream destinations, he believes AI will enable personalization to budget and preferences, offering "much deeper knowledge of opportunities and places to go way more than the mainstream," thus sending travelers to "more interesting exotic destinations."

AI Investment, Market Diversification, and Geopolitical Risks

Guy, Head of Developed Market Strategy at Amundi Investment Institute, attributes the current "risk off" sentiment to profit-taking after a strong year for US equities and concerns about AI's ultimate profitability and funding. He anticipates more bond and debt issuance to fund CapEx in 2026.

Bond Market and Dollar Outlook Guy expects Japanese 10-year yields to test 2%, leading to repatriation of Japanese money in Q1 2026. For Treasuries, he foresees 2-3 more Fed rate cuts (December, Q2 2026) due to a slowing US economy. A potentially dovish new Fed chair could lead to even more aggressive cuts (below 3%), resulting in higher inflation expectations, a steeper yield curve (2s-10s, 5s-30s), and more "anti-inflation trades." He projects a weaker dollar in H1 2026 (monetary policy driven) but a recovery in H2 2026 (capital flows driven by investment). Gold, surprisingly strong in 2025, could test $5000 by early 2027, driven by diversification due to concerns about US dollar strength.

AI Investment and Diversification The biggest risk to these projections is a "real lack of confidence" in AI's return on investment, which could trigger a 15-20% US equity pullback and a flight to quality in fixed income (US 10-year below 4%). Guy notes NVIDIA's incredible 62% operating margins in Q3, but cautions that the semiconductor cycle typically sees a pullback after 7-8 quarters of growth. While a cyclical margin pullback is possible, NVIDIA remains "very profitable." He highlights that Chinese companies trade at roughly half the multiples of US companies.

Guy stresses the critical importance of "geographic diversification" for investors, particularly in emerging markets (like India, which had an excellent 2025 and offers attractive valuations and consumer demand) and European equities (especially small caps, which are cheap and poised to benefit from AI-driven industry changes). He believes the focus of AI investment is shifting beyond infrastructure to sectors radically transformed by AI, such as robotics, drones, transport, and biotechnology, in 2026-2027. AI regulation is not a primary driver of valuation currently, but barriers to entry and technology profitability are key.

China-Japan-Taiwan Diplomatic Tensions

The diplomatic dispute between China and Japan over Taiwan is a significant geopolitical flashpoint. Taiwan's Foreign Minister Lin Chiao Long believes the dispute could "stretch on for a year," with Taipei adopting a "soft approach" to de-escalate tensions, such as encouraging travel to Japan and consuming Japanese food. He suggests Beijing also has no interest in escalation due to its economic downturn, high debt, rising unemployment, and trade conflicts with the US. Lin notes Japan's willingness to shoulder more security responsibilities, with the US, Taiwan, and Japan coordinating to defend the status quo against "Chinese expansionism." Taiwan is strengthening its defense capabilities through increased budgets, extended military service, and asymmetrical warfare.

Beijing's Perspective Victor Gao, Vice President at the Center for China and Globalization, offers a starkly different interpretation. He views the Japanese Prime Minister's recent comments as "profound," openly "threatening war against China," and tantamount to overturning Japan's 1945 unconditional surrender terms and the post-WWII international order. Gao accuses Japan of "militarization or neo-fascism," citing discussions about removing nuclear weapon restrictions and sinking Chinese aircraft carriers. He asserts that Japan must "cut off any relation with the Japanese fascism," honor its 1945 commitments, and "never develop weapons of mass destruction," warning that nuclear weapon development would lead to Japan's "annihilation."

Gao calls on the US to embrace peace with China, warning that war between the two would be "Armageddon for mankind." He trusts the communication channels between President Trump and President Xi Jinping and urges "Taiwanese separatists" to stop "betraying your own country," stating that "Chinese reunification is the megatrend of our time."

Hong Kong Housing Fire Inquiry

Hong Kong Chief Executive John Lee announced an independent inquiry, led by a judge, into a recent housing complex fire that killed at least 151 people. This addresses a key public demand and aims for "systematic reform" to prevent future tragedies. The inquiry will investigate potential "transfer of benefits, conflicts of interest and bid rigging or corruption," and review safety materials, inspection effectiveness, and penalties. So far, 14 people (consultants, subcontractors) have been arrested for manslaughter, and 12 for corruption.

Lee, facing questions about his leadership and the upcoming Legislative Council election, did not directly answer whether he should step down or confirm arrests by National Security Police related to the petition. He strongly warned against anyone trying to "exploit this tragedy" for political gain, emphasizing the importance of national security.

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Synthesis and Conclusion

The global economic and geopolitical landscape is characterized by significant uncertainty and interconnected challenges. Financial markets are navigating a complex environment of rapid shifts in monetary policy (BOJ tightening, Fed easing), volatile risk assets (crypto), and evolving investment strategies (diversification, AI focus). Geopolitical tensions, particularly the escalating dispute between China and Japan over Taiwan, pose substantial risks, with deeply divergent interpretations of historical commitments and future intentions. Meanwhile, specific industries like aviation are grappling with supply chain and quality control issues, while the travel sector is adapting to currency fluctuations and leveraging AI for personalized experiences. Underlying these dynamics is a broader re-evaluation of investment valuations, particularly in the high-growth AI sector, and a growing emphasis on geographic diversification. The Hong Kong fire inquiry highlights the ongoing need for governance reform and accountability in the face of public tragedies, set against a backdrop of heightened national security concerns. The overarching theme is one of adaptation and resilience in the face of rapid change and persistent global risks.