TOKYO -- A growing number of analysts and economists argue that a global glut of liquidity is causing asset inflation around the world. Meanwhile, forecasters are divided over the growth potential of China and Japan while they grapple with the uncertainty surrounding U.S. monetary policy and its implications. Henry Kravis, the co-founder of Kohlberg Kravis Roberts (KKR), a global investment firm, recently sat down with The Nikkei to discuss these and a range of other economic and investment issues. This is the last in a series of interviews with prominent players in the financial, policymaking, industrial and academic sectors.
Q: How will the world change in 2018?
A: The world is changing at an unprecedented speed. As the soaring prices of fine arts clearly indicate, the world is awash in cash, with companies and banks holding sufficient amounts of money. Companies need to invest more to boost their sales.
Q: Is it not that companies are unwilling to invest because there is only limited room for growth?
A: No. Look at China. Companies like Alibaba Group Holding, the largest e-commerce player, and Tencent Holdings are growing remarkably. Their spectacular growth is being driven by a wave of innovation. Money is important, but the driving force of their growth through effective use of money is bold and aggressive management backed by the spirit of not fearing failures and diversity. Their corporate cultures encourage risk taking and make it possible to learn lessons from mistakes and failures for further growth.
Q: How do you assess the competitiveness of Japanese companies?
A: It is declining without a doubt. First of all, they should become less dependent and focused on manufacturing. Traditional manufacturing should be left to countries with a large working population, such as China and Malaysia. Japan should focus its resources on high value-added industries. Japanese companies need to shed their inward-looking mindsets and take effective steps to raise their productivity.
Q: Are you downbeat about the prospects for Japanese companies?
A: No, I am not. Japan has one of the most highly trained and highly educated workforces in the world. Japanese companies can raise their productivity by divesting their non-core businesses and concentrating their management resources on innovation for their core businesses. The mindsets of the chief executives of Japanese major companies are changing. When they spin off businesses, investment funds like ours can help their management. We can offer new growth opportunities by using our global network of information gathering.
Q: The world economy expanded at a moderate rate in 2017. What is your outlook for 2018?
A: The U.S. economy, the main engine of global growth, will return to growth at an annual rate of 3% to 3.5%. The massive tax cut package and deregulation measures the Trump administration has pushed through will stimulate corporate activity and increase the corporate appetite for investment. Key emerging economies are growing steadily, contributing to creating a virtuous cycle for expansion of the earnings of American companies.
Q: Some people say the U.S. stock market's vigorous run up the charts, going from one record to another, is being powered by a "bubble." What are your thoughts?
A: I do not deny that investment indexes signal overvaluation of many U.S. stocks. But that will not directly lead to a major adjustment to stock prices. Long-term interest rates in the U.S. are below 2.5% and lower than 1% in Germany. Institutional investors have no choice but to pour into stock markets in pursuit of higher yields.
Q: Do you expect a shift in the monetary policy of the U.S. Federal Reserve?
A: Jerome Powell, who has been nominated as the next chairman of the Federal Reserve, is likely to become something like "Janet Yellen 2.0." I have no worry about the Fed's policy under Powell's leadership. He will not act like an inflation hawk as he raises interest rates gradually and cautiously. I will not be surprised if the Fed raises rates twice or three times next year. Long-term interest rates may rise above 3% but will remain low from a historical perspective.
Q: What will be the main economic risks going forward?
A: Considering the business cycle, the U.S. economy is likely to start slowing down in 2019. Artificially low interest rates will not last forever.
Q: Will the Trump presidency change the world?
A: I have known President Trump for 30 years. He is a smart man. Being the U.S. president is a tough job. But he is learning. He will continue pushing a button to make things happen in the U.S. and the world. He certainly says things that shock people, but American people voted for change when they elected Trump as their president.
Henry Kravis, 73, co-founded Kohlberg Kravis Roberts in 1976. KKR invests in over 110 companies around the world and manages some $150 billion worth of funds.
Interviewed by Nikkei staff writer Jo Kawakami