Episode summary
The AI Divide Between the U.S. and Japan
Thoughts on the Market (Morgan Stanley)
· · 11 min · Hosts: Robert Feldman, Michael Gapen
Summary
The episode argues that AI is likely to affect the U.S. and Japan very differently because their economies start from different labor-market conditions. In the U.S., the guest says the key question is whether AI mainly replaces labor or augments it; if it behaves like a general-purpose technology, it could lift output and productivity while leaving employment near full employment, which would support risk assets. The guest’s baseline is optimistic, with AI diffusion fast enough to matter but slow enough for the labor market to adjust.
The guest says AI’s contribution to U.S. real GDP growth could rise from about 0.05 percentage points in 2024 to 0.43 percentage points in 2027. He also warns that if diffusion is faster than expected, investors should watch for rising layoffs, higher unemployment, and underemployment. But he argues that AI should also create new tasks, new jobs, and wealth effects through stronger equity performance, which can offset some lost labor income.
For Japan, the discussion centers on labor scarcity, low unemployment, and wage pressure. The host argues that a 10% productivity gain could produce very different outcomes depending on market flexibility: either deflation and weaker employment or higher wages and more jobs. The guest says Japan needs more reskilling, and that the race there is between labor scarcity and productivity.
Key takeaways
- The guest expects AI to raise U.S. real GDP growth, with its contribution increasing from about 0.05 percentage points in 2024 to 0.43 percentage points in 2027.
- In the U.S., the key market risk is whether AI replaces labor faster than workers can be reallocated, which would show up in higher layoffs, unemployment, and underemployment.
- The guest’s base case is constructive: AI should behave more like a general-purpose technology, supporting productivity, equity markets, and credit markets without a dystopian labor shock.
- For Japan, the host says the same productivity gain can lead to either deflation and weaker employment or higher wages and more jobs, depending on labor and goods-market flexibility.
- The guest says Japan needs more reskilling because a healthy, older workforce can work longer, but staying productive requires new skills.
Notable quotes
“the real crux of the issue over time in the US and therefore what it means for financial markets is ultimately whether AI is labor replacing”
“we think ultimately it'll benefit markets greatly similar to what we saw from the mid90s uh to the early 2000s”
“the crucial element really is the flexibility of goods and labor markets”
“in the US the race is between diffusion and absorption. But in Japan it's between labor scarcity and productivity”
How the episode opens
Welcome to Thoughts on the Market. I'm Robert Hilman, senior adviser at Morgan Stanley MUFG Securities in Tokyo. — And I'm Michael Gapen, Morgan Stanley's chief US economist. — Today, we'll discuss why the US and Japanese economies may react differently to the AI productivity test. It's Thursday, July 9th at 8:00 p.m. in Tokyo
And 9:00 a.m. in New York. AI is the biggest theme around the world right now.
But AI will play out differently in different economies. Take the cases of the US and Japan. In the US, it's already a catalyst in investment, imports, productivity, and the labor market outlook.
But here in Japan, it's seen as a savior for an economy with an intense labor shortage, low unemployment, and very little room to raise labor force participation. Mike, in the US, AI's contribution to real GDP growth will rise from about 0.05 percentage points in 2024 to an estimated 0.43 percentage points in 2027. What does that mean for markets?
Well, Robbie, I think it it means a number of things, but you know, I'm an economist, so the answer is always it depends. I I think the the real crux of the issue over time in the US and therefore what it means for financial markets is ultimately whether AI is labor replacing and pushes the unemployment rate higher or it acts like a more traditional general purpose technology that's labor augmenting. So if if that's the case, meaning it looks similar to the internet and digital era, then it would mean faster output growth, stronger productivity growth, but still an economy that's running at or near full employment.
That would be very beneficial in our estimation for risk assets, equity markets, credit markets, and it would probably mean that we stay in an interest rate environment that's certainly higher than it was during the post GFC period.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai adoption
- us vs japan economic growth
- labor market
- productivity
- workforce disruption
Watch the episode
Watch “The AI Divide Between the U.S. and Japan” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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