>> this is bloomberg daybreak middle east. our top stories this morning -- a ceo arrested in vancouver may be sent to the u.s. markets slump amid fears of intensifying the trade war. saudi arabia and allies trump. to defy president opec plus is on the verge of a production cut in vienna but has yet to thrash out details. crucialas theresa may's brexit vote nears, the ceo of

royal bank of scotland shares his fears for the british economy. >> i think the reality is, uncertainty will push this economy into a much slower growth than we even had in the last 12 months. that's just reality. vows toresident macron face down the riots that have plagued france for weeks, saying he will not abandon reforms. ♪ ♪ yousef: 8:00 a.m. across the emirates, 5:00 a.m. here in a very cold vienna. welcome to the show. i am manus cranny, at opec. tracy: and i am tracy alloway in tokyo, here for the bloomberg

year ahead of end. very interesting time both for the japanese economy and market and global market as well. japan possibly in the midst of its longest economic expansion in the postwar era. inflation is still trending below the boj corporate -- target and yet corporate profits are at record highs and foreign investors are fleeing local equities. we have a continuation of the volatility we have seen in recent weeks. we will discuss the outlook for international markets as well as japan in a few moments. we have some amazing guests, including kathy matsui from goldman sachs. all of that coming up. already saysroda he's concerned about issues from the global economy. i am here in vienna. it is freezing! we will be chasing the opec ministers gathering today. the foundation of a deal is

there. now it is the hubble bubble toil and trouble to get a deal. 1.8 million barrels a day. the market wants 1.3 million barrels. the issue is how much will non-opec contribute? we know the intention of the saudis, but how much will russia do? that is the question that needs to be thrashed out over the next 48 hours. and mr. hook, the gentleman in wasge of iran sanctions, here but denied having a meeting. interesting times in vienna. tracy? tracy: interesting all around. let's talk about markets. we have david ingles in hong kong. let's start with you. an ugly open for u.s. futures. david: it is still ugly, and remains ugly. the drop we saw a right at the

open, when the s&p contracts started trading, basically filtered through. the s&p contracts pared back early losses, but asia is doing badly now. hong kong, 2.6%. looking at currency markets, all you need to know, the dollar is up against the yen, but down against safe haven currencies like swiss and the japanese yen. cfo story and the arrest announced, actually arrested december 1, traders partly blame that for souring the mood, potentially on pace for the worst day in asian equity markets in about six weeks. manus: let's get straight to india. these markets are repricing growth. how is it playing out in the indian market? am: the rate change of the

reserve bank of india has offered no respite to indian equities. at this point in time, they grind lower taking cues from global markets. the nifty and sensex down as much as 1%. wefar as the indian rupee, see the u.s. dollar strengthening against the indian rupee, around nearly the mark of 71. that could be another factor playing out against indian equity markets. tracy: thank you so much for that. let's go over to debra mao in hong kong with first word headlines around the world. debra: u.k. prime minister theresa may is considering a round of concessions to win over conservative rebels and save her sinking brexit deal. she held talks with prominent

eurosceptics to solicit support. northern ireland's democratic unionist party is said to be prepared to drop support over the so-called irish backstop. royal bank of scotland says uncertainty around the brexit deal could push the u.k. into recession, as politicians continue to wrangle the deal. the ceo says it is already causing a get in investment. he says negotiations are always difficult, but little alternative to the agreement on offer. >> i have been a backer of the deal, because at the moment i don't see another deal. so from a business perspective we need certainty. you any deal where negotiate hard, you will not get everything you want. they will be things you have to give up to get something else. and for me it is how we get certainty in the marketplace, because what is starting to happen, investment is not being made. debra: emanuel macri has vowed

to face down the violent protests that have troubled friends for weeks, telling ministers measures over the last 18 months including the scrapping of a wealth tax will not be undone. but having shown a flash of weakness in suspending a plan to feel tax hike, the tough talk may not carry the same weight as before. washington has said goodbye to george -- president george h.w. bush in an emotional service at the national cathedral. the president's elder son george w. called him a man of unrelenting optimism and steadfast character. president bush was the last u.s. leader to fight in wartime. he will be buried after a funeral service in texas on thursday. global news 24 hours a day, on air and at tictoc on twitter powered by more than 2700 journalists and analysts in over 120 countries. tracy? that. thanks so much for wei's cfo has hua

provoked a storm in china just as trade negotiations with the a cripple stage. the chinese embassy in canada has called for them to rectify what they call wrongdoings. characterslain the involved in this and what we know so far? provoking a lot of outrage in china given that the deputycfo, chairwoman and the daughter of the founder of huawei. the arrest came in vancouver, canada in recent days. what we know was that this was over potential violations of u.s. sanctions against iran. there had apparently been and a quest -- a request for her to be extradited to the u.s., but that has not happened. we have not heard from the u.s.

justice department. in april it began a investigation into huawei for potential violations, saying they had sold goods, sold gear to iran in potential violation of sanctions against exports sold to iran. that's really all we know at this point, whether she will be extradited in the coming days, we don't know, but there is a request for that. of course, the chinese are expressing their outrage over to , saying that this needs be sent back to china, that they of this as a real violation the standards of, international standards. we see this playing out, of course, just days after we got word from the g-20 of a 90 day truce in that trade war between

u.s. and china, and that there would be no additional tariffs for 90 days while they try to work out an agreement. this arrest would certainly seem to come looking those trade negotiations. jodi schneider, thank you so much for that. that is a story we will be following through the day, but first let's get over to our guest. u.s. equity futures had a volatile start to trading with data indicating the cme group had to pause trading in u.s. futures. asian stocks are down this morning, and the question of the day, how concerning is today's ugly session? maisoneuveirginie joining from tokyo. we had the huawei sidelines --headlines and then this they drop in futures.

it really feels like you markets are trading off the short-term headlines. arrest, what is interesting is the timing, just a couple of days after the good trade news, and then the fallback. i think what's really interesting if you are a tog-term investor is actually think about where you take advantage of that volatility. and of course the market is very nervous about, you know, the odd market in particular. three-year,at the five-year versus the 20-year and 10-year, my view is that this is not it, we are not entering recession. my view, this is the result of surprises. the market doesn't like surprises, and right now we are in what i call yo-yo land if

you want. part of it is political, parties geopolitical. but if you strive to think of what happens over the next 18 months, most likely you will see peak rates. we think we will have two or three rate hikes. but the world economy is slowing, the u.s. economy is slowing quite dramatically, and not without risk of recession. but we don't think we will go into a recession. so i think what you do in this environment, you must for one structure your portfolio properly, meaning having some low volatility, some nice assets, diversification, but also take advantage of the depth of volatility and the surprise, if you want. almost like the markets are "ground control to major trump." we just want a little stability here, and that is what you saw last week with this illusion of good news on trade.

tracy: we have the fed beige book overnight that showed some caution creeping into the economy. there is some concern on the u.s. yield curve, of course. can u.s. exceptionalism last into 2019 in terms of this asset? virginie: my view is the u.s. economy will slow down. it's not going to go into a recession, but it will slow down. you'll have to face that fact. second, the positive impact of fiscal stimulus, you know, is slowing down basically. but that is not a bad thing, provided the rest of the world is also slowing, so you have a reorganization of the global economy on a slower pace. the key thing, if you go back to the peak rate, what the dollar does, what i call the clash of the titans, the trade war between the u.s. and china being more of a competitive race in my view around technology than

trade, you have to see how that plays out and it will be a volatile ride. if you look at the bond markets, the two-year and the 10 year are still positive. clearly, you have had cases of inverted curve, markets doing if you look at-- 1988, 1998, 2005, you had markets in this environment. i don't think we are there yet. the employment situation is still positive in the united states, so we should expect two or three rate hikes, and then we have to watch the wording of the central bank very carefully. but my view is that they will signal over the next six months. manus: this is manus cranny in vienna. good to see you this morning, in

asia running on full cylinders. talk to me about china. it lost $2 trillion in market value. you suggest we might see more policy response from the chinese. what do you expect from the chinese markets, and what risk do you want to take there? virginie: well, that's really interesting. i just came from shanghai, actually, for the opening of our business ceremonies, so we are very excited about china for the long-term. spring already has a presence with citic, but we are bullish long-term. what does that mean? reaction to the slowdown, as we continue to shift the economy toward a service economy. we are going to see more favorable measures towards consumption, probably small and

medium-sized enterprises, and some caution in terms of reengineering growth towards investments. as we know, that's not really the goal. but if you look at spending, possibly in buying, agricultural, land, there is a shift. if you look at the chinese policy, china 2030, both in terms of building this harmonious economy, being an ai leader, there are some challenges china has to overcome. at the same time, it has a lot of tools and flexibility. with the changes in benchmarks, potential added liquidity, additional rate cuts, i say there is further weakness in the first half of the year, and people should position themselves to be in that market. iusef: virginie maisonneuve, am afraid we have to leave it there. although you will be joining me in a little more than an hour at

the bloomberg year ahead event. before that, theresa may and her crucial brexit vote. the ceo of the royal bank of scotland shares his fears of the economy. manus: saudi arabia and allies are set to defy president trump's call to keep the cap soap and. the latest on opec+ next. this is bloomberg.

manus: saudi arabia and allies representing -- recommending a curb on oil production, rebuffing a tweet from president trump to keep the taps open and prices falling. at a meeting in vienna, the opec+ group secured russian backing for six months of reduced output from january. although specific cuts were not discussed. onenal agreement could see million barrels a day removed

from the market. the ceo of lukoil, russia's largest nonstate owned oil company, says he's hopeful there will not be a need for a large cut, speaking exclusively to annmarie hordern. the temperatures in western siberia are around -30, -40 celsius. the water cut of the fluid produced is around 80% to 90%. for 2017, it took 4-5 months to meet the cuts set. so once again, the discussions are taking place right around the times when the weather is most severe for our region. so basically, if the decision is made to cap -- cut down on production, it will take 3-4 months to actually reach the requirement. >> so at least march or april of next year?

>> once again, i hope that maybe these measures won't be necessary, because as i already mentioned, the price is already where it should be, to my opinion. on thetrying to cut down inventories, so the production cut is not fundamental the inventories is what we are working with. >> january 1, new year. where do you think oil will be trading? >> i believe there won't be a dramatic change. >> so the 60's? >> guests. -- yes. manus: that is the voice of lukoil's ceo. let's get to our energy reporter in dubai. anthony, it seems the intention is there, but the bogeyman in the room, nobody wants to talk about cuts. the market wants 1.3. what is the reckoning at the moment? all about russia? anthony: good morning.

it is about russia agreeing to some cuts, some substantial cuts that will not leave the saudi's with all the heavy lifting. that is what the saudi arabian energy minister wants to avoid. he wants a consensus spreading the cuts around the group. a lot of the others will say it was the saudis who ramped up production after june when opec exited a period of strong cuts, and the saudis should take the majority of the market. the saudis of course are most susceptible to the tweets from donald trump. we saw them today, and i expect we will see them again soon. we see some debate about what those numbers are, so you will be watching that as it unfolds in vienna. it is tracy alloway here in tokyo. i wanted to press you on those donald trump tweets. he's obviously not in vienna,

but he is sort of the elephant in the room of the opec meeting, saying hopefully opec will be keeping flows as is, not restricted. is opec and particularly saudi arabia going to listen? anthony: good morning, tracy. there's a lot of risk for both parties in making the cuts. from one point, donald trump is looking for lower oil prices. we are already seeing that that's hurting some of the shale producers. some of them were getting back to making some money, but it will take a bit longer now. donald trump wants to make sure he doesn't curb any of that u.s. production growth, which has been helping that energy independence or less-dependence on imports that he is so proud of. from the saudi point of view, some ofwill also erode the market share, so that's a real risk for them. the other opec members bringing production on, even the uae,

they have plans to increase production, and they don't want to see opec cutting back, losing market share to the u.s. producers. coming seen more shale on the market than we have seen demand increases forecast for next year. so if opec takes the brunt of that, that indicates that will be some market share last, perhaps more difficult to call back in the future -- claw back in the future. manus: one of the stories in the streets of vienna, brian hoke was here, the iran sanction and if you want to give him -- sanction man if you want to give him a headline. i will have a conversation with barclays later on, and they say this is the issue. waivers will run out in 180 days. lower oil price, this could exert more pressure as it were on the waivers. they are a critically important part that we aren't spending a great deal of time talking about this morning. anthony: that's a great point. it's interesting, the meeting. as the lukoil ceo pointed out,

it may take a couple months for some of those producers to make those cuts. by the time that oil starts coming off the market, we should iranian more imports of crude oil by those buyers given waivers, we should see those ramping down, because the six-month waivers will be running out. the purchasers will have to show another decrease in their imports from iran. i met brian hoke here in dubai that a month ago, and he was saying that already two of the countries given waivers had reduced their imports to zero and would not be resuming. they said a third would be fully cutting its imports by the end of the year, so down to effectively five countries only importing crude oil from iran. of those, the europeans, italy, greece, they are small importers, so we are left with three main buyers. india, china,, and turkey, of iranian crude.

we will see that potentially coming to a head towards the end of the first quarter of next year. manus: well, these equity markets are certainly under pressure. let's see what opec and non-opec can do to put a bit of a floor in the oil market. anthony, great reporting. let's get a quick check on the business flash headlines. debra mao is standing by. good day. debra: good day. is showinglarkin flagging demand. the taiwanese company declined to name customers that say that demand is weak, but clients include apple and huawei. they reported sales of $130 million in november, a fall of 25% year on year. several technology companies indicated weakening demand for the new iphone range. marriott slumped after saying it is too early to put a price on the massive data breach it announced last year. the company released that the

personal data of up to 500 million guests was compromised in the hack of starwood hotels. the total bill from the breach could be estimated to cost $1 billion. google's self driving car spin off is finally ready to justify its decade-old drive. waymo is introducing a small-scale ride-hailing service in phoenix that will include a human behind the wheel in case of malfunction. it is a milestone for a company that began as a secretive project in google in 2009. cars have, robot logged more than 16 million kilometers on public roads. manus: there are lingering doubts in this very christmasy city that a deal can be done. oil markets are under pressure. the tweet-storm has started from the united states. trump wants the taps left open, at least 1.3 million barrels according to cibc.

if you want a floor in this market, that is what this city is demanding and the markets. we return to tokyo with barclays' securities japan chairman, mr. kodama. ♪ ♪ there's no place like home ♪

argh! i'm trying... ♪ yippiekiyay. ♪

mom. ♪ manus: 11:30 p.m. in downtown, midtown new york i should say. s&p futures are down 1.9% at the open. the cme, intermittently caused having lost $3 trillion of value since september. more pain to come in cording to invest -- according to investec. the pricing for growth? that is the debate over the next 3.5 hours from dubai, tokyo and vienna. let's get to debra mao with first word headlines. good day. debra: china's embassy in ottawa has asked canada to free huawei cfo meng wanzhou, who was

arrested in vancouver over the weekend. the u.s. is seeking her extradition in connection with potential sanctions violations in iran. a bail hearing is set for friday. the company says they are not aware of any wrongdoing by meng. in april, the justice department began investigating whether huawei sold equipment to iran despite sanctions. saudi arabia and analyze are recommending a curb on oil production, rebuffing a tweet from president trump to keep taps open. secured russian backing for six months of reduced output from january, although specific cuts were not discussed. a final deal could see one million barrels a day removed from the market. u.k. prime minister theresa may is said to be weighing a range of concessions to win over conservative rebels and save her sinking brexit deal. after losing three votes on tuesday night, she held talks with prominent eurosceptics to solicit support.

the northern ireland democratic unionist party is said to be ready to drop support for the government over the so-called irish backstop. the european union wants internet companies including google, facebook and twitter to file monthly reports on their progress banning russian backed fake news from their platforms ahead of elections next year. e.u. officials say they will add a rapid alert system, increase budgets and add expert staff and tools to combat the spread of misinformation. lion air says it feels betrayed by boeing over october's fatal crash and is threatening to cancel upcoming orders. a preliminary report from the indonesian transportation regulators didn't specify the cause of the disaster, but said lion air needed to improve its safety culture. boeing issued a lengthy statement including questions about the carrier's maintenance of the doomed plane. global news 21 hours a day, honor and -- 24 hours a day, on air and at tictoc on twitter. i am debra mao.

this is bloomberg. let's get to david ingles for a look at the markets. david: not a lot of good news to tell you at this point. session lows. msci asia-pacific down 4% from monday, and it is fairly broad-based. i had a look at my bloomberg here. well over 90% of large caps are lower today, and essentially what you are looking at, spelling it out quite clearly. the biggest three-day drop here in about seven weeks, taking you back about two weeks on the index. as far as bigger movers on the index, let's get to sector groups. that is a look at today. again, it's hardware, i.t. yesterday the story was apple and the slowing demand for the iphone. today, the iphone story persists, and then there's the huawei story, with the likes of zte also being sold, anything related to while away survivors

-- huawei suppliers. zteei is a private company, is not. essentially, the narrative is huawei and zte need to step back. are it comes to 5g, they the providers. ericsson step in? these bottom two are are the biggest suppliers for the likes of nokia. the korean supplier up 2%, tells you everything you need to know about that story. tracy: yes, it does indeed. david ingles there. let's stay with market volatility, and talk about how one big bank is dealing with that. barclays managed to turn around its japan business in the last fiscal year after three years of losses, giving it confidence to

boost operations and hiring. so can that turnaround continue? can that momentum be continued in the face of multiple market risks? we are joined now by tetsuya kodama, chairman of barclays securities japan. thank you so much for being with us this morning. we are talking about market volatility. goldman sachs says it is handling it well. how is barclays handling it? tetsuya: i think i have to talk about two things. in general, we are handling it well. yes, we had a difficult patch the last couple years, but i think that globally we feel we are at now in the right places, the right business. i think controls are in place. and being an intermediary, sometimes you do need a certain amount of volatility to kind of be able to be profitable. i think we are in the right place. tracy: i think you know what i might be asking you, in terms of the risks. one of those has to be brexit.

plenty of japanese companies have corporate treasuries in london. what are you seeing from clients when it comes to greg's it -- brexit. tetsuya: i think it's a major concern for japanese clients. what we have been doing with british institutions, of course in london we stay in close touch with the government there, and in tokyo we stay in close touch with the british embassy and the japanese clients, to hear their real feelings about this. yes, it is real anxiety. what i would say, they are hoping that common sense will prevail. but on the other hand, i think that we are working very closely with our clients and in london. there is an element, you have to make sure you are ready to take whatever risk we might see, or volatility we might see in the coming months up to march 29. tracy: so brexit on one hand, trade tensions on the other.

how are you retooling business offerings to clients to take those risks into account? tetsuya: on the trade risk, i would say that's more of a global economic risk. i think that's pretty macro. ministerepeat what the said in his speech, that it's cautiously optimistic, because although politics is sometimes not logical, if it becomes very heated, it doesn't help anybody, and there is some kind of common sense prevailing, one way or another. because that is something slightly beyond their control. tracy: right. i mentioned briefly that barclays japan had a very impressive turnaround. part of that has come through hiring additional employees. is there more to come on that front, and what areas are you targeting? tetsuya: i think that's a very good question, and i think it will be a very boring answer. what we have done as a group, and also focusing in japan, we

decided to make sure we are the right size for the new environment, the regulations and everything, and also very much in the right way linked to a global platform. now, what we have to do is focus on what the client cross-border, in and out between japan and other parts where we operate. there's not going to be a major announcement, but i think it will be mostly incremental. we will make sure, if we had demand and need from the clients, we will make sure we meet that demand if necessary by making additional investments. tracy: what about the flip side of this? the flip side of expenditure, that has to be reducing cost, increasing efficiency. is there more to come in cost cuts? tetsuya: we can't say never. but on the other hand, one thing i can say, part of the management in asia-pacific, is not go through

all the pains that our 2016, and weid in knew we had to make a major change, but that was done to make sure we had a solid, stable platform to cope with future risks, future opportunities. the short answer, we feel all the way from the top in london to branches in asia, we have done what is necessary. of course, we will be vigilant about expenses, but i don't think we are much concerned we need to trim further on a major scale like before. tracy: you are here at the bloomberg "year ahead" event to talk about the future of banking, particularly in japan where there are some headwinds, such as low interest rates. the outsized presence of the boj. we also have demographics, which don't necessarily bode that well for a banking business. what is the future of banking here in japan? tetsuya: banking here in japan i

think is two things. one, we are a wholesale bank, so for some but he like barclays that doesn't have a retail presence, the main focus will be to kind of connect japan with the outside world and be the intermediary to make sure there is an efficient flow of money, business and people. the challenge really in japan, the retail, local banking business. there, i think there's still more work to do to create more efficiencies, and also there is a need, as we talked about, to bring in technology to help that efficiency. tracy: pinning hopes on technology. we will have to have you on to discuss that more, but that's all we have time for now. thank you so much, tetsuya kodama. chairman of berkeley securities in japan. up next, more from the "year ah ead" event, speaking to kathy matsui, goldman sachs japan vice

chair. this is bloomberg. ♪

manus: let's get you up to speed on some of the markets. we have our bloomberg partner standing by in mumbai. emerging markets under pressure this morning. how is india? >> no different to be honest. good morning to you as well. no different from the rest of the emerging markets. lower.ld argue, about 1% all the key indices are in a fair degree of red. a key concern could be the way ,he currency has depreciated extending weakness and now at 71 rupees to the market. a rumor yesterday forced some stability in the rupee and strength in the bond yields that has dissipated today. without exception, all the key

performers, all the key stocks are in the red, key indices in the red, exactly in line with what asian counterparts are doing. back to you. not a pretty day in markets at all. speaking of that, asian stocks continue to suffer as investors limp towards the end of 2018. there has been volatility in plenty of markets. here in japan, the nikkei is extending this week's selloff. outlook iser 2019 goldman sachs japan vice chair kathy matsui. so nice to see you this morning. let's start with volatilities we saw in this morning's session. a really ugly opening for u.s. equity futures. it seems like we get more volatility on a daily, weekly basis. what do you think is driving that? kathy: a combination of factors. obviously, if we look at the broader picture, there is a

deterioration in the environment for risky assets, specifically equities, namely that for this duration, an extended bull market in global stocks, we have had above-trend growth with very limited, low inflation. now that growth and inflation mix is already beginning to deteriorate. rates going up in the united states. look at global growth momentum, forecasting gdp growth globally to slow to 3.5% next year from 3.8% in 2018. so naturally, investors having enjoyed quite a goldilocks type of environment are becoming increasingly wary and nervous about what's to come. and of course, on top of that we had issues related to the vote on brexit coming up, employment data in the united states. a little sigh of relief are now on trade tensions between the u.s. and china, but who knows? is theension to march 1,

u.s. going to be happy with what china comes up with, or is there going to be at the end of the day an ultimate increase in tariffs on chinese goods? so lots of uncertainty going into the year end. obviously, people are very worried, causing a lot of the jitters we see in markets. tracy: from goldilocks to the bear market. let's focus on japanese stocks in particular. you point out that japanese equities have more than doubled since abe-nomics began, but we have also seen lots of foreigners pulling out this year. is the bull market over? kathy: our conclusion is not yet, but we think the juiciest returns so to speak are probably behind us, given that again the length of the cycle is already quite long. we have had extraordinary quantitative easing. most of that is again already behind us. so what we expect going forward is as long as there is no recession in sight, and that is

our base case, it is unlikely corporate profits are going to fall. if corporate profits don't fall, and actually expand into 2019, even with no assumption that p.e. multiples will expand, just staying flat, we think there is moderate upside left for japanese stock markets. we have a topix target of 1800, into nextths, a dip year. in a global context, not so bad. you pointed out that foreigners absolutely dumped their japan exposure, ¥11 trillion this year alone between futures and cash. most investors we speak to around the world tell us they have very limited or minimal exposure to the stock market. so if global growth is ok, if japanese profits can continue to grow, the policy environment will remain relatively benign in

2019. we think the risk-reward for the stock market here is relatively attractive. tracy: you mentioned the base case is not for recession in japan, but we have two big potential economic headwinds on the horizon, in the form of the boj maybe tapering the qe program, and a consumption tax hike. how are those going to play out in the economy and the markets? we do not expect any meaningful change to the current monetary framework that the boj is pursuing, primarily because if you look at the inflation 2%,et the tank has set, which we are still quite a ways. away from secondly, you mentioned the v.a.t. hike. a consumption tax, adding to that mix monetary tightening when the cycle has been so long in the tooth,, with global uncertainty building, that's not a really good combination,

especially going into perhaps very important elections july of next year. politically, i think the desire of policymakers will be, don't mess anything up, try to keep things smooth as long as possible, so we don't expect any meaningful change from the bank of japan. there could be some tweaks, targeting the 10-year, but tweaks as opposed to a big change. , a lot of people were fearful of the consumption tax and implications thereof, but that's why the government has been coming up with measures to mitigate the negative repercussions of the tax hike. japan learned very painful lessons the last go around, 2014, 1996, extraordinarily painful, much more negative than forecasters anticipated, so therefore they will exclude for example food items, come up with others, subsidies to help cushion that blow in october of next year. it is still a negative impact, no question, but a lot of steps

will be taken to try to smooth the impact on the cycle. tracy: you mentioned politics. let's talk about the interplay between japanese politics and structural reforms of the economy. there is a sense among some commentators that abe will be laser focused on constitutional revision as opposed to a lot of the economic reforms he has undertaken, as he progresses in his time as prime minister. how do you see that playing out? kathy: i think that is correct, that he's going to be very focused, prioritizing ultimately and the partyhe would like to make vis-a-vis the constitution. but remember, that's not, the prime minister says we can change the constitution and the next day it is changed. first you need a national referendum. every japanese person has to vote on this. to call a national referendum, you need to thirds support in the upper and lower houses of the diet, which some people say

we are there, but i think it is still very unclear. first off, you need people feeling good about life, feeling good about the direction of the economy, before you can even contemplate going down that path. so i think it's almost facetious to assume we can just focus on the constitution, forget the economy, let it go on the wayside, let asset market crash and it will be fine. those things are not exclusive. the ultimate challenge for the government here will be how to maintain the growth. it has been a very long cycle, as we discussed. how to keep it going. we have trade friction. we have currency risk. we have so many risks globally facing japan, so within that makes of challenges -- mix of challenges, can the japanese economy continue on a steady path of expansion? looking at work reforms next april, bringing in 500,000

foreign workers into the nation, lots of things he's trying to push vis-a-vis structural reforms. but again, he ultimately does need solid political support to get any of this done. tracy: kathy matsui from goldman, i am afraid we have to leave it there. you will of course be joining me on stage in a little bit. up next, of course, brexit. we have an exclusive with the rbs ceo. you can hear that next. ♪

>> we're certainly in a very tense political moment, with the vote next week on the proposition the prime minister has negotiated. it looks like the politicians have some big decision-making to be made. the big thing for me, how do we build some certainty into this market place? because you are seeing the equity market off again today, stocks off 20% this year, pretty

much all on the backend of what will happen to the u.k. will there be a deal? the uncertainty is the issue. >> and you urged mp's to back the deal that goes to parliament. what happens if he doesn't get backed? >> i have been a backer of the deal, because at the moment i don't see another deal. from a business perspective, we need certainty. with any deal you negotiate hard over a long period of time, you aren't going to get everything you want. there will be parts you have to give up to get something else. for me it is around how we get certainty into the marketplace, because what was starting to happen, investment is not being made. larger companies are not investing for the long-term at the moment. wanting to see some certainty. that is what i think is really important for the u.k. economy, to build some certainty. i think it's really now in the hands of our mp's. there is a deal on the table. make your mindset, do you want

it or not? >> sme's, if we have a worst-case scenario with a hard brexit, are they ready? >> i don't think they are. the conversation we had with our business clients, remember, we are the largest lender to the business economy. the bank might be ready, but many of our customers are not ready. they don't understand it, the ramifications. we have been talking to customers for the last 3-6 months to say, what are your contingency plans? there are very few with firm contingency plans. many have thought about it. for example, if you are in the construction industry, importing things from europe, where are the storage areas i can store these goods, if i do need a three-month supply chain extension, where do i store? these are the issues many businesses looked at and just didn't know how to work through. >> do you see a recession

coming? >> i think if we don't get a certain position, i think there is a chance this economy will go into recession. i know anyone who says that says -- i think the reality is, uncertainty will push this economy into a much lower growth then we even had in the last 12 months. that's just reality. i said that actually two years ago when we were asked what brexit might look like. i said, i think you'll see a slowdown. i think you are just seeing the ramifications starting today. >> what is the percentage chance of a hard brexit? >> when we looked last ended our own review of the last quarter, we said there was probably a 20% chance of a hard brexit. at that point in time, we had to make a provision against the modeling we had.

i think that took the market by surprise. showay it works, models something that could be negative, we have to start preparing to take that charge. there will be maybe even a higher charge if we get no deal whatsoever. ♪ ♪ there's no place like home ♪

argh! i'm trying... ♪ yippiekiyay. ♪ mom. ♪

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