tag:blogger.com,1999:blog-36257892507030338172023-11-16T08:14:57.999-08:00Asia Economy WatchUnknownnoreply@blogger.comBlogger22125tag:blogger.com,1999:blog-3625789250703033817.post-86687301260533617982008-02-19T06:29:00.000-08:002008-02-19T06:30:11.767-08:00China Inflation January 2008China recorded an inflation rate above 7 per cent in January – the highest in more than 11 years and providing evidence of entrenched inflationary pressures.<br />Consumer prices rose 7.1 percent in January from a year earlier, <a href="http://www.stats.gov.cn/english/newsandcomingevents/t20080219_402463161.htm">the statistics bureau said today</a>, after gaining 6.5 percent in December. January's consumer prices climbed 1.2 percent from December.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi72YYjVuT39byUiAazUhUqSKGoBO7voxeS178R3gKh9_rxx21Yd6aiWqJ5CAC4wHGBcIAaQMY_qVMq7m8hTyH0nTUgG8EfSx8aE2w9dnJKZIarZLwn3yF4AIghTYazksAihWripIGq2tI/s1600-h/china+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi72YYjVuT39byUiAazUhUqSKGoBO7voxeS178R3gKh9_rxx21Yd6aiWqJ5CAC4wHGBcIAaQMY_qVMq7m8hTyH0nTUgG8EfSx8aE2w9dnJKZIarZLwn3yF4AIghTYazksAihWripIGq2tI/s400/china+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5168676192864399154" /></a><br /><br />Widespread expectations of a significant jump in retail inflation had been reinforced yesterday when manufacturing producer prices hit a three-year monthly year-on-year high of 6.1 per cent, mainly as a result of winter transport bottlenecks and higher commodity prices. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjL_924tz2cVljCWrBcv_DENZF9Jhe1z1uvXXgU7jTz5W4qBp5TC1HKxGnOeYvzTM6dM2pZCvvx87gIpfnN6edx5L1911hVoF18x5TChK-wtMn8_Yh9x0Irc-TmtboNiRh8VEa_ea6D298/s1600-h/china+PPI.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjL_924tz2cVljCWrBcv_DENZF9Jhe1z1uvXXgU7jTz5W4qBp5TC1HKxGnOeYvzTM6dM2pZCvvx87gIpfnN6edx5L1911hVoF18x5TChK-wtMn8_Yh9x0Irc-TmtboNiRh8VEa_ea6D298/s400/china+PPI.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5168691766415814466" /></a><br /><br /><br /><br />There are signs that global inflationary pressures have been fuelling higher Chinese food prices. Global prices for top-quality spring wheat - for example - have jumped by 90 per cent in the past six weeks, as corporate consumers have scrambled to secure supplies and speculators have bought stocks. The rising cost of pig feed is another example, and pork prices climbed 59 percent, edible oil 37 percent and vegetables 14 percent. Even more preoccupying is the fact that this process might now endure well into the year – creating a further headache for Chinese policymakers.<br /><br /><br />The breakdown of the CPI is also interesting, food, with a weighting of about 25%, is obviously important, and the price of foodstuffs increased 18.2 percent. Of this total, the price of grain was up by 5.7 percent.<br /><br />On the other hand clothing was down by 1.9 percent year-on-year. The price of household facilities, articles, and maintenance services rose by 2.1 percent year-on-year. Of which, the price of durables rose by 0.7 percent, but household services and upkeep surged by 10.7 percent.<br /><br />The price of health care and personal articles increased 3.2 percent year-on-year. The price of western medicines increased by only 0.5 percent, while that of traditional Chinese medicinal materials and medicines was up by 11.4 percent.<br /><br /><br />The price of transportation and communication dropped 1.1 percent, with transport alone dropping 2.9 percent. Communication prices fell by 19.6 percent. The price of recreational, educational and cultural articles decreased 0.3 percent. Of which, price of tuition and child care increased 0.5 percent; that of teaching materials and reference books dropped 1.3 percent; that of expenditure of culture and recreation increased 2.1 percent; that of tourism and outgoing was up by 5.1 percent; and that of cultural and recreational articles dropped 0.7 percent.The price of articles related to residence expanded 6.1 percent over the same period of the previous year. Of which, price of water (5.5%), electricity (5.7%) and fuels (4.7%) all up strongly.<br /><br />Inflation has soared since last year on food and fuel costs, but it is important to note that wages were rising by a very rapid 22% on a national basis in Q3 2007, and a surging money supply increasingly poses the risk that these price gains may become self-propelling.<br /><br />The threat of enduring inflation will add significantly to the pressures on Beijing to allow an even faster appreciation of its tightly managed currency. Food prices soared 18 percent after blizzards paralyzed transport systems and destroyed crops. The government faces the challenge of curbing inflation without derailing the expansion of the world's fastest-growing major economy<br /><br />The renminbi, which has risen by about 13 per cent against the US dollar since mid-2005, has been rising more rapidly recently, in-creasing at an annualised rate of about 19 per cent in January.<br /><br />As a result, China’s central bank is, technically, losing billions of dollars a month on the foreign exchange reserves it invests in US dollar instruments because it is paying higher rates at home on renminbi bank bills than it is getting in the US. The key one-year lending rate is 7.47 percent. <br /><br /><br />With interest rates on the back burner, a higher renminbi has become an important weapon for the government to fight inflation, by lowering import costs of oil and other commodities as well as soyabeans. Eighty per cent of soyabean imports are used for pig feed. <br /><br />Although higher Chinese costs and currency appreciation will inflate its export prices, China is still importing inflation rather than exporting it at the moment, say economists.<br /><br />“If anything, what is happening in the US is affecting China rather than the other way around,” said one Beijing-based economist is quoted as saying.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3625789250703033817.post-20445473688127308042008-02-18T01:39:00.001-08:002008-02-18T01:39:47.636-08:00India Price Inflation February 2 2008India's wholesale inflation slowed at the start of February as prices of vegetables and pulses fell. Wholesale prices climbed 4.07 percent in the week ended Feb. 2 from a year earlier, slower than the previous week's 4.11 percent, the Ministry of Commerce and Industry said today in New Delhi.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEip0hEGgoZSYj5ObHFjA3m_C_zg2TvZt9JI_y65xYOA5SMh33hW9eOlaAfPPYMAx0YmsfFH8qGQTgAcfqVGfO6Me7tbxL5hCaPtPD8I5k7_01a_-8Gi04Lou0CVFFjHd5z1JGR3b_IyYgIr/s1600-h/india+wholesale+prices.jpg"><img id="BLOGGER_PHOTO_ID_5167113477603683698" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEip0hEGgoZSYj5ObHFjA3m_C_zg2TvZt9JI_y65xYOA5SMh33hW9eOlaAfPPYMAx0YmsfFH8qGQTgAcfqVGfO6Me7tbxL5hCaPtPD8I5k7_01a_-8Gi04Lou0CVFFjHd5z1JGR3b_IyYgIr/s400/india+wholesale+prices.jpg" border="0" /></a><br /><br /><br />Slowing inflation may be temporary because Prime Minister Manmohan Singh yesterday approved raising retail fuel prices for the first time in 20 months. India's central bank kept interest rates at a five-year high on Jan. 29, citing concern that fuel and food costs may fan inflation in Asia's third-largest economy.<br /><br />Higher borrowing costs are putting a brake on demand for homes, motorbikes and other consumer durables, and this is significant since consumer spending has been a key driver of India's economic growth in recent times. Bajaj Auto - India's second- biggest motorcycle maker - reported recently that sales fell in January as local demand declined. Sales of motorcycles, three-wheeled auto rickshaws and scooters fell 16 percent to 192,193 in January from 229,583 a year earlier. That aggregate number included exports of 43,533 units, a gain of 9.3 percent.<br /><br />But there seems to be something of a tussle going on between the Finance Ministry and the Central Bank over what to do about the situation. India's government announced on Feb 7 that India's economy may well only expand by 8.7 percent in the fiscal year ending March 31, which would be the slowest pace in three years, and the slowdown is in part the result of higher interest rates, and in part a consequence of the higher rupee, which makes India's exports more expensive.<br /><br /><br />On February 12 Finance Minister Palaniappan Chidambaram asked state-run banks to provide more loans for the purchase of homes and consumer goods after asking banks to cut interest rates last month. But it is not clear that they are of the same mind over at the Reserve Bank of India. Inflation is constantly being stressed, and needs to be brought down further, according to central bank Deputy Governor Rakesh Mohan yesterday in New Delhi, speaking just before the announcement of a fuel-price increase. ``The inflation rate is still high by global standards," he is quoted as saying. The Singh cabinet approved raising the retail gasoline price by 2 rupees (5 U.S. cents) a liter and the cost of diesel by 1 rupee a liter,yesterday.<br /><br />Previously, the government had capped fuel prices and lowered import duties over the past year to curb inflation. It hadn't allowed any rise in fuel prices since June 2006, even as the cost of crude oil surged 57 percent last year and climbed to $100 a barrel in January.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-34879154795867843602008-02-18T01:33:00.000-08:002008-02-18T01:34:11.796-08:00Toshihiko Fukui's Term At The BoJToshihiko Fukui will retire as governor, after five years at the helm of the Bank of Japan, on the 19th March. His successor <a href="http://www.reuters.com/article/companyNewsAndPR/idUST34828820080218">may well be announced this week</a>. This morning in the Financial Times David Pilling <a href="http://www.ft.com/cms/s/0/1c165f0a-dd76-11dc-ad7e-0000779fd2ac.html?nclick_check=1">has a long, and very "fair and balanced" asseessment </a>of Fukui's time at the BoJ, which is more than worthwhile reading for those of you who would like to understand the workings of this venerable institution just a little better. As Pilling's concluding paragraphs make clear, what would seem to matter most in this case isn't so much what just happened, as what gets to happen next:<br /><br /><blockquote>“Fukui has often been portrayed as chomping at the bit to raise rates,” says Ben Eldred of Daiwa Securities “The truth is that Fukui’s BoJ has been fairly pragmatic – waiting until relatively late in the economic cycle before raising rates, doing so only very gradually and pausing as soon as it became clear that the global economic outlook had worsened in 2007.”<br /><br />The pause to which Mr Eldred refers has lasted a year. As well as a response to international circumstances, the delay also reflects the failure of the domestic economy to click into gear as Mr Fukui has long predicted. The governor has continually stressed his belief that record corporate profits will feed through into higher wages and consumer demand – a “virtuous circle” that might have been a good justification for the bank’s forward-looking policy.<br /><br />Unfortunately, it has not panned out. Wages have stalled or even fallen as global competition, coupled with labour market and demographic changes, has short-circuited the normal mechanism by which profits flow into remuneration.<br /><br />This has left Japan’s economy running on only one, export-led engine and flying too close to the deflationary ground for comfort. What headline inflation there has been is due almost entirely to higher oil and commodity prices. If commodity-led inflation fades – as many predict if the global economy slows – Japan could yet crash-land back into deflation.<br /><br />Markets are factoring in the possibility that the BoJ’s next rate move will be down – not up as the governor has long intimated. It would be a severe blow indeed for the bank to put hard-won interest rate rises into reverse. But if the day for such a decision arrives, at least it will not be Mr Fukui’s to make.</blockquote><br /><br /><br />Basically I think Fukui's big bet was that domestic consumption would prove strong enough to provide a second leg (in tandem with exports) for the Japanese economy. As Claus details at great length <a href="http://japanjapan.blogspot.com/2008/02/review-and-preview-on-japan.html">here</a> (and <a href="http://japanjapan.blogspot.com/2008/02/q-on-japan.html">here</a>) - and as Pilling also seems to accept -this view seems to be inadequate, and fails to get to grips with the malaise which is affecting the Japanese economy. And as if to give just one last kick to this now thoroughly wobbly perspective, todays index for December services <a href="http://www.meti.go.jp/english/statistics/tyo/sanzi/index.html">has just been published by the Japanese Trade Ministry</a>. The tertiary index, which is a measure of the money households and businesses spend on things like phone calls, power and transportation, declined 0.6 percent from November. The Ministry listed the following sectors as having declined:<br /><br />1. Finance and Insurance, 2. Services, 3. Compound Services, 4. Wholesale and Retail Trade. Industries that contributed to the increase are as follows:1. Eating and Drinking Places, Accommodations, 2. Real Estate, 3. Learning Support, 4. Electricity, Gas, Heat Supply and Water, 5. Medical, Health Care and Welfare.<br /><br />Although the index actually rose some 0.2 percent over the fourth quarter, this latest sign of weakening will certainly not come as good news for Fukui as he prepares to clear up his desk.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCN_deGPXZixk-DyTWI2fdbtegWoA2DjSDFvQSGwNHWSvbSwuzUoP50LmhNNT2XydpNfB8xX5Urq_u6igiFX2M7TP62CmpKi3xjPnfZFQevJ54MLKYmXyYjjhBvieu1G4UfmMkeEefFEo/s1600-h/japan+services+index.jpg"><img id="BLOGGER_PHOTO_ID_5168248590215376642" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCN_deGPXZixk-DyTWI2fdbtegWoA2DjSDFvQSGwNHWSvbSwuzUoP50LmhNNT2XydpNfB8xX5Urq_u6igiFX2M7TP62CmpKi3xjPnfZFQevJ54MLKYmXyYjjhBvieu1G4UfmMkeEefFEo/s400/japan+services+index.jpg" border="0" /></a>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3625789250703033817.post-37121725434781887732008-02-16T01:31:00.000-08:002008-02-18T01:33:21.936-08:00Q&A on Japanby Claus Vistesen<br /><br />In the context of Francois Guillaume's pertinent comments and questions to my <a href="http://japanjapan.blogspot.com/2008/02/review-and-preview-on-japan.html">review and preview</a> note and in the light of today's much surprising <a href="http://japanjapan.blogspot.com/2008/02/japan-q4-2007-gdp.html">Q4 GDP release</a> I have chosen to present my comments and answers to Francois' questions/comments above the fold à la Q&A.<br /><br />---<br /><p><b><span lang="EN-GB">1) </span>GDP much higher than expected...how do you explain that ??</b></p><p>I want to focus on two issues here. First of all, the current figures are preliminary and in this light I expect to see a downward revision in March. In this light, we need to realize I think that given the incoming stream of data we have seen from the three months of Q4 2007 this figure of 3.7% (Q4 YoY) is pretty hard to justify. For a reasonable take on the whole situation Graham Davis from the Economist Intelligence Unit had a good overview I think in his interview with Bloomberg (can’t hyperlink to the clip I am afraid). Also, we should note I think a comment made recently by Takehiro Sato over at Morgan Stanley’s GEF … </p><p><i>Incidentally, in Japan’s case, quarterly GDP data are too volatile to be a suitable criterion for calling the economic cycle. This is clear from the GDP trend in past recessions. Yet while GDP has at times been positive when the economy is in retreat, industrial production has consistently mirrored the downward path of the economy. It seems reasonable to say that the critical factor for assessing the economic cycle is simply the direction of industrial production.</i></p><p>However, if we accept the figure as it is I still don’t think that the underlying path of the Japanese economy has changed even if the level seems somewhat too high. Let me consequently highlight some of the snippets from Bloomberg’s report on the break-up of the GDP components as well as the much more detailed break-up provided by Edward vis-à-vis the official estimate provided by the Cabinet office. What thus seems clear to me is that although consumption rose in the last half of 2007 net exports and by derivative capex continues to drive forward Japan on the margin. Remember that we need to talk about levels here too since private consumption commands a much larger share in the Japanese economy than does both investment and net exports. </p><p>Let us try to annualize the quarterly growth rates in both real and nominal terms which yields a quite different picture. In <a href="http://www.esri.cao.go.jp/jp/sna/qe074/rshihanki.pdf" mce_real_href="http://www.esri.cao.go.jp/jp/sna/qe074/rshihanki.pdf">real terms</a> Japan thus grew 1.8% through 2007 and in <a href="http://www.esri.cao.go.jp/jp/sna/qe074/nshihanki.pdf" mce_real_href="http://www.esri.cao.go.jp/jp/sna/qe074/nshihanki.pdf">nominal terms</a> we are down to a rather un-impressing 0.6%. Particularly for Q4 the figures are 0.9% and 0.3% for real and nominal growth rates respectively. In this way, the GDP deflator is a welcome alternative to the CPI index in that it accounts for the change in prices relative to what consumers actually buy in the measurement period. Thus note in passing the following from Bloomberg … </p><p><i>Rising oil prices may have boosted growth in real terms. The GDP deflator, a broad measure of prices used to calculate real growth from nominal, fell 1.3 percent from a year earlier, the biggest drop since the first quarter of 2006. The deflator is adjusted downwards when oil prices rise. In nominal terms the economy grew an annual 1.2 percent in the fourth quarter.</i></p><p>I am going to discuss this more below since inflation measurement is clearly one of those areas where data mining and basket building can be used to construct just about any kind of number you would like. In this way, all these kinds of inflation adjusted growth rates etc need to be taken with a pinch of salt. In conclusion on the GDP figures I think the following is important to note. First of all, this is good news since it indicates, all things equal, that Japan has defied at least some of the claims that a recession/slowdown is imminent. However, I am not sure how much valuable information we can reasonably derive from the figures at this point. First of all, I think these figures are in for a haircut once they are subject to revision. Yet, even if we rely on them such as they are I think that it is reasonably clear how for example the value component of energy prices might have pushed up the real GDP to unrealistically high levels if we consider the underlying trend. <i><br /><br /><!-- [if !supportLineBreakNewLine]--></i><b><!-- [endif]-->2) Inflation: see my previous posts: CPI is just a price index. Its definition is very different from a country to another. Change in the index & methodology would give a total different picture. Most important is the trend of the index itself, and the recent trend is up. It’s ridiculous to speak of deflation any more. CPI has been ranging from -2% to 1% in last years. It doesnt make a lot of difference. Asset-prices are more important: Nikkei is still nearly more than 80% off 2003 lows, real estate in central Tokyo as well despite being off its highs probably by 20% at least.</b> </p><p>Unfortunately I am not sure about which posts Francois is referring to here but nevertheless he fires off a lot of reasonable questions here. First of all, I completely agree with the point on methodology. Since the CPI is based on a basket which can be changed and re-weighted and since the CPI may or may not include headline inflation what we end up with is a veritable mind field of potential ‘best practices’. This also means that whatever the picture you want you can rig the data so that your specific view of the world emerges. I don’t think however that this is what I have falling victim to in my analysis of Japan. In my opinion, the price movements in Japan both in the most recent period as well as in 4-5 year perspective show two things. </p><p>First of all, there is the overall level of inflation which has been very low and essentially negative. This, coupled with the very aggressive monetary regime put in place to normalize conditions indicates I think that there is indeed ‘something funny’ about consumption and domestic demand in Japan and this is what has led me to conclude that the whole price edifice in Japan has something to do with the population structure of the country. Secondly and in the more immediate context the recent divergence between input and output prices further support my claim that price dynamics in Japan do not follow the theories we can discern from macroeconomic textbooks and traditional empirical studies. Moreover, it obviously suggests that the equality often exclaimed in the financial press between the return to inflation and economic recovery is wrong. </p><p>Now, all this leads me to disagree with Francoise when he says <i>It doesnt make a lot of difference. </i>I think it does although I do agree that asset price deflation/inflation is extremely important too. In this respect the Nikkei is mentioned being considerably off its low levels of 2003 as well as those much debated Tokyo real estates have seen hefty increases in price. Both these points are very important to take aboard I think and merits, at least a bit, that Japan has moved on. Of course, the most recent developments in the Japanese housing sector suggest that the construction/residential sector in Japan might very well be in for a more difficult future but let us leave this point here. </p><p>However, what about another kind of asset in the form of human capital? How does the value of this asset stand? Well, as we have observed one of the recent trademarks of the Japanese labour market has been a consistent decline in wages and the transition from a labour market of full time workers to part time workers (on the margin of course). Since aggregate national wages essentially can be seen as a measure/reflection of the national labour productivity (either absolute or per/hour) what does this imply for the general price level in Japan? As can be seen, this readily becomes rather complicated. Another reason as to why inflation matters has to do with the workings of a modern economy is monetary policy. Quite simply, deflation or next to no inflation has implications for the workings of monetary policy as well as it has implications for the consumption dynamics of the society. More importantly, we have seen the condition of deflation in Japan and subsequent low interest rates have had notable externalities on the global economy. So, I would say that it does indeed matter.<br /><!-- [if !supportLineBreakNewLine]--><br /><!-- [endif]--><b>3) Monetary policy. I fear there could be a big misconception on USD buying interventions. MOF as you know is running a hell lot of debt. It is short Yen cash. But it seems to me that most of the FX intervention is executed by BOJ, but on behalf of the MOF. So when MOF buys USD, it needs to borrow even more JPY. But with the end of Quantitative easing, they can’t issue as many Financial Bills to back them as they would like to (because BOJ would basically buy an unlimited amount of them @ 0% before.) I think that with the deterioration of public finances, it becomes harder to do such intervention. So I see just a lot of talk, not much more.</b> </p><p>Here I stand corrected. Consequently, I had not, in my analysis of the JPY and subsequent potential for intervention, thought about the perspective Francois presents here. It is very interesting I think. Now, for some of our readers this may seem a bit complicated but what Francois is saying is simply that absent quantitative easing/ZIRP it becomes more ‘expensive’ for the MOF to intervene since they cannot be sure that they are able to offload the subsequent debt. Of course, this also paves the way for a rather perverse scenario. Consider thus that the JPY is driven largely by risk sentiment at the moment. If the BOJ sees it fit to lower rates during the course of 2008 and perhaps even returns to ZIRP we could expect the JPY to shoot up given we accept the current market dynamics. Note in passing here that this morning’s GDP release has been followed by a depreciation of the JPY which shows the disconnect between the fundamentals and the JPY. In this way, a return to ZIRP or just a drop to 0.25% could in this context be followed by an increased in the pressure to intervene. Of course, this is not a plausible scenario at this point but still goes to show the potential dynamics as we move forward. </p><p><b>4) JPY everybody I talk to is bullish on the JPY... maybe that is why it is so sticky now...but its way off its lows against many crosses.</b> </p><p>As I have said above and also in <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/2/12/review-and-preview-on-japan.html" mce_real_href="/alphasources-blog/2008/2/12/review-and-preview-on-japan.html">my recent review and preview</a> the JPY remains wholly disconnected from the fundamentals of the Japanese economy. I concur with Francois that the sentiment on the JPY at the moment seems to be bullish given the general risk sentiment in the markets. At time of writing it is sniffing at 108+ which is outside the recent weeks’ range of 106-107. It is difficult to see where it goes from here. I am expecting this ‘stickiness’ theme to dominate since it is unclear I think whether market conditions would favor a move below 105 or upwards to 110. </p><p><b>5) Long term interest rates... the credit markets have imploded in less than a year. My prediction is for a failure of a big govt bond market in 5 to 10y time. Japan would be an obvious candidate. In that scenario, long term interest rates are heading HIGHER. Just people will be tired to be stuck with low interest rates when there is inflation everywhere. But in the short term, as the asset-bubble is deflating, and this process is not over, global govt bonds will remain for some time the asset of choice, by default. </b></p><p>Now, this is very interesting in my opinion. Whether or not we will see a failure in a government bond market is an open question subject to one of those rather long term falsification clauses. I have argued before that in the context of countries such as Japan and Italy it will, at some point, cease to make sense in ‘rating’ the sovereign debt market based on the same criteria as you treat e.g. India, the US etc. Quite simply, this will become unfeasible as we move forward since this would push these countries into a technical default. As Francois alludes this may of course come to pass some way or another not because of the rating agencies themselves but rather because with inflation the nominal yield may become too unattractive. </p><p>Note also that once we enter this discussion we also enter a whole gamut of issues in the context of Japan in the sense that the BOJ and the MOF is in a double bind. On the one hand the BOJ faces external pressure (those externalities again) to raise or more aptly to normalize rates but it finds this difficult because deflation still dominates the general price level. Moreover, a transition towards whatever the interest level we assert to be normal would most likely drive up the value of the JPY and thus further lead to deflationary pressures. We should also consider the simple points that as interest go up the debt becomes more expensive to service and in this way the MOF has a distinct interest in keeping interest rates down. Within this framework headline inflation pressures are of course simply a further pinch it seems not least because of the reasons mentioned by Francois.</p>This topic on sovereign debt and long term interest rates is very important I think but for now I think that I will lower my guns. Thanks for Francois for the comments. Needless to say, here at JEW (and at Alpha.Sources) we always appreciate to be challenged on our views and opinions.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-53462828854280846432008-02-14T01:30:00.000-08:002008-02-18T01:31:44.359-08:00Japan Q4 2007 GDPWell the preliminary Q4 GDP numbers are now out and they are definitely better than expected. Japan's economy grew at an annualised rate of 3.7 percent in the last quarter of 2007, and this was at least double the pace most economists were expecting, as strong business investment and exports to Asia and Europe helped the Japanese economy weather the U.S. slowdown. Gross domestic product in the three months which ended Dec. 31 accelerated from a 1.3 percent annualised rate expansion in the third quarter, according to <a href="http://www.esri.cao.go.jp/en/sna/qe074/gdemenuea.html">data released by the Japanese Cabinet Office in Tokyo today</a>. We need to be a little carfeul in using these annualised rates, since they are derived by simply multiplying quarterly rates by 4, but still whole year growth for 2007, according to the first preliminary estimate, was 2.1%, which compares with 2.4% in 2006 and 1.9% in 2005, so the final result is not at all - by current Japanese standards - a bad one.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPSBHfXcQaXYCjB3UiJ0XxCS4HmtaHDLGkyDHNdw-lW-2H-zqpGqFC8ryo1XrGqjhJIHs3y6YX75TnICtcml91IX_k4AZHOhtnx-kFdLy5GpFTFZqHwYQ97_ihTd321V2-_a-KqHo1yfI/s1600-h/Japan+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5166748907894697106" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPSBHfXcQaXYCjB3UiJ0XxCS4HmtaHDLGkyDHNdw-lW-2H-zqpGqFC8ryo1XrGqjhJIHs3y6YX75TnICtcml91IX_k4AZHOhtnx-kFdLy5GpFTFZqHwYQ97_ihTd321V2-_a-KqHo1yfI/s400/Japan+GDP.jpg" border="0" /></a><br /><br />On a quarter-on-quarter basis, growth in Q4 was at 0.9%, up from 0.3% in Q3, and the -0.4% contraction in the second quarter.So it is clear that, despite all the negative sentiment we have been faithfully recording here, the Japanese economy actually accelerated in the second half of 2007 and this despite the dramatic slowdown in residential housing. The big question - as Francois reasonably asks in comments to Claus's last post - why?<br /><br />I freely admit these results have surprised me, as I was expecting something significantly worse. But I suppose we should to some extent have seen this coming. Growth in Q2 was very bad, and the rebound in Q3 was relatively weak, yet <a href="http://japanjapan.blogspot.com/2008/01/japan-exports-and-trade-surplus.html">all those export numbers we have also been recording</a> over the months - and the surprise upside in consumption in December - should have been some sort of indication. Plus government spending in the last quarter seems to have been pretty strong. Lets take a look at some of the details.<br /><br />I have made the following charts on a simple cut-and-paste basis from the PDF summary file provided by the cabinet office, but I think they may help people to see what is happening at a glance, since they show either the percentage contributions of the more important components to growth or the quarterly percentage growth rates (depending), and hence may make what are otherwise pretty dry numbers a bit more real. Firstly the evolution in real quarterly GDP growth (all the charts are based on real, not nominal, data).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjR19EDvxL8GX59NdMOubPPedQOn_tmZJUG_MDLI3dWiTfk-nFESPCVP95jMjH-dmxDn0IIHV6v2uGzCD-kTMhea47vju9nSKo07qwBRSGR1K2fE-4OFjPmM2UJGeE2oa1THz41S-Py73E/s1600-h/gdp+overview+2.jpg"><img id="BLOGGER_PHOTO_ID_5166750247924493474" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjR19EDvxL8GX59NdMOubPPedQOn_tmZJUG_MDLI3dWiTfk-nFESPCVP95jMjH-dmxDn0IIHV6v2uGzCD-kTMhea47vju9nSKo07qwBRSGR1K2fE-4OFjPmM2UJGeE2oa1THz41S-Py73E/s400/gdp+overview+2.jpg" border="0" /></a><br /><br />If we now come to look at the comparative role of exports and domestic demand, we can see that while the role of exports continues to be strong (and is much better in both Q3 and Q4 when compared with Q2) the share was actually down slightly on Q3, so exports aren't the whole story here by any means, since domestic demand moved from being a negative 0.4% drag in Q3 to a positive 0.5% boost in Q4.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNz4zHGIs_FDdHxJIXS0LeQq56n6f2Dzpd3IDln8eFHQ2cjqyC7R5QnMNdzu-X40UdsJKCMwj0uL05IyM90iIRLp8bj-Yt3r52L_x7YXS4X8I5ySZHcZNBc0TxyPAtZZtaOF2tpHUIk7g/s1600-h/exports2.jpg"><img id="BLOGGER_PHOTO_ID_5166752326688664754" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNz4zHGIs_FDdHxJIXS0LeQq56n6f2Dzpd3IDln8eFHQ2cjqyC7R5QnMNdzu-X40UdsJKCMwj0uL05IyM90iIRLp8bj-Yt3r52L_x7YXS4X8I5ySZHcZNBc0TxyPAtZZtaOF2tpHUIk7g/s400/exports2.jpg" border="0" /></a><br /><br />Household consumption was up slightly, contributing 0.2 percentage points to growth:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinNh5l8htUUzJ6o8rSC1CKwvaezO8dsKsrI9qtduXcqBwwzq-3SE93psFvjSizyAn57KA4a9_zmv1ejFLoI06aQxCXiOQGbHC9_jjdx7oovOyD833uEP0RkzZqJkGhtOaKF3cJPNV0pOU/s1600-h/household+consumption2.jpg"><img id="BLOGGER_PHOTO_ID_5166755822792043714" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinNh5l8htUUzJ6o8rSC1CKwvaezO8dsKsrI9qtduXcqBwwzq-3SE93psFvjSizyAn57KA4a9_zmv1ejFLoI06aQxCXiOQGbHC9_jjdx7oovOyD833uEP0RkzZqJkGhtOaKF3cJPNV0pOU/s400/household+consumption2.jpg" border="0" /></a><br /><br />The decline in residential construction continued and even accelerated across Q4 (residential construction declined by 9.1% over the previous quarter when it declined by 8.3% from Q2, although the rate of decline may well have been slowing off in November and December).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLqCsUBFQzBgT8Z3RcLw6Nbkoo4GmKMBQz2zk_uMMxBH09HivxnfWmDdn2_SPRqqOwysE5nx78M79sN7-XvZcknRqH3OXGI-jn0uHsVEMD6XX2Qfr7B8av6McABjYed9CMD4tTlb0ho9A/s1600-h/residential+2.jpg"><img id="BLOGGER_PHOTO_ID_5166762389797039378" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLqCsUBFQzBgT8Z3RcLw6Nbkoo4GmKMBQz2zk_uMMxBH09HivxnfWmDdn2_SPRqqOwysE5nx78M79sN7-XvZcknRqH3OXGI-jn0uHsVEMD6XX2Qfr7B8av6McABjYed9CMD4tTlb0ho9A/s400/residential+2.jpg" border="0" /></a><br /><br />Private non-residential investment (or fixed capital formation) grew strongly in Q4. Could we interpret this as a response to the stronger than expected performance in exports in the face of the US slowdown?<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhImwv5dB4NBm5L-HTsA-JLbXXFI-XaXH0eohf_hOW3LFYIrDilNDTbpVxiihyphenhypheneYqZL_7RlbLxdTZ2_s7jKErjFU09SvK44Suy7-wxJ5hvrH4fhB09h3VOOKg1RXOtxLwNPD__daCshFvU/s1600-h/non+res2.jpg"><img id="BLOGGER_PHOTO_ID_5166762037609721090" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhImwv5dB4NBm5L-HTsA-JLbXXFI-XaXH0eohf_hOW3LFYIrDilNDTbpVxiihyphenhypheneYqZL_7RlbLxdTZ2_s7jKErjFU09SvK44Suy7-wxJ5hvrH4fhB09h3VOOKg1RXOtxLwNPD__daCshFvU/s400/non+res2.jpg" border="0" /></a><br /><br />But perhaps the biggest surprise of all comes from government consumption, which grew 0.8% over the previous quarter, contributing 0.1 percentage points to quarterly growth.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAts-R3ncp3j2VXaM3lg4OfIxNZ8bAqcmV26jj-V_mQ65rrGRS5AVnlLk_fNduiApScW75u4TGi1kQb_lJqU-V3bRt-gn-rr31dWvffpez3-4ucc5vDw499nSiUM4dJad8J6xd_K3BKP4/s1600-h/govt+con2.jpg"><img id="BLOGGER_PHOTO_ID_5166761736962010354" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAts-R3ncp3j2VXaM3lg4OfIxNZ8bAqcmV26jj-V_mQ65rrGRS5AVnlLk_fNduiApScW75u4TGi1kQb_lJqU-V3bRt-gn-rr31dWvffpez3-4ucc5vDw499nSiUM4dJad8J6xd_K3BKP4/s400/govt+con2.jpg" border="0" /></a><br /><br /><br />So to go back to Francois original question, about how to account for the Q4 performance, could we say some small improvement in household consumption, sustained export growth, an increase in government consumption (perhaps undertaken to offset the impact of the housing contraction), and a large rise in investment, as I say possibly the outcome of the strong performance in exports and the reasonable domestic consumption outcome leading people to be a wee bit more optimistic about the immediate future.<br /><br />And here's a bit of news<a href="http://www.bloomberg.com/apps/news?pid=20601101&sid=aIqzHFitvSx0&refer=japan"> I just saw in Bloomberg </a>that may help explain some of what is happening on the exports front:<br /><br /><blockquote>Japan's shipments of construction machinery may rise 9 percent to a third straight annual record next fiscal year as building and mining booms in Asia drive demand for earthmovers built by Komatsu Ltd. and its rivals.<br /><br />Shipments of excavators, tractors, cranes and other construction machinery may climb to 2.6 trillion yen ($24 billion) in the year starting April 1, according to estimates released by the Tokyo-based Japan Construction Equipment Manufacturers Association today. Shipments in the year ending March 31 may reach 2.4 trillion yen, 15 percent more than the previous year.<br /><br />China's effort to develop its hinterland, oil-funded construction booms in Russia and the Gulf nations, and mining projects in Southeast Asia have countered the housing recession in the U.S., the world's biggest market for earthmoving equipment. The demand has prompted Komatsu and Hitachi Construction Machinery Co., Japan's biggest makers of earthmoving machinery, to expand factories and boost production. </blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-33899602260176390042008-02-13T01:28:00.000-08:002008-02-18T01:30:36.048-08:00Review and Preview on Japanby Claus Vistesen<br /><br />I realize that I am moving in a bit late with this but the data I use to input in my analysis only recently came out for December 2007. More generally, this post is going to be quite big since I have a lot of things I want to get off my chest this time around. I have two main areas of focus I want to cover.<br /><p></p><ul><li>Firstly I want to finalise my analysis of Japan in 2007 with the December data for consumption expenditures and prices.</li></ul><ul><li>Secondly, I want to continue with a general assessment of two of the main market points in Japan at the moment. The Yen and the BOJ rate policy faced with an incoming slowdown and potential recession.</li></ul><p>As for the general situation in Japan I am sure it has not escaped your attention that Japan now seems set to enter a recession. The only question will be the extent and more importantly the length of the slump. In Morgan Stanley's GEF (edition 8th of February) Takehiro Sato points towards industrial production trends as well as US GDP readings and tantamount to the forecast that Japan is heading more meager times ...<br /><br /><span style="FONT-STYLE: italic">The risk of dual recession is mounting. Our </span>US<span style="FONT-STYLE: italic"> economics team is already calling for capex-induced negative GDP growth in successive quarters (Jan-Mar, Apr-Jun), for a technical minor recession in the first half of the year by definition. We are forecasting that </span>Japan<span style="FONT-STYLE: italic"> will cling on to a modicum of growth in the Oct-Dec 2007 quarter, boosted by external demand, but there is a possibility that, like the </span>US<span style="FONT-STYLE: italic">, that quarter will mark the peak and the economy will retreat in Jan-Mar. Future data for industrial production will tell us if this is the case.</span><br /><br />This note will not focus on figures for industrial production or US GDP stats but rather I will initially move in with my traditional focus on the internal demand dynamics in Japan. As ever, the <a href="http://japanjapan.blogspot.com/">Japan Economy Watch</a> contains the latest cyclical indicators fresh in off the wire in order to bring you up to speed. Here at Alpha.Sources <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/1/28/limping-along-in-japan.html">I made a note recently</a> which also sums up the most recent trends and pieces of data. For now, let us turn to the updated charts which usually form the main edifice of my analysis of Japan ...<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWYM6AdNa8_2t9fkPV19SPNlIvP3f5NTz5Tu19bK0GHl1TRj10FPJ6Q7ke5e-dX-D5JnR9_2JsK0z04Jqb5Jd2Qdw9BTgIB3UZt141s2LJmHTr13gIDjYGjMimKWwnpqlIooWr_AGU_Gwl/s1600-h/prices.jpg"><img id="BLOGGER_PHOTO_ID_5165434560478589746" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 326px; CURSOR: pointer; HEIGHT: 189px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWYM6AdNa8_2t9fkPV19SPNlIvP3f5NTz5Tu19bK0GHl1TRj10FPJ6Q7ke5e-dX-D5JnR9_2JsK0z04Jqb5Jd2Qdw9BTgIB3UZt141s2LJmHTr13gIDjYGjMimKWwnpqlIooWr_AGU_Gwl/s320/prices.jpg" /></a></p><p>If we begin with prices we see that inflation, at a first glance, seems to have returned to the shores of Japan even to such an extent that I will soon need to adjust the y-axis of my graph (and yes, this is an apology for a sloppy excel graph). Yet, the most important point to take away from this is, as I have been at pains to hammer home before, the disconnect between the inflation indices. Core inflation as measured by inflation ex food and energy prices is still in negative territory whereas the general index is shooting up thanks to headline inflation. This disconnect suggests that the inflation we are seeing in Japan is not driven by demand factors (demand pull) but rather by supply factors (cost push) and thus this does not signal an impending Japanese recovery. </p><p>Quite the contrary in fact as the spurt of inflation at this particular point in time will only further pinch an already troubled Japanese consumer. <a href="http://japanjapan.blogspot.com/2008/01/japan-cpi-december-2007.html">Edward also moves in</a> with a much worth while analysis of the inflation issues in Japan. A key point here will be the extent to which future inflation readings will have a bearing on the BOJ's decision to actually move in with a cut in the already low interest rate of 0.5% in order to accommodate a slumping economy. I don't think Fukui will cut rates before his term ends this spring and given the debacle which may arise in the context of finding a new governor it seems that economic fundamentals should not be the only thing to watch in order to make a call. What seems obvious however is that if inflation pressures suddenly show signs on abating the door will be open for a cut.<br /><br />If we turn to the indicators for domestic demand proxied by various measures of consumption expenditures we can also close the book on my forecasts for 2007. As such, I dared to venture that growth in consumption expenditures would not increase by more than 1% on a y-o-y basis. Let us look at what we have.<br /><br /></p><p><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiriqCjyBWFwk6dmZ61Aty4xV48YNmKGzulrce0jtp9u1MoazPpvgBAUdivt8SsUOR0Hp8yAo9YstLE1_UfGviC3WKFvq05y6mNYP0QaUf2H51D0GxCuNk9xJ2kGWJfxOCNOWLFp1WFxcQF/s1600-h/cons.mom.jpg"><img id="BLOGGER_PHOTO_ID_5165434573363491650" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiriqCjyBWFwk6dmZ61Aty4xV48YNmKGzulrce0jtp9u1MoazPpvgBAUdivt8SsUOR0Hp8yAo9YstLE1_UfGviC3WKFvq05y6mNYP0QaUf2H51D0GxCuNk9xJ2kGWJfxOCNOWLFp1WFxcQF/s320/cons.mom.jpg" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjdDZx4uRoxTbR-gnVgH4CRItFE1qsOc1-1vFm1XtHb9hFLCQr-PHuvr6aLe9_leus9dc-nuB5Ju5S_05M80EFeFbTbj9dwGJynByR52T8aW8b5npKk_XCJnNVONduF1w1rJhh8YxPaxeo/s1600-h/cons.yoy.jpg"><img id="BLOGGER_PHOTO_ID_5165434581953426274" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjdDZx4uRoxTbR-gnVgH4CRItFE1qsOc1-1vFm1XtHb9hFLCQr-PHuvr6aLe9_leus9dc-nuB5Ju5S_05M80EFeFbTbj9dwGJynByR52T8aW8b5npKk_XCJnNVONduF1w1rJhh8YxPaxeo/s320/cons.yoy.jpg" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJ-gTiX1Zg7hZJBaxHfsPA4zFjs0a6H7XZxMVEDC-zEHsMThDDxe3qqC0A-Ro_ibNolmjUOMSAbW10GdZgIge1x1S8CxraKX4dKjJA3vtPc13X7Gw1NLajQkKFGNneH1F5qaAtleYaC_Tw/s1600-h/cons.real+index.gif"><img id="BLOGGER_PHOTO_ID_5165434577658458962" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJ-gTiX1Zg7hZJBaxHfsPA4zFjs0a6H7XZxMVEDC-zEHsMThDDxe3qqC0A-Ro_ibNolmjUOMSAbW10GdZgIge1x1S8CxraKX4dKjJA3vtPc13X7Gw1NLajQkKFGNneH1F5qaAtleYaC_Tw/s320/cons.real+index.gif" /></a>Let us start by the forecast first. As can be observed the Japanese consumers put in a strong showing in December on a y-o-y basis with a 2.2% increase. I have to say that this figure represents something of a fluke for me since if you look at the underlying indicators such as income, retail sales and department store sales they all clocked in with declines. <a href="http://www.japaneconomynews.com/2008/01/31/december-household-spending-up-22-percent-household-income-down-27-percent/">Ken Worsley</a> also ponders the 2.2% increase and provides a detailed break-down which shows how spending on culture and recreation as well as furniture and household utensils accounted for a substantial part of the increase. </p><p>I have to agree with Worsley though when it comes to January and beyond where the rise in energy prices, declining income, and a general slumping confidence will be sure to slow spending considerably. As for the forecast, the December reading almost had my forecast shattered or, if you will, assured that I was very close to the mark. Consequently, the mean value of the increase in consumption expenditures was a 0.95% monthly y-o-y growth rate. The two remaining charts are merely there for differentiation. The average value for the m-o-m chart was 0.217% in 2007 and together with the y-o-y figure it shows the momentum and <span style="FONT-WEIGHT: bold">level</span> of growth rates we can expect from Japanese internal demand in a given economic environment. </p><p>The long term index anchors my analysis in the sense that it supports the general hypothesis that domestic demand is on a structural decline in Japan and that this might very well be due to the demographic profile of Japan, this last point of course being a hypothesis of mine. In terms of forecasts for 2008 I have no trouble extending my forecast of an increase of <1%><p>Before I finish I want to make a leap up towards current events and assess a couple of mounting issues in the context of Japan. Firstly, I think that the Yen demands some attention. Recently, I noted how the Yen was driven by anything but macroeconomic fundamentals. This clearly still seems to be the case. However, the main question is when this will end? At the moment and if you look at the FX price action in the beginning of 2008 almost all Yen crosses have been correlated with the stock market and thus by derivative the general sentiment of risk aversion in the market. This is nothing new in the sense that since the subprime market hit the global economy in the middle of August 2007 the Yen has been the main canary in the coalmine when it comes to the risk sentiment in the market. </p><p>Yet, the Yen is not only driven by cyclical factors. As such, the decline in home bias of Japanese investors as well as the general yield disadvantage of Japan suggests that all those talks about an undervalued Yen aren't clued in to what is really going on in the sense that what is really the fair Yen value at this point? We need to think about the fact that the whole global economy seems to be undergoing the initial phases of a much more structural correction (recoupling) and in this context it is difficult to see how the Yen can stand its ground. It might not happen today or tomorrow but I have difficulties seeing how the risk aversion dynamic can hold the ground for the more wider and structural trend. </p><p>Turning to more immediate drivers of the Yen the potential that Japan would intervene in currency markets to cushion the Yen's depreciation has reared its head with regular intervals. Back in early November I asked the question putting the limit at 105 for the USD/YEN which. Various other estimates have been around. Morgan Stanley's Stephen Jen puts it at 100 which is just the same as <a href="http://macro-man.blogspot.com/">Macro Man</a>. Recently, currency strategist at Dailyfx Boris Schlossberg kept the speculations alive suggesting, as me, that 105 just might be the threshold for Japan. Currently the Yen is hovering in the region of 106-107 and in this light Boris' conclusion seems to be a sound one, if a bit noncommittal, to take with you in the trenches of FX trading.<br /></p><p><span style="FONT-STYLE: italic">While there is certainly no guarantee that the BOJ will intervene at the 105-100 area, economic factors and positioning data suggest that Governor Fukui and company may indeed opt for that solution. Given that possibility the above mentioned strategies should hopefully minimize risk and optimize return for both momentum and carry traders. At the very least traders should pay particular attention to the price action if USDJPY slides down to the 105 level in the near future.</span> </p><table style="WIDTH: 762px" cellspacing="0" cellpadding="0"><tbody></tbody></table><p>From a macroeconomic point of view this makes sense. Japan is largely dependant on exports to fuel growth as well as need to remember that an appreciating currency is deflationary and Japan has not escaped those fangs just yet. As for the Yen all evidence seems to point towards a continuation of current trends for the immediate future with the Yen acting as a global parameter of risk and investors' risk aversion. In this light, the risk of intervention needs to be weighed in as a potential market mover as we move forward.<br /><br />The second topic I want to cover has already been mentioned above and essentially also cuts across the whole discussion on the Yen. In short, what will we see from the BOJ? Perhaps the most important thing to note here is that before we get to the discussion of what exactly the policy rate will be as we move forward into 2008 the BOJ will need a new governor. As I noted in my <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/1/2/round-up-on-japan-in-2007-and-a-sneak-peak-to-2008.html">long end-of-2007 note</a> this may well turn out to be quite a messy affair. </p><p>Whether the shift of guards at the BOJ will turn into the political gridlock many observers have indicated is difficult to see from my desk here in Europe. However, there are some clear risks. As I have argued before a situation of political stalemate in which the <span lang="EN-GB">Democratic Party of Japan (DPJ) will use their majority in the upper house to stall the nomination of a new governor will, all things equal, bring the MOF closer to monetary policy making. Basic logic would, in such a situation, call for a freeze of the nominal interest rate until the new BOJ leadership is set to assume their seats. However, if this current slowdown turns for the worse it may provoke measures which at this point in time might seem unrealistic. One risk is thus that Japan re-enters ZIRP over the course of 2008 and that this happens sooner rather than later. Before this materializes however, I am quite happy moving in behind the Morgan Stanley team in forecasting a cut in the main refi rate for Q2 2008.<br /><br /><span style="FONT-WEIGHT: bold">In Conclusion</span><br /><br />A lot of ground has already been covered in this piece and as such I think it is time to move in with some summarising remarks. I had two main objectives in this note. Firstly, I finalised my monthly analysis of consumption expenditures (domestic demand) and prices for 2007. Even though 2007 most likely will go down as a rather strong year in relative terms the failure of the overall consumption expenditure gauge to break the 1% threshold YoY tentatively suggests that domestic demand cannot become a driver of growth in Japan in any given sense. This point was underpinned by the monthly and long terms indicators of consumption. In connection to prices, we observed how inflation seems to be coming back to Japan. Yet, if we strip out energy and food Japan is still stuck in deflation and even though the core-of-core index might also nudge up towards positive territory the transmission mechanism from headline inflation to core inflation does not suggest that the inflation pressures we are seeing are driven by buoyant domestic demand. This does not warrant complacency against inflation but tells a story which needs to be told I feel if you really want to understand what is going on in Japan.<br /><br />I also had a brief look at the Yen and more specifically the driver of the currency. I concluded that while risk sentiment seems to be the main trend explaining the current movements more general structural forces should not be neglected. The key issue here is timing and thus the dynamic relationship between the immediate environment and the more long term structural trends. Moreover, I also reviewed the latest speculation that we will observe intervention in the FX market by MOF and the BOJ. At this point, we have no clear indication that this will occur but I think the possbility should be entertained that the MOF will dip its toe at some point. In terms of the the BOJ and a subsequent call on the rate policy in Japan I moved in behind Morgan Stanley noting that Q2 2008 will see a cut to 0.25%. Another factor which I discussed was the extent to which the departure of governor Fukui will result in a policy gridlock. The risk is definitely there I would argue and it is a possibility which should be taken into account. I think that such a gridlock would (and should) result in a an effective standstill of rate movements but if the slump turns for the worse new dynamics may come into play where the MOF moves in to 'politically' steer down interest rates. Whether 2008 will see ZIRP is still an open question I think. I believe the probability is fairly high not least because I think that the recession we are now seeing on the horizon may very well be more severe than many expect. The main question however is not centered on the slowdown in Japan per se. This is the nature of economic cycles in the sense that they go up and down; yet, what remains the most compelling question in Japan's case is just how far and how long it will be this time. </span></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-80333037418004176882008-02-12T01:37:00.000-08:002008-02-18T01:39:11.583-08:00India Industrial Output December 2007India's industrial production again in December as record investment in factories, roads and power plants increased demand for cement and steel. Production in factories, utilities and mines rose 7.6 percent over December 2006, after gaining a revised 5.1 percent in November, according to the statistics office in New Delhi today. So it seems that despite the pressure on India's export potential which comes from having a rising rupee, the pace of capital inflows and hence investment means that industrial expansion has a strongish underlying momentum.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKef66nb_s84IubUe5t9LpNVB1e14FYISpe9nOze99P_RZmwtQd8qrPsqUCW6MagI6ps7MJulJafmHaLWfdRJrf9nkZsavnGgjPy7NDHent1Dv53kjN8Gtwt9iCRO53KcZUgt8yY9aNhyh/s1600-h/india+indistrial+output.jpg"><img id="BLOGGER_PHOTO_ID_5166009731138153362" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKef66nb_s84IubUe5t9LpNVB1e14FYISpe9nOze99P_RZmwtQd8qrPsqUCW6MagI6ps7MJulJafmHaLWfdRJrf9nkZsavnGgjPy7NDHent1Dv53kjN8Gtwt9iCRO53KcZUgt8yY9aNhyh/s400/india+indistrial+output.jpg" border="0" /></a><br /><br />Industrial production grew 9 percent in the nine months ended Dec. 31, less than the 11.2 percent gain in the same period in the previous year, the government said. Manufacturing in December rose 8.4 percent, led by a 16.6 percent increase in the output of capital goods such as plant and machinery.<br /><br />Higher borrowing costs are prompting consumers to postpone purchases. Bajaj Auto Ltd., India's second-largest motorcycle maker, posted a 16 percent drop in sales in January, its 12th straight month of declines.<br /><br />ABN Amro Bank NV's purchasing managers' index indicated manufacturing growth recovered in December from the previous month and fell again in January to the lowest level since September.<br /><br />Prime Minister Manmohan Singh's government is spending 1.34 trillion rupees ($34 billion) in the year ending March 31, a 40 percent increase over the previous year, on roads, ports and power plants.<br /><br />Economic expansion in India is still the second-fastest after China among the world's biggest economies. The economy has grown an average 8.8 percent since 2003, the fastest expansion since the country's independence in 1947.<br /><br />India's middle class, defined as those with annual disposable incomes between $4,380 and $21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co., the New York-based consulting firm.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4Bld4VgLoXbkoTd6XV0VfBTp4hhd1N0ll-iofjVYjhX6n4P3mkjrZnz6uRBjyLiyuYYN0qS7JGl-8rCHbv6uJAZKA7gMOf6APIM9bjM8gZKeNTU5NxtKnx9Y58-1Nw-MieiidtyN8l6F3/s1600-h/india+GDP+growth.jpg"><img id="BLOGGER_PHOTO_ID_5166015696847727522" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4Bld4VgLoXbkoTd6XV0VfBTp4hhd1N0ll-iofjVYjhX6n4P3mkjrZnz6uRBjyLiyuYYN0qS7JGl-8rCHbv6uJAZKA7gMOf6APIM9bjM8gZKeNTU5NxtKnx9Y58-1Nw-MieiidtyN8l6F3/s400/india+GDP+growth.jpg" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOSNIM9SVjUNawzDKqQHzr03OxQKVmExLkFN1EwwXcJyaaYzQEYJxRRq4SPYy74AKc2ZCDO2_5nafFg7rFzMwAxlCY3Mtc7fEPZN9nzKO6dIiqTXsNZl-IJXu79B-kzf8UtbaL6FnruF0/s1600-h/china+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5165446446177282866" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOSNIM9SVjUNawzDKqQHzr03OxQKVmExLkFN1EwwXcJyaaYzQEYJxRRq4SPYy74AKc2ZCDO2_5nafFg7rFzMwAxlCY3Mtc7fEPZN9nzKO6dIiqTXsNZl-IJXu79B-kzf8UtbaL6FnruF0/s400/china+GDP.jpg" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEqaaHLzoqzY7fstckgZXyQeewVAq5zUN7odYErIzUWH9wHn_Ov8Xk92jAzIV1FISaB43V2rl3b8LNDiAo_H5itHgd6wbhyphenhyphenhHKiw0puiAseZsc_rEcPBtyFLYMinBjzfcS1bIczxlb3P-e/s1600-h/median+ages.jpg"><img id="BLOGGER_PHOTO_ID_5166019081281956786" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEqaaHLzoqzY7fstckgZXyQeewVAq5zUN7odYErIzUWH9wHn_Ov8Xk92jAzIV1FISaB43V2rl3b8LNDiAo_H5itHgd6wbhyphenhyphenhHKiw0puiAseZsc_rEcPBtyFLYMinBjzfcS1bIczxlb3P-e/s400/median+ages.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-75644443647006498142008-02-10T01:35:00.000-08:002008-02-18T01:35:49.385-08:00Has China's Economic Growth Now Passed It's Peak?Is the annual rate of Chinese growth now about to slow, not just temporarily, but may it actually be that the long march of Chinese "catch-up" growth is now finally slowing? This is the question that was asked by the <a href="http://www.ft.com/cms/s/a136b73e-d5a1-11dc-8b56-0000779fd2ac.html">Financial Times earlier this week</a>, and, as they point out, it may well be that behind those headline forecasts for decelerating Chinese output in 2008 there lies a deeper and more significant trend that may mark the arrival of the long-awaited turning point in the trajectory of the Chinese economy.<br /><br />Certainly both local Chinese and World Bank economists have significantly downgraded their forecasts for China’s 2008 growth in recent weeks – down from 11.4 per cent rate achieved in 2007 to around 9 to 9.5% this year. But more importantly, could the 11.4 per cent expansion in 2007 – the fifth consecutive year of double-digit increase – represent the peak point in headline growth for China's economic development process. That is, after falling back this year, will Chinese growth ever climb back to its previous heights, and even if it doesn't , should this fact be producing concern among us?<br /><br />On the face of it, it is obvious that noone - not even China - can continue growing at double digit rates forever, and at some stage the cycle of growth will fall steadily back towards the much lower rates traditionally associated with a developed economy. The big question is really, has that point now been reached?<br /><br />To get an idea of what we are talking about, and of what all this might this mean, perhaps it is interesting to take a quick look at the longer term growth patterns of some other economies who have been through the "accelerated greenhouse" catch-up growth that China is currently enjoying. Perhaps a good place to start would be with South Korea, since South Korea is arguably the South East Asian "tiger" which is most similar to what Chinese economic evolution might look like, since Singapore, Taiwan and Hink Kong are, each in their own way, very special cases.<br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHlGsamoQt773JtOFNGQv9j943XBmaGllT0CDKCv6NSnXqfYif17Btyn9QfFIkrpb_OO8Mu1t_vm42Y2UKIDc00QTxwCZAGgLbtWTYCn6yQhUJInZTnplFpEhvfdUA7pZLjxIgDawyf-0/s1600-h/south+korea+economic+growth.jpg"><img id="BLOGGER_PHOTO_ID_5165440145460259618" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHlGsamoQt773JtOFNGQv9j943XBmaGllT0CDKCv6NSnXqfYif17Btyn9QfFIkrpb_OO8Mu1t_vm42Y2UKIDc00QTxwCZAGgLbtWTYCn6yQhUJInZTnplFpEhvfdUA7pZLjxIgDawyf-0/s400/south+korea+economic+growth.jpg" border="0" /></a><br /><br />Now as we can see from the above chart, South Korean was at one point very strong indeed, until growth "peaked" around 1987 (at 11.1%) and since that time growth has followed a more normal cyclical pattern, with the important detail that with each successive cycle Korean growth has slowly and inexorably slowed ("stripping out" the very exceptional sharp decline and rebound produced by the Asian crisis in 1998).<br /><br />Economic growth for an emerging economy tends to show this kind of profile since in general terms there are both technological and demographic components in "catch up" economic growth - although there may actually be no such thing in reality as a constant steady state rate to catch up with <a href="http://edwardhughtoo.blogspot.com/2006/10/what-is-neoclassical-growth.html">as I try to argue here</a> - and once most of the technological gap has been closed and the benefical momentum of arriving at maximum proportions of the population in the highly productive 25 to 50 age group begins to pass, economies then seem to eshibit a steady loss of momentum rather like air escaping from a pinprick in a gas balloon, as we can see in the cases of the two oldest societies on the planet, Japan and Italy, in the charts below.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOWJqh8aM96pxyA85uSBIir7CJsTQW_6xVi0jhcAtJ9GwIq4DBowHTe8-sR5eLYJ3rgunDKGaXaN6Es_16wvx91WpE2M0fyxVGDanryoR5E7ZxRSW0xRGomcalQ1RU1Xib1KspHvojVjaE/s1600-h/Japan+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5150229937058397730" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOWJqh8aM96pxyA85uSBIir7CJsTQW_6xVi0jhcAtJ9GwIq4DBowHTe8-sR5eLYJ3rgunDKGaXaN6Es_16wvx91WpE2M0fyxVGDanryoR5E7ZxRSW0xRGomcalQ1RU1Xib1KspHvojVjaE/s400/Japan+GDP.jpg" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2oUNh5p5hZw3bMtjEeWoC8E-zN_9xBfcPi1uExg9MWD0mkTI6IfoSf-eDVAyUvGS_DWD3JKyDj6fGyd0CsGeQGnFiO6x7IoPqT33SPHXRjeYifEsz5oC8rS2WEs6fDO9o4Y_qgyyUr-E4/s1600-h/italy+growth.jpg"><img id="BLOGGER_PHOTO_ID_5150230022957743666" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2oUNh5p5hZw3bMtjEeWoC8E-zN_9xBfcPi1uExg9MWD0mkTI6IfoSf-eDVAyUvGS_DWD3JKyDj6fGyd0CsGeQGnFiO6x7IoPqT33SPHXRjeYifEsz5oC8rS2WEs6fDO9o4Y_qgyyUr-E4/s400/italy+growth.jpg" border="0" /></a><br /><br />Now I have singled out Italy and Japan (the profile for France, or the UK, or the US is really quite different) since they are both late economic developers, and also since their subsequent demographic transition to ultra low fertility has been very rapid, as it is about to be South Korea and China. Hence Japan and Italy have experienced very rapid ageing, and we already know China is about to follow them down this road, at what may well be an even more rapid pace. In fact China may well, thanks to the presence of a forced restriction of fertility, a reasonably high level of life expectancy and a virtually negligible impact from inward migration as we move forward, become the most rapidly ageing society the world has so far seen.<br /><br />The comparative median age charts for China and South Korea give the general picture. When we get to 2020 China will still be significantly younger than South Korea, but is following the same trajectory. By 2020 Korea will be nearly as old as the three oldest societies - Germany, Japan and Italy - currently are, and will in all probability be older than slower ageing societies like the UK and France. The is a very dramatic change for a newly developed country.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWhyy34xSq6A-7Wg6D5K_pBIdqpw6VV7nmQw_BIv_p2FXmDTYVe_gsS5JIk2qEFnsvyk_M8K0R0QbLPX4q7VvMcm91exTbjJxke1hhyEcYc8yyLSOcbS4-8OgkNyUI1IYgSRs-99JrOcM/s1600-h/median+ages.jpg"><img id="BLOGGER_PHOTO_ID_5165669934800530242" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWhyy34xSq6A-7Wg6D5K_pBIdqpw6VV7nmQw_BIv_p2FXmDTYVe_gsS5JIk2qEFnsvyk_M8K0R0QbLPX4q7VvMcm91exTbjJxke1hhyEcYc8yyLSOcbS4-8OgkNyUI1IYgSRs-99JrOcM/s400/median+ages.jpg" border="0" /></a><br /><br /><br /><strong>Chinese Growth</strong><br /><br />So what do we know about growth to date in China? Well, lets look at the longer term chart.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOSNIM9SVjUNawzDKqQHzr03OxQKVmExLkFN1EwwXcJyaaYzQEYJxRRq4SPYy74AKc2ZCDO2_5nafFg7rFzMwAxlCY3Mtc7fEPZN9nzKO6dIiqTXsNZl-IJXu79B-kzf8UtbaL6FnruF0/s1600-h/china+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5165446446177282866" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOSNIM9SVjUNawzDKqQHzr03OxQKVmExLkFN1EwwXcJyaaYzQEYJxRRq4SPYy74AKc2ZCDO2_5nafFg7rFzMwAxlCY3Mtc7fEPZN9nzKO6dIiqTXsNZl-IJXu79B-kzf8UtbaL6FnruF0/s400/china+GDP.jpg" border="0" /></a><br /><br />Now when we come to look at this chart, we immediately face a number of important problems. The first and most obvious one is that the further back in time you go prior to 2000 the more unreliable the data is. So the fact that the maximum growth period seems to be in the mid 1980s, followed closely by the mid-1990s burst might, at first sight, seem strange, since it is the growth spurt which China has enjoyed post-1998 which has really been the most convincing. But it should be noted that China's demographic trajectory is virtually unique, and it is the case that it was getting some sort of potential demographic dividend or other well before 2000, so while the earlier data most probably does not give a complete picture, perhaps it would be a mistake to disregard it altogether. Of course, the more credence we give to the 1980s growth, the more we have to reach the conclusion that some significant slowing down or other may well be at hand, since following the trajectory of the line would suggest it. But as I say, maybe we shouldn't give too much credence to earlier data, so we need to be carfeul with this kind of argument.<br /><br />What we do know is that from the late 1990s onwards China systematically introduced a very extensive labour and financial market reform process, and this certainly has served to unlease a huge amount of pent-up potential, and it is this which has given us the sustained growth since the early 1990s which has only been accompanied by one small dip between 1998 and 1999 (again the Asian crisis). </p><p>Now if we think about the currently rather fashionable coupling-decoupling arguments in this context, it is clear that China was effectively "decoupled" during the 2001 internet bust global slowdown, since it kept growing regardless. That is to say there is evidence that China was much more affected by events in surrounding Asia in 1998 than it was by the recession in the G7 in 2001/2002.<br /><br />There are of course plenty of reasons for taking the view that things may not be the same this time round. China is evidently much more "locked-in" to global dynamics due to its systematically increased share in world trade. Also China was much more able during to trade increasing its market share for slowing overall world growth during the last recession, by using its price leverage - due to all that pent-up unused labour - but again there are reasons (and especially the domestic inflation ones) for thinking that things may not be quite the same this time. This would be doubly the case if China has been able to extend the post 1998 wave beyond its natural duration by taking advantages of the global imbalances situation, and its own currency and price leverage, to extend its export growth beyond what might be considered the normal sustainable extent. Basically I am very suspicious when I see such extended growth with virtually no humps, like we get in the Chinese case. As we can see for the other charts, growth should be more wave like, so we should at least ask ourselves what it is that has been going on?</p><p></p><p><strong>The Intractable Inflation Problem</strong><br /><br />So the big question is when will the current wave come to an end, and when could we expect China to follow in the footsteps of South Korea and show us that steady but constant reduction in annual growth rates. Well... looking at the chart, and sticking my neck out, and also making some sort of back of the envelope estimation about how intractable the inflation problem may turn out to be (and of course recent Eastern European and Russian experience is relevant in this context), my feeling is we may well find China starting to slow this year, and the process continuing next year, and the one after etc - with the normal and anticipated ups and downs. So the Financial Times may well be right when it suggested that Chinese growth may slow and never quite be the same again, but there are grounds for thinking that they may perhaps have only captured part of the picture, and the grounds for thinking this are that they do not appear to have factored in population, labour market and inflation dynamics, and the ineveitable interaction of the three of them.<br /><br />Certainly Chinese growth from now on is going to be constantly pushing up against limits which are increasingly set by the level of inflation. The inflation problem China has is a very real one, and at this point in time it is hard to see how they can adequately address it. Certainly the popular remedy - unchaining the yuan - could just as easily lead to an acceleration of capital inflows and a further increase in the overheating problem as to any more benign outcome, and I here I would suggest we treat <a href="http://clausvistesen.squarespace.com/alphasources-blog/2007/7/16/kiwis-still-on-the-menu.html">New Zealand </a>(and <a href="http://indiaeconomywatch.blogspot.com/2007/12/capital-inflows-into-india-and-rupee.html">India</a> for that matter) as the "Canaries in the Coalmine" (or if you prefer "smoking guns"). Conventional monetary policy is up against very clear limits at the present juncture.</p><p>And the recent resort to administrative measures seems almost destined to fail - as it is failing in the Russian case - since the problem is not a temporary one produced by high oil and food prices (which are anyway in part a by-product of Chinese growth), but is now becoming more endemic and structural. In the face of the present inflation surge the Chinese government has been gradually widening price controls, and finally took the plunge and froze all food prices last month while at the same time clamping limits on fertilizer prices and raising price supports for rice and wheat. These controls are meant to shield China's poor and working classes, who spend up to half their incomes on food. But the inflation spike is blamed on shortages of pork and grain, and it is obvious that putting a lid on prices simply shifts the hardship over to the farmers, discouraging them from raising output, and thus in the medium term reducing output and putting even more upward pressure on prices.</p><p>The recent extreme weather has only exacerbated the problem. In order to ease electricity shortages, thousands of trainloads of coal were rushed to power stations and hundreds of mines were kept running through the Lunar New Year holiday. But with the price of coal now forecast to climb by anything up to 100 percent this year, Beijing has yet to say how power companies will cope. </p><p></p><p></p><p>So I am really not that clear that China has any easy way out of the present inflation dynamic - and remember this is a huge change from the moment when China was reportedly "exporting deflation to the rest of the world", a process which at best has lasted from 1998 to 2007, but is unlikely to continue in the same way. In addition there is now significant evidence of labour market tightening in some parts of the Chinese economy. Wages and salaries of employees went up in the 3rd quarter of 2007 - the latest quarter for which we have data - by 22% (and by 27.2% if we take the private sector alone). And there are significant regional differences, with wages in the private sector in Beijing rising by 36.4% year on year. Even subtracting inflation these are sill very high rates of increase in real wages, and are surely not compensated for in their entirety by productivity increases. So China is steadily losing its competitive edge.</p><p>Clearly given the very low level from which Chinese wages started, and the restrained growth in the value of the yuan, it is possible to absorb to some extent such increases. The problem is that they may go on and on, and even accelerate.</p><p><strong>And The Growing Difficulties In Finding Young Labour</strong></p><p></p><p>The reason I say that we should expect worse to come in this regard is due to the underlying strong structural break in the Chinese population pyramid, a break which has been produced by many years of one child per family policy. Looking at those other canaries we have sent down the collective coalmine - <a href="http://latviaeconomy.blogspot.com/2007/07/something-is-afoot-in-latvia.html">Latvia</a> and <a href="http://globaleconomydoesmatter.blogspot.com/2007/10/is-estonia-really-heading-for.html">Estonia</a> (and then, of course, <a href="http://russiatooat.blogspot.com/2007/12/inflation-in-russia-two-much-money.html">Russia</a>), then it does seem that push-comes-to-shove much sooner than any of us had been anticipating in the question of labour market tightening in the key 15 to 24 age group. In a way these could be thought of as the labour market equivalent of "first time buyers" in the housing market, since they tend to set the rates for others higher up the ladder. And just in case you have difficulty imagining how a country with a 750 million odd labour force could possibly have labour shortages, just remember that this labour force has been growing at an annual rate of 6 or 7 million to sustain the double digit growth rate, and even China can't find the additional people to keep explanding its labour force at this rate forever. And in particular it can't with generational cohorts which will soon be much smaller than those exiting the labour force at the upper age end, and with participation rates in the 15 to 24 age group bound to fall as people go for more and higher levels of education. Maybe it is worth bearing in mind here, that size doesn't mean you have less labour supply problems, au contraire you have more as time passes, and it is no accident in this regard that Russia and the US are the two countries with the largest annual migration needs. In theory we might expect the Chinese economy when it finally becomes the largest in the planet to also be the world's largest consumer of economic migrants, but this scenario hardly seems plausible.</p><p>As I say, 2008 could well be the year that inflation really gets a hold on China. Certainly the strong uptick in the latter months of 2007 is evident, as can be seen in the chart below.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBgegdTmH0BHs1zp6yT1w9EAivDFXgoEv1cBHbSSZmLxPYZ463OcD6XejQ9JFQVJouu6msrekV2qtdmoJJ9FtYli13Guv7ZBbj9D2Wrh_5fLVQ02p3_A8QfIY1j5eiwJKL_bW7NJqa6jU/s1600-h/china+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5158986931728431522" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBgegdTmH0BHs1zp6yT1w9EAivDFXgoEv1cBHbSSZmLxPYZ463OcD6XejQ9JFQVJouu6msrekV2qtdmoJJ9FtYli13Guv7ZBbj9D2Wrh_5fLVQ02p3_A8QfIY1j5eiwJKL_bW7NJqa6jU/s400/china+inflation.jpg" border="0" /></a><br /><br />Curiously this uptick coincides exactly with the peaking of the 15 to 19 age group, as you can see in the chart, and the decline in this age group from here moving forward is really quite dramatic, as you would expect from the drastic policy measure which was applied.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz4gH0qXiMaQaUb8sjAuJOl1oPSgMjKiHsasqFj4MojVU10GwLnq3H6pSucTXzRr5U2QQkUBnr7_kgkxOX1ekFgbi5_KPuD4yJ4bjMLKMnWpALF8DWlKaC_OG0TuPGh1zDnTk60mcdmvU/s1600-h/china+age+groups.jpg"><img id="BLOGGER_PHOTO_ID_5150095465927327154" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz4gH0qXiMaQaUb8sjAuJOl1oPSgMjKiHsasqFj4MojVU10GwLnq3H6pSucTXzRr5U2QQkUBnr7_kgkxOX1ekFgbi5_KPuD4yJ4bjMLKMnWpALF8DWlKaC_OG0TuPGh1zDnTk60mcdmvU/s400/china+age+groups.jpg" border="0" /></a><br /><br /><br />I have selected the 2022 horizon looking forward based on the fact that this is now known data. We can predict with a reasonable degree of accuracy just how many 15 year olds there will be in China in 2022, since they have now already been born. So we have a pretty good idea of China's new labour supply going forward. Obviously China can still get considerable growth by relocating the existing workforce across sectors to more productive ones. But the end of the labour intensive low economic value growth must now surely be in sight, and the big question is can China sustain inflation-free growth of the order of magnitude we have been seeing in recent years, bearing in mind that much of the recent growth in many of the higher growth developed economies - the US, the UK, Ireland, Spain - has been very labour intensive. My feeling is that it can't, this is why all those exhausted canaries swooning in Latvia have been so useful, and that we will see a slowdown in China which will not simply be cyclical, but rather structural. Possibly the moment of inflection (or tipping point) here will come around the time of the Olympic Games.<br /><br />So, as I say the 15 to 19 age group has now peaked in China, and from here on in it is essentially downhill all the way, as far ahead as anyone can see. The truth is that no-one at this point in time knows what the consequences of this are going to be. But don't worry, since at least one thing is for sure: we are all just about to find out.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-3133116031845119932008-02-08T01:37:00.000-08:002008-02-18T01:37:48.167-08:00Indian Wholesale Inflation 26 January 2008India's inflation accelerated at the end of January to the highest rate in more than five months as prices of fruits, spices and salt increased. Wholesale prices rose 4.11 percent in the week ended Jan. 26 from a year earlier, faster than the previous week's 3.93 percent, the Ministry of Commerce and Industry said today in New Delhi.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjODDjcLerAPK4Z8zoEQE4uTLTU0BHrHVs5uumAudyiQgWrZ0D0WoS6tvjmOUAhMriH0kGf_PF1JsDU8tV0E_xwYdoUmPZPJ2zPjI9CsGSTtU6qFM3M_S5spwijIeuY7yMK5XYgNeICFIge/s1600-h/india+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5164545160575337394" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjODDjcLerAPK4Z8zoEQE4uTLTU0BHrHVs5uumAudyiQgWrZ0D0WoS6tvjmOUAhMriH0kGf_PF1JsDU8tV0E_xwYdoUmPZPJ2zPjI9CsGSTtU6qFM3M_S5spwijIeuY7yMK5XYgNeICFIge/s400/india+inflation.jpg" border="0" /></a><br /><br /><br />Inflation accelerated in the week as prices of manufactured goods, accounting for 64 percent of the wholesale price index, rose 0.3 percent from the previous week.<br /><br />The Reserve Bank of India kept the benchmark interest rate unchanged last week on concern rising fuel and food prices may fan inflation. The central bank has also allowed the rupee to appreciate to reduce the cost of imports and curb price gains.<br /><br />That's helped the government damp inflation, which reached a more than two-year high of 6.69 percent almost exactly a year ago.<br /><br />Inflation is a sensitive issue in the $906 billion economy and rising prices may cause the Congress party to lose votes in forthcoming elections. The term of Singh's government ends June 1, next year. The ruling Congress party lost elections in four states in 2007, reducing its influence in parliament. The party was ousted in Punjab and Uttarakhand states and fell further behind in the nation's most populous provinces of Uttar Pradesh and Gujarat.<br /><br /><br />In the meantime the capital inflows continue, and India's foreign exchange reserves rose in the week ending February 1, to $292.6 billion dollars, from $288.3 billion a week earlier.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhITZqWMRA5HLn6oPYDkyNkjtA3nNP3sCZ1NQfcFaj0r6Gjq0Spe8b9v8F-6H8bOheANFqL-kFDhK-prrarDRXE7trRCjLS6wcED9RcsaLOsn9a9TeksGr_gI_r_VWK7AOhv2EBsbCU2B9h/s1600-h/india+fx.jpg"><img id="BLOGGER_PHOTO_ID_5164719291434419250" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhITZqWMRA5HLn6oPYDkyNkjtA3nNP3sCZ1NQfcFaj0r6Gjq0Spe8b9v8F-6H8bOheANFqL-kFDhK-prrarDRXE7trRCjLS6wcED9RcsaLOsn9a9TeksGr_gI_r_VWK7AOhv2EBsbCU2B9h/s400/india+fx.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-25227135495411873882008-01-10T00:09:00.001-08:002008-01-10T00:09:42.782-08:00Japan Leading Indicator November 2007Japan's broadest indicator of future economic activity was down again this month, the fourth cosnecutive weak showing, suggesting that the what has been the longest expansion in more than 60 years may well now be coming to an end. The leading index was at 10.0 percent in November, the Cabinet Office said today in Tokyo. A reading of below 50 signals slower growth in the next three to six months. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFtsSGAeYP-L9ekBxViaepCQ5-3LEVr2XtvIZ7o8Vi7NgVTdij5gCzLZxDBgPnQ31H-5BU-o8JVS2cnqhJGWh4l-6OKH7V4_ITV3HvvfO8SAihkvcF6J-MgRnYX29mLLuxNt-fnetLHmo/s1600-h/japan+leading+indicators.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFtsSGAeYP-L9ekBxViaepCQ5-3LEVr2XtvIZ7o8Vi7NgVTdij5gCzLZxDBgPnQ31H-5BU-o8JVS2cnqhJGWh4l-6OKH7V4_ITV3HvvfO8SAihkvcF6J-MgRnYX29mLLuxNt-fnetLHmo/s400/japan+leading+indicators.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5153749113001658498" /></a><br /><br />Weak domestic demand and consumer consumption as Japan's population and workforce steadily age leave the economy increasingly dependant on export growth and overseas demand. To date the slowdown in US demand has been comensated by growth in Europe and China, but now there are clear signs the Chinese authorities really will have to throw the brake on growth this year as iflation gets steadily out of control, while <a href="http://globaleconomydoesmatter.blogspot.com/2008/01/eurozone-economies-entering-2008.html">the slowdown in Europe is now gathering speed more rapidly </a>than the one in the United States. Goldman Sachs Group today cut its estimate for Japanese growth in 2008 arguing that slower export demand has put the risk of a recession in Japan at a "danger level". Goldman cut their growth forecast to 1 percent from 1.2 percent and said the Bank of Japan will have to forego any interest rate increases until next year. I would go further. I would say that a recession in Japan is now a foregone conclusion. The only real question is how deep and for how long. 1% growth may well be on the optimistic side, and I would start out at 0.5% and subject to downward revision. On the BoJ, as Claus says, it isn't so much that they won't raise as when are they likely to cut, and when will we be back (yes, that dreaded word) to ZIRP.<br /><br />Japan has had three recessions since the country's stock and property bubble burst in the early 1990s. The first lasted 32 months from March 1991 to October 1993, while the second dragged on for 20 months from June 1997 to January 1999. The most recent recession was in the 14 months from December 2000, following the bursting of an information-technology boom. So all the indiactions are that this recession will not be a short affair. It needs to be borne in mind that each time round now Japan's population is older, and the fragility of the underlying situation proportionately greater.<br /><br />As Claus was indicating in his recent post, there is probably now going to be a certain monotony in the data here, as it all moves - sometimes more slowly and sometimes more quickly - in the same direction. The centre of action is now likely to move to the political stage and to following how the Japanese population react to yet another disappointment. <br /><br /><blockquote>``We project weaker-than-expected growth in the first half of 2008 owing to an inevitable, moderate slowdown among emerging economies,'' said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs in Tokyo.</blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-37425149298190721432008-01-08T00:11:00.001-08:002008-01-10T00:12:38.930-08:00India Inflation December 22 2007India's inflation held below the central bank target for a sixth straight month as the government continued to keep a cap on fuel prices despite the fact that global crude oil surged to a record. Wholesale prices rose 3.5 percent in the week ended Dec. 22 from a year earlier, faster than the previous week's 3.45 percent gain, the Ministry of Commerce and Industry said today in New Delhi. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFfSUp2BFv4tg8SnJ6omk4UqJ2bpq5wlKY83jWdpy1ilt2hL0AC6QG5UGHEE33-6NAMvxvMNrbYkDKFqvq9tALs9j6ZvXZmUugK6Tdg_gTsqw5_-7-cDvx6rRZtUKZqvi7EIhI5qf7oH5t/s1600-h/india+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFfSUp2BFv4tg8SnJ6omk4UqJ2bpq5wlKY83jWdpy1ilt2hL0AC6QG5UGHEE33-6NAMvxvMNrbYkDKFqvq9tALs9j6ZvXZmUugK6Tdg_gTsqw5_-7-cDvx6rRZtUKZqvi7EIhI5qf7oH5t/s400/india+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5151553757648175410" /></a><br /><br /><br />The Indian government may raise auto fuel prices by the end of January for the first time in 18 months according to Oil Minister Murli Deora yesterday. That could reignite price pressures and prompt the central bank, which targets 5 percent inflation, to keep its benchmark interest rate at a 5 1/2-year high at its Jan. 31 monetary-policy meeting.<br /><br />India imports almost three-quarters of its energy needs, and has not allowed increases in fuel prices even as crude oil prices have risen 79 percent from a year ago.<br /><br />The government caps gasoline and diesel rates to help keep inflation down and protect the poor, who make up half the country's 1.1 billion people. Gasoline and diesel prices were last changed on Feb. 15, when they were cut for the second time in 2 1/2 months. Cooking gas prices haven't been raised since November 2004 and kerosene since April 2002.<br /><br />Inflation in the third week of December rose as the index of fuels, with 14.2 percent weight in the inflation basket, rose 0.5 percent and the index for manufactured products, including sugar, cement and edible oils, rose 0.1 percent.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-54988287822213046982008-01-08T00:11:00.000-08:002008-01-10T00:11:38.127-08:00Rupee Near RecordThe rupee climbed again today to reach its highest level in almost a decade as the benchmark stock index rose to a record, raising expectations global funds will buy more local equities. The rupee gained for the fourth successive day after Citigroup and Deutsche Bank said in research reports that the Bombay Stock Exchange's Sensitive Index, or Sensex, will add to gains for the seventh year in a row as a near-record pace of economic growth boosts company earnings. Prime Minister Manmohan Singh today said ``conditions are favorable'' for the nation to sustain a growth rate of between 9 percent and 10 percent in the next five years. <br /><br />The currency gained to 39.275 against the dollar at the 5 p.m. close in Mumbai, the highest since Feb. 26, 1998, according to data compiled by Bloomberg. It closed at 39.295 yesterday. The rupee, which last year posted the biggest annual gain since at least 1974, may reach 39 this month according to many observers.<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRNQ7uw4fKMBT41Wh0zyMfg_H7IhTyNOJFmWygR6aXyF95dTFN3BYpF3VL6XABg6mVhw6ik4fXWSEVusm86YmO_q7G55PWemxtgMgU3KANMutbFbS_D0rJpptfBLtnjjEcAZFxTxUmtogq/s1600-h/rupee.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRNQ7uw4fKMBT41Wh0zyMfg_H7IhTyNOJFmWygR6aXyF95dTFN3BYpF3VL6XABg6mVhw6ik4fXWSEVusm86YmO_q7G55PWemxtgMgU3KANMutbFbS_D0rJpptfBLtnjjEcAZFxTxUmtogq/s400/rupee.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5153105456317777778" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-78730673574110125212007-12-25T14:30:00.000-08:002007-12-25T12:36:13.992-08:00Merry Xmas and A Happy New YearWell, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of <a href="http://es.wikipedia.org/wiki/Reyes_Magos">Los Reyes Magos </a>in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, <a href="http://indianeconomy.org/2007/12/21/the-rise-and-rise-of-the-rupee-or-how-to-screech-a-galloping-elephant-to-a-halt-atop-of-a-dollar-bill/">but in all likelihood the rising star of India</a>.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHYYOVyYuHyMViHUgx0HgBkkAIo2dzpxEQp9nU3sj51wCLqS5AOflu5Y5utGLxxYkAdNxbe7shWWjKPX8pzF7qg-9CvCMx2V0JyUEyO2tNKza7YYYlUbyJPODCE0A6yJjfLRd2xc2nwZ8A/s1600-h/libor.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHYYOVyYuHyMViHUgx0HgBkkAIo2dzpxEQp9nU3sj51wCLqS5AOflu5Y5utGLxxYkAdNxbe7shWWjKPX8pzF7qg-9CvCMx2V0JyUEyO2tNKza7YYYlUbyJPODCE0A6yJjfLRd2xc2nwZ8A/s400/libor.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5147621083728492354" /></a><br /><br />Credit crunch, <a href="http://globaleconomydoesmatter.blogspot.com/2007/08/credit-tightening-or-liquidity-crunch.html">did someone use the expression credit crunch</a>?Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-54548045764628254362007-12-24T22:21:00.000-08:002007-12-25T12:36:44.346-08:00Japan in 2008 ... ZIRP Coming Closer?by Claus Vistesen<br /><br />None of the writers here at Japan Economy Watch are professional forecasters and analysts per se. Yet, with what seems to be happening 'next' in Japan I can not help but think that you have been extraordinarily well served here at JEW during the past year. As such, let us have a look at <a href="http://clausvistesen.squarespace.com/alphasources-blog/2006/12/26/japan-in-2007.html">what I said</a> on Japan (and indeed the global economy) about a year ago as we stood on the brink of 2007.<br /><br /><span style="FONT-STYLE: italic">(...) we have </span><a style="FONT-STYLE: italic" href="http://www.globalinsight.com/publicDownload/genericContent/TopTenPredictions_2007.pdf" target="_blank">the Top 10 of economic predictions for 2007 by Global Insight</a><span style="FONT-STYLE: italic"> where the chief economist Nariman Behavesh argues that the BOJ is likely to have raised to 1% by the end of 2007; this would then imply three 0.25% steps from the current level 0.25%. As you will see this is a part of a broad discourse concerning how global interest rates differentials will narrow as the Fed is going to cut while the BOJ and the ECB are going to raise; for the record I do not see this happening at all! </span><br /><br />Now, the ever perceptive readers of this blog will immediately notice the apparent rather peculiar reason as to why I am feeling so smug in my introduction. In this way and apart, of course from the BOJ raising to 1%, isn't this thing of 'narrowing' of global interest rate differentials exactly what we have seen? It could indeed seem so as the Fed's aggressive easing have coincided with a fixed stance in Japan and increases moving over to holding operations at the ECB. However, this is also where I would like to start the whole 'what will happen in 2008' debate since how sustainable is this current state of affairs amongst the three G3 economies? Well, as for the US they have already bitten the bullit. The subprime mess is still pounding away with the recent victims being Morgan Stanley and Bear Sterns having to push the big delete button on a slew of internal balance sheets as it became clear that the subprime debacle had claimed yet another score of assets. But the US economy in general and while certainly still on the ropes is on its way to get to grips with its new situation and get on with the fight. I won't even begin to rant on the Eurozone here where I fear that 2008 will be a year of many a camel swallowing (or was that cold pouridge?) by those who have been pushing the Goldilocks narrative the hardest. Let me move swiftly over to Japan where as can readily be seen the BOJ has not managed to raise the short term interest rate to 1%, far from it actually. I should note in this context that I am not trying to pound excessively on Global Insight and its chief economist who I am sure is a very able and smart analyst. I am simply trying to hammer down that the consensus on Japan as it emerged from 2006 has not exactly materialised and what we now need to do is to understand why as well as we need to look forward as to what will happen next. I will begin with the latter question as <a href="http://www.bloomberg.com/apps/news?pid=20601068&sid=aqNq.ktH_N90&refer=economy">Bloomberg today</a> carries a piece on Japan where it is actually suggested that the BOJ will have to lower rates which effectively would take them back into ZIRP ...<br /><br /><span style="FONT-STYLE: italic">Toshihiko Fukui's final act as governor of the Bank of Japan may be to cut borrowing costs for the first time in more than six years. Economists began predicting Fukui, 72, will have to lower rates after the Bank of Japan yesterday downgraded its assessment of the economy for the first time in three years. The bank has raised rates twice since July 2006, when it ended a policy of keeping borrowing costs near zero to beat a decade of deflation. ``They may have to cut,'' said Robert Feldman, head of economic research at Morgan Stanley in Tokyo. ``As Fukui said yesterday, the economy is getting worse.'' </span><br /><br />This is of course far from being a done deal but it is interesting to see how the discourse kicked off in 2006 with sustainable recovery stories flying all over the place to now where it seems as if we have come full circle. What I particularly want to emphasise here is that this Felman talking and when he says something on Japan people all over the place are bound to listen carefully. Whether the BOJ will actually go ahead with a return into ZIRP is difficult to say indeed. The point is that while economic factors will indeed be importants determinants so will political. The BOJ stands before a change in leadership in Spring 2008 and given the current spout of political uncertainty lingering in Japan combined with fierce debate over potential future 'un-popular' political measures (e.g. a consumption tax perhaps?) any decision and especially one downwards in the interest rate is bound to be surrounded by much commotion not least from the external environment where the G7 is sure to be jumping and dancing all over the place in the event of a cut. This brings me to the other question raised above and one which is far more fundamental and important. As such, why is it that Japan did not see that sustainable recovery? The first thing to bear in mind is clearly the fact that the financial turmoil which was brewing in the beginning of 2007 reared its head with much more force than most had anticipated. There is no doubt that this has not exactly been accomodative to the Japanese economy. However, what I really want to home in on is the narrative which has emerged here in the twilight of 2007 as it has become clear that Japan will probably be flirting with a recession. In this way, it seems that whatever happens next in Japan with respect to the inevitable slowdown of economic momentum is bound to shore up exclusively at the politicians' door. Now, this is an extremely dangerous path to go by I think as <a href="http://clausvistesen.squarespace.com/alphasources-blog/2007/12/12/japan-in-a-mild-recession-sounds-about-right-to-me.html">I also noted recently</a> (for good measure, <a href="http://www.morganstanley.com/views/gef/archive/2007/20071212-Wed.html">Takehiro Sato's 'Buckle Up' analysis</a> can be found here). Edward also treats this point in one of the post <a href="http://japanjapan.blogspot.com/2007/12/japan-economy-20072008-moment-of-truth.html">which immediately preceedes this one</a> where the following point is worth pondering ...<br /><br /><span style="FONT-STYLE: italic">For anything to work for you in life you need a certain amount of good luck, and when your luck is down, and the level of adversity you face mounts, then the problems only seem to pile up. This perfectly describes Japan present problem set I think (I mean don't forget the famous pensions-records scandal, which seems to have been all but forgotten at the moment, except by the people who had their records lost, of course). If you really could live without a spanner showing up in the works, then it never fails to show up. That's what we mean by being "down on your luck". As Jefferson said, when I find myself being lucky I am normally sitting here, hard at work at my desk. That is, we make our own luck, using foresight and sound policy.</span><br /><br />In this way and to paraphrase one of pre-modern history's most vexing questions on whose altar many a head has been severed from its body we need to ask whether the sun revolves around the earth or whether in fact it is not the other way around? Of course, no heads will be severed this time around which serves to indicate the strides human intelligence and community have made after all. So, leaving you with these arcane matters I might risk coming off as a scrooge here just before Christmas. This was not my attention but I do think that we need to think long and hard about what cause and effect are in terms of analysing the Japanese economy.<br /><br />I will have more later on the actual market implications of all this and do have a Merry Christmas come next week.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-60944002058370821512007-12-24T14:35:00.000-08:002007-12-25T12:35:17.637-08:00Capital Inflows into India and Rupee AppreciationWell, this is headed I think to become topic of the year again in 2008. Arpitha Bykere has<a href="http://www.rgemonitor.com/content/view/233966/108/"> a post up today </a>on RGE Monitor, and I <a href="http://indianeconomy.org/2007/12/21/the-rise-and-rise-of-the-rupee-or-how-to-screech-a-galloping-elephant-to-a-halt-atop-of-a-dollar-bill/">had a piece on Friday</a> up on India Economy Blog.<br /><br />I think here that perhaps three charts tell it all. First we have the capital inflows themselves:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFC4zwHK9Uhwcyi1DSMOJH457uKoClxrBlvzWYerxeGxenAUjjpYeGX3CPGze1aq-AoZPbb2SD4Jh6BJQfaBM3sHtmn3xNcJDIGUMeQHevvjoMhx4WZCEZW7rbI2CAynKc5o0-DNhzTuoI/s1600-h/India+Foreign+Exchange+Reserves.jpg"><img id="BLOGGER_PHOTO_ID_5145423039725482690" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFC4zwHK9Uhwcyi1DSMOJH457uKoClxrBlvzWYerxeGxenAUjjpYeGX3CPGze1aq-AoZPbb2SD4Jh6BJQfaBM3sHtmn3xNcJDIGUMeQHevvjoMhx4WZCEZW7rbI2CAynKc5o0-DNhzTuoI/s400/India+Foreign+Exchange+Reserves.jpg" border="0" /></a><br /><br />And then secondly we have the changing relative dollar values of global GDP, which is a topic that takes us straight into the whole debate about "decoupling" and "recoupling". Basically there seem to be two versions of the "decoupling" thesis knocking about. The first of these (which is now very definitely going out of fashion very fast) was based on the idea that the global economy was finally decoupling itself from the US one due to the fact that key global engines among the G7-type economies - and in particular Germany and Japan (and following in both cases lengthy periods of structural reforms) - were finally coming out of a long period of sub-par economic growth and achieving "home grown", domestic-demand-driven, sustainable recoveries in a way which would enable them to take more of the global strain<br /><br />But there is another sense of "decoupling" (which is the one Claus Vistesen and I prefer to call "recoupling" - although this is not, it should be noted - recoupling in the way in which Nouriel Roubini (for example) uses the expression, which seems to refer to some form of renewed coupling to a US economy which is basically on its way down, not in GDP growth terms - although there may of course be a recession - but in dollar share of world GDP terms) and this is to do with the way in which certain emerging market economies (the EU 10, Ukraine, Russia, China, India, Turkey, Brazil, Argentina, Chile etc) are now accounting for a very substantial proportion of global growth (Claus and I have yet to do the detailed numbers on this, but suffice it to say that India, China and Russia alone will account for over 30 % of the growth in the global economy in 2007). This is a far cry from the central role which the US economy was playing in global growth in the late 1990s. So in this sense something fundamental has changed, and this is what Claus and I are calling "recoupling". <p></p><p>This situation can be observed quite clearly in the two charts which follow, which are based on calculations made from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001 - the weight of the soc called BRIC economies (Brazil, Russia, China and India) has been rising steadily. This is just one example - and a very crude one at that - of why Claus and I consider that demographics is so important, since it is precisely the population volume of the BRIC countries (and the fact that they start their development process from a very low base, ie they were allowed to become very poor comparatively, for whatever reason) that makes this transformation so significant.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTvYX9xq9NISziXKBlZFcVO-Xg1s5tS_qNfp7lbSRxa9XluZYIat400-5DhzWRi_xk3F5NlR-oEB7r5by4rAvhg4nQZSu56dVvTDOvyajCB3ocRlH-jKNtPzqtWqklMtRhDCzhNVFyxgc/s1600-h/World+GDP+by+Country.jpg"><img id="BLOGGER_PHOTO_ID_5136030952038938578" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTvYX9xq9NISziXKBlZFcVO-Xg1s5tS_qNfp7lbSRxa9XluZYIat400-5DhzWRi_xk3F5NlR-oEB7r5by4rAvhg4nQZSu56dVvTDOvyajCB3ocRlH-jKNtPzqtWqklMtRhDCzhNVFyxgc/s400/World+GDP+by+Country.jpg" border="0" /></a> </p><p>Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these economies in recent years and the significantly weaker role of "home grown" US growth. The impact of the collapse of the Tech stocks/internet boom in 2001 is clear enough in the chart, as is the fact that everyone went down at the same time, and this is the old form of "coupling" wherein the US economy due, to its size (and hence specific weight) and "above-par" growth potential played a key role, and, as can be seen, when the US went down, then god save the rest. The present debate is really about what will happen if the rising dollar cost of oil and the ongoing difficulties in the financial sector caused by the sub-prime problem leads the US into recession in 2008. Will everyone else follow this time? In 1999 the US economy represented 30.91% of world GDP, and in 2007 this percentage will be down to 22.4% (on my calculations based on the forceast made by the IMF in October 2007). In 200 the US economy accounted for a staggering 40.71% of global growth, and by 2007 this share is expected to be down to 6.43%. So there are prima-facie reasons for thinking that this time round the impact of any US slowdown will not be as acutely felt in some parts of the globe as was the case in 2000, but which parts of the globe will be more affected and which less so?<br /><br /></p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ZUI4z5VL3W4Kb3jHhhNoYVoikaiOEkha94-vKv3d1ciHj0O0mZA898iHgiLmRBBJKQVXRbiJsemCTFitLw7jJGx7disM5MtsS_V5GqvfoO6jj1QApgI9d5Tms6TqCSfqH1DJxbDg1XI/s1600-h/world+GDP+growth+shares.jpg"><img id="BLOGGER_PHOTO_ID_5136031076592990178" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ZUI4z5VL3W4Kb3jHhhNoYVoikaiOEkha94-vKv3d1ciHj0O0mZA898iHgiLmRBBJKQVXRbiJsemCTFitLw7jJGx7disM5MtsS_V5GqvfoO6jj1QApgI9d5Tms6TqCSfqH1DJxbDg1XI/s400/world+GDP+growth+shares.jpg" border="0" /></a><br /><br /><br />So now back to those capital flows. As Arpitha Bykere points out, the rupee rose by around 15.5% against the dollar between Sep 2006 and Oct 2007. The RBI and Indian government have been busying themselves trying to use the various tools they have at their disposal to try to manage the inflows and their potential impact on liquidity and inflation with a variety of forms of FX intervention and sterilization.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaGBRc5VElXnBPqsva-jUUq6odQg2stE23O8KRtOuMMiyFoD_9Aigr2NEVGQCoMpJiPwJrm2uFYK3A2Gh-dRurRunOwUsKPk74rqT9PEBotPc0N2Y3wKb6pYbBjoqPZuWrVkXwGMo8TnjF/s1600-h/USD+Rupee.jpg"><img id="BLOGGER_PHOTO_ID_5147193871921493650" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaGBRc5VElXnBPqsva-jUUq6odQg2stE23O8KRtOuMMiyFoD_9Aigr2NEVGQCoMpJiPwJrm2uFYK3A2Gh-dRurRunOwUsKPk74rqT9PEBotPc0N2Y3wKb6pYbBjoqPZuWrVkXwGMo8TnjF/s400/USD+Rupee.jpg" border="0" /></a><br /><br />Bank reserve requirements have been raised eight times this year, from 5% in December 2006 to 7.5% in October 2007.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEio0LXr50I4rCOZdFKQu0fz059yOSEljyiiZzzMSpnUgMAbwYksJMucRBh90YeW9Iika8RjqZvmYgLIxeMuLsWBr5k4o6SVM9XfLbeSCWTAf9yUkET4-k0fg9h4-NfQlhsTA4e_4vOUVBNx/s1600-h/cash+ratio.jpg"><img id="BLOGGER_PHOTO_ID_5147272740405950146" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEio0LXr50I4rCOZdFKQu0fz059yOSEljyiiZzzMSpnUgMAbwYksJMucRBh90YeW9Iika8RjqZvmYgLIxeMuLsWBr5k4o6SVM9XfLbeSCWTAf9yUkET4-k0fg9h4-NfQlhsTA4e_4vOUVBNx/s400/cash+ratio.jpg" border="0" /></a><br /><br />The repo rate been raised seven times from 6% in April 2005 to 7.75% in March 2007 while the reverse repo rate has been increased five times from 4.75% in March 2004 to 6% in July 2006.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtWlA6A2laR3L5e-rOJwKPyGXlVBb0qnWKkvipBYLg1JwH_9Hiz_7qt5M-Yb-RPi50_psMcC4UlkoyDRBoGpXPXARXueSudKuRpbl9xGyig7YamEax0W4GpEyZ82ZCrT0fCrFis91ke_gH/s1600-h/repo+rate.jpg"><img id="BLOGGER_PHOTO_ID_5147274217874699986" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtWlA6A2laR3L5e-rOJwKPyGXlVBb0qnWKkvipBYLg1JwH_9Hiz_7qt5M-Yb-RPi50_psMcC4UlkoyDRBoGpXPXARXueSudKuRpbl9xGyig7YamEax0W4GpEyZ82ZCrT0fCrFis91ke_gH/s400/repo+rate.jpg" border="0" /></a><br /><br /><br />The increase in reserve requirement acts as a kind of tax on banks (and this makes their work even more difficult for them to increase their deposit base given the pressures for funds which exist in the consumer market and the attractive returns available elsewhere. Further, RBI rules that effectively force them to hold a quarter of their deposits in govt bonds and to purchase the low return sterilization bonds make for added pressures in the conventional banking sector).<br /><br />India's central bank on December 14 also curbed bank loans to mutual funds by mandating that these loans will be treated as lenders' direct investments in stock and bond markets. The central bank has also accelerated the pace of the sterilization via issuance of market stabilization scheme (MSS) bonds. Using such techniques the RBI has managed to sterilize about 58% of the foreign inflows, <a href="http://www.morganstanley.com/views/gef/archive/2007/20071113-Tue.html#anchor5802">according to estmates by Chetan Ayha</a>. The sterilized liquidity (excess liquidity) stock - which includes reverse repo less repo balances, MSS bonds, government balances with the RBI and the increase in the cash reserve ratio - has shot up to US$77 billion as of end-October 2007 from US$19 as of end-October 2006, according to the same estimates.<br /><br />Banks are currently required to limit investments in capital markets to less than 40 percent of their net worth, while funds may borrow from banks only to meet ``temporary liquidity needs'' and as per the capital market regulator's guidelines.<br /><br />This move was a response to the discovery by an apparently astonished RBI that the financial records of some banks showed they had extended "large loans to various mutual funds and also issued irrevocable payment commitments to stock exchanges on behalf of mutual funds and foreign institutional investors". Such transactions were found to have been widespread, but were not included by the banks as part of their declaration of capital market investments.<br /><br />As a result the Securities and Exchange of India has ruled that a mutual fund may borrow only up to 20 percent of its net assets and for periods of not more than six months.Also the RBI has ruled that banks must not give loans or other forms of financial assistance, such as payment guarantees, to foreign institutional investors. Domestic banks have now been given six months to comply with the instructions.<br /><br />RBI’s control over monetary policy has evidently been gradually weakening. Initially RBI followed an independent monetary policy of targeting the interest rate while maintaining a competitive exchange rate with partial capital controls. But as the economy has gradually accelerated to around a 9% average over the last three quarters, and as the sub-prime blow out has added to the attraction of strongly growing emerging economies with relatively higher interest rates and the prospect of strong relative currency apprecaiation, the consequent ineviatable arrival of large capital inflows has lead to RBI to acquiesce its ongoing appreciation, and control over the value of the rupee has to some extent been sacrificed in an atempt to keep control over the interest rate. But as the rupee has steadily approached the 40 USD pain threshold level the RBI has shifted its efforts towards control over the capital account, imposing soft controls on inflows and easing outflows. Moreover, the use of interest rate is constrained by concerns about unnecessarily slowing growth in one direction, and accumulating inflationary pressure (including food, manufacturing, asset inflation) in the other.<br /><br />In theory the RBI could allow exchange rate appreciation to offset the liquidity injection (buying dollars and selling rupees, for example). But a case can well be made that the Indian exchange rate is already somewhat over-valued. The 36-country real effective exchange rate was about 8.5% above the ten-year mean as of September 2007. <br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuMO7aE8ms2BjgA4q3uxEkQ3_vupDJvBGAC3SuyB_EUdR6Yr285kFhinkH-j2j8mUoMNNehM5gLJ0eH3w0IcDpxvw3FREgEmW9kK6VUn_HmIF9MaAjY70gt4ZlY7g_MoChD_mHUA_xGUi7/s1600-h/reer.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuMO7aE8ms2BjgA4q3uxEkQ3_vupDJvBGAC3SuyB_EUdR6Yr285kFhinkH-j2j8mUoMNNehM5gLJ0eH3w0IcDpxvw3FREgEmW9kK6VUn_HmIF9MaAjY70gt4ZlY7g_MoChD_mHUA_xGUi7/s400/reer.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5147538152204973842" /></a><br /><br /><br />More importantly, the 12-month trailing trade deficit has shot up to 6.7% of GDP as of September 2007, resulting in an adverse impact on job creation in the manufacturing sector. Total goods exports growth has decelerated to 4.3% in rupee terms as of September 2007. In our view, small and medium enterprises would have been growing at an even slower rate, as the large companies would have been able to maintain their growth better.<br /><br />Even if one were to consider the services sector exports, the trailing four-quarter sum of the current account deficit (excluding remittances) is at 4.2% of GDP as of June 2007. The headline current account deficit, however, is at a manageable level of 1%, primarily on account of the rising remittances from non-residents. The four-quarter trailing sum of non-residents’ remittances has shot up to US$30 billion (3.2% of GDP) as of June 2007. For assessing the impact of the exchange rate on the domestic output balance, we believe that we should exclude remittances, which represents transfer of income generated in foreign countries. Having to stand back and watch any further appreciation of the exchange rate will be a testing moment for policy makers considering the potential adverse impact on domestic growth and job creation.<br /><br />Another important source of capital inflows has been Portfolio Investment which rose from $2.8 b in FY2000 and $12.5 b in FY2005 to $18.5 b Apr-Sep 2007. According to the IMF Foreign Institutional Investment (FII) has risen from $1.8 b in FY2000 to $8.7 b in FY2004 and to $15.5 b during Apr-Sep 2007. Moreover, the number of FIIs registered in India doubled to 1,050 between Mar 2001 and Jun 2007, and there are now around 3,336 FII sub-accounts. FII equity inflows have increased from $9.8 b in 2004, to $11 b in 2005, and now to over $16 b in the year so far of 2007. <br /><br />India's stock market - buoyed by strong corporate performance and the aforementioned inflows - has risen 43% to date in 2007. According to Citigroup, FIIs holdings in the Bombay Stock Exchange 500 companies rose from 12% in March 2001 to around 22% in June 2007, which is greater than the holdings of domestic mutual funds.<br /><br />In mid-October, the RBI reacted to some of this by banning foreign investment in the stock market via off-shore derivatives in the form of Participatory Notes (PN). Such derivatives had been habitually used by foreign investors who were not officially registered in India (say hedge funds) to indirectly invest through registered investors. Between Mar 2004-Aug 2007, the number of FIIs/Sub Accounts that issued PNs rose from 14 to 34. The share of PNs in total foreign portfolio flows is believed to have increased from 32% during 2006 to about 55% by Oct 2007, with hedge funds accounting for around 50% of the PNs. It has, however, been suggested that the real motive behind the October RBI measure was not so much to restrict investment as to improve the transparency of capital inflows and that restricting inflows via PNs is likely to have little or no impact on the overall inflows entering India in the medium term.<br /><br />Hedge and mutual and pension funds activity have all been growing in India. Hedge fund investment in India has risen 400% from $2.8 b in Sep 2005 to $13.97 b as of July 2007 with over 90% of these investments in equities accruing high returns. According to the Financial Times, private equity deals have surged from $3.9 b in 2006 to around $ 5.9 b ytd in 2007.<br /><br />FDI has also risen significantly from the low level of $3.8b in FY2004 to $16 b in FY2006. In addition, cross border M&A deals increased to 226 deals worth $15.3 b in 2006 from 192 deals worth $9.5 b in 2005. More importantly, investment by non-resident Indians in foreign currency deposits and rupee accounts has risen over the years from $21.7 b in FY2000, $33 b in FY2004 to $41.2 b in FY2006, leading the RBI to cap interest rates on the latter. Moreover, remittances have increased from $12.9 b in FY2000 to $20.5 b in FY 2004 and $27.2 b in FY 2006.<br /><br />According to the IMF India's external debt rose 22.6% to $155 b in FY 2006 (with the appreciating rupee contributing to 10% of this increase) and now is equivalent to 16.4% of GDP. Around 56% of the increase in external debt was due to ECBs and 16% of the increase was due to NRI deposits. India's Net International Investment Position has improved somewhat in the recent years due to increase in assets (rising outward FDI), even as liabilities have continued to grow. Rising FDI and equity portfolio inflows have helped non-debt creating inflows to rise from 27% in FY2000 to 47% in FY2006, but FDI inflows are only up from 14.7% in FY2000 to 25% in FY2006.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-31761681451751271392007-12-24T14:33:00.002-08:002007-12-24T14:34:27.426-08:00Thailand's Economy - At a Crossroads?by Claus Vistesen: Copenhagen<br /><br />As we never tire of pointing out here at this space the analysis and proper understanding of the global economy and more specifically her markets demand a vigorous interaction and -play between the overall broad conceptual analysis and the more nitty-gritty country analysis. Today, and as most people, in the Western World at least, rev up for some of that most scarce and precious quality time with friends and family I feel inclined to wander off over to Thailand for one last spout of economic analysis before closing down for the holidays. Before I start I think it would be only fair to point out that I am not exactly an expert when it comes to Thailand's economy but rather I shall progress in the spirit of traditional writings here at GEM where authors attempt to aspire to the ideal and tradition of the <a href="http://en.wikipedia.org/wiki/Polymath">polymath</a> rather than towards the profile of the 'genius savant' in one specialist area.<br /><br />Yet, and despite my denial of expertise in the area of Thai economics I think it is safe to say that Thailand commands a rather special place in the whole global economic framework for two main reasons. The first is strictly endogeous to political life in Thailand, where the frequency with which governments are toppled by the military only to be subsequently re-inserted (with a quick change of label), is rather high when compared with most other members of the emerging economies leading group.<br /><br />The lastest example of this tendency was handed to us a little over a year ago when General Sonthi Boonyaratglin ousted prime minister Thaksin Shinawatra and declared that a military junta would stay in power for a year. Such abrupt changes of government (and of course the way of changing them) have a tendency not to go down too well with foreign investors and naturally have tended to affect the ability of Thailand to attract foreign capital inflows, as well as to act as a source of outflows. Of course, many would, at this point in time, simply exclaim that since these things are now a natural part of the political cycle in Thailand they are already well priced-in to current market premiums. I will leave this issue here and simply note that whatever importance we ascribe to the political situation in Thailand, an interventionist military is certainly part of the picture and needs to be taken into account.<br /><br />The second reason for Thailand's rather special position in the international economic environment is to be found by going back to 1997 and the Asian currency and financial crisis. As I am sure many of our readers remember Thailand acted was one of the principle centres of attention during the boom phase and then one of the victims of the sudden and abrupt retrenchment of private inflows to emerging markets which occured during the Spring and Summer of 1997. This would then translate into a modern day 'once bitten twice shy' mantle and although I am unsure whether this actually applies for Thailand it serves us well always to remember that debating capital flows in the context of Thailand always will tend to have that historical glow around it.<br /><br /><span style="FONT-WEIGHT: bold">Where now for Thailand? </span><br /><br />In order to deliver a reasonable crack at answering this after all very general question I need to invoke the headline of this note. In my opinion and as I will try to argue below Thailand is now at a crossroads. On the one hand Thailand finds itself right smack in the middle of the sweet spot relative to the ongoing demographic transition known as the demographic dividend. As we know this does not by any means constitute free lunches - of which, of course, there are very few, if any - but rather a golden opportunity for Thailand to move now in order to make sure that it does not go down the road of other rapidly ageing emerging economies of which China is perhaps the most important and best known example. However, if Thailand is to get rich before she actually gets old the window is closing fast.<br /><br />By <a href="http://thailandeconomy.blogspot.com/2007/12/thailand-median-age.html">inspecting</a> <a href="http://thailandeconomy.blogspot.com/2007/12/thailand-male-life-expectancy.html">the graphs</a> over <a href="http://thailandeconomy.blogspot.com/2007/12/thailand-fertility.html">at the</a> <a href="http://thailandeconomy.blogspot.com/">Thailand Economy Watch</a> we can readily see that Thailand with respect to its demographic position is now borderline between two extremes. The fertility rate has been stable at about 1.6 for the past 8 years and coupled with a rapid increase in life expectancy (which of course is a good thing) Thailand is now set to age rather rapidly. However, the effects of the ageing process are likely to be subdued in the interim as Thailand will enjoy something like 15 years of demographic headwind before reaching that ever so important 40 year <a href="http://thailandeconomy.blogspot.com/2007/12/thailand-median-age.html">median age</a> threshold. Now, and although I realize that I have not yet fielded one single economic chart let me be very clear. A great deal of Thailand's economic future rests upon whether the economic growth which is now set to come and continue all things equal will bring Thailand a further notch into the demographic transition bringing TFR below the 1.5 mark. I really hope not and if there ever was an important objective for policy makers in Thailand it would be to make sure that what comes next is accompanied by an effort to keep the fertility rate from falling further, and preferrably, to find ways to nudge it back up to a slightly higher level. This would then bring me back to the present, which is what indeed is set to happen next in the context of the global and thus the Thailand economy?<br /><br />Let us begin with a kind of overview of the Thailand economy such as it. As we can see from the two graphs fielded below, Thailand's prosperity has done been on the rise over the past 15-20 years, - a much more modest rise following 1998, but a rise nonetheless - and there is really no reason to believe that this will not continue to be the case in the immediate future. The Asian Crisis as it occured in the 1997-1998 is certainly not absent from the charts and you could even, if you are into such matters, debate whether in fact Thailand suffered an irreversible blow to its growth trend back in 1997? For more on this topic <a href="http://clausvistesen.squarespace.com/alphasources-blog/2007/3/23/economic-shocks-and-recovery-a-myth.html">go here</a>.<br /><br /><br /><p><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg084rekmDKO1GGIa-yEK5WKXZH6l709B-waEAPWwm21bvjLEeEE87IwQV9bXUKMRdccS0BouvW6GcGanQnH4vP5YcIBnPZ7PbtPZWM6xVBqu3F51cuGHUDinBc3Ni_gmRsc1XydQ_QGD_j/s1600-h/GDP.Thailand.jpg"><img id="BLOGGER_PHOTO_ID_5147098741702974882" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg084rekmDKO1GGIa-yEK5WKXZH6l709B-waEAPWwm21bvjLEeEE87IwQV9bXUKMRdccS0BouvW6GcGanQnH4vP5YcIBnPZ7PbtPZWM6xVBqu3F51cuGHUDinBc3Ni_gmRsc1XydQ_QGD_j/s320/GDP.Thailand.jpg" border="0" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJLw_EzlyFWuD4i0QCtKkK8xUULOKppw9tk4at4NW-R93r4sKnzrEyeXQGx3QliKS_Kot86jRx4Frf2ZNUUVChyphenhyphenGNXVquqlZmla1fct7_O20LQNpFTcu82yQdzGbx9mLD3MkdWkv51dA3m/s1600-h/PPP.Thailand+.jpg"><img id="BLOGGER_PHOTO_ID_5147098737408007570" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJLw_EzlyFWuD4i0QCtKkK8xUULOKppw9tk4at4NW-R93r4sKnzrEyeXQGx3QliKS_Kot86jRx4Frf2ZNUUVChyphenhyphenGNXVquqlZmla1fct7_O20LQNpFTcu82yQdzGbx9mLD3MkdWkv51dA3m/s320/PPP.Thailand+.jpg" border="0" /></a>As for the short term economic data on Thailand, the <a href="http://www.bot.or.th/bothomepage/BankAtWork/Monetary&FXPolicies/Monet_Policy/report/2007/IReng_oct07.pdf">most recent central bank inflation report</a> (PDF) provides us with ample ammunition to get a more solid grip on the immediate outlook. If we scrutinize the data a bit more closely we see that growth in Thailand seems to have moderated somewhat when it comes to the evolution of headline GDP. This slowdown which must be considered in relative terms has coincided with a subtle but important change with respect to the engine of headline GDP growth. As can readily be seen from the chart the central bank provide (reproduced below) as private consumption and fixed capital formation have waned net exports of goods and services have slowly but surely been taking over as the main engine of economic growth in Thailand.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiX_tJIeQ9HWDm-pkmBcriSVOf43OVHySIk5lLP9Cuw5Q_9fkXs4vqFE-_yRE86ivonSQEjtfvCGV08mXf6WbHX5G8_kIuLmunSn6FOPakdlQrEPImNoW3W0opRkoPgUx13jzncxSOmMxtb/s1600-h/GDP+Components.jpg"><img id="BLOGGER_PHOTO_ID_5147292132183291618" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiX_tJIeQ9HWDm-pkmBcriSVOf43OVHySIk5lLP9Cuw5Q_9fkXs4vqFE-_yRE86ivonSQEjtfvCGV08mXf6WbHX5G8_kIuLmunSn6FOPakdlQrEPImNoW3W0opRkoPgUx13jzncxSOmMxtb/s400/GDP+Components.jpg" border="0" /></a><br /><br />This is of course an important trend to take into account since it does mean that Thailand is subject to the whims of global markets to a higher degree than had been the case if private consumption had been doing the heavy lifting. Clearly, at this point we should remember that the time-span in question (i.e. Q2 2006 to Q3 2007) is exactly the period where domestic political uncertainty took a hefty leap upwards. So, it is really difficult to discern a notable trend in all this. However if we look at the central bank's private consumption index we can see after a slowdown at the end of 2006 (which would be associated with the political uncertainty) things do now seem to be turning back up again, so we may well be in a recovery phase.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFTwRFDMdjDCTaJVVvM5a6Z_8RaGLvXchwCtUpp9DsPZcPJa3HaJ61BCy7vkTuT5pUZfO-GLn7ATHeHDHdSMvS8YDZpRD1coenhiHm9NpqrhR6AVoIDLJISIB2PWEjFhFGl5m0VFGMIBc/s1600-h/thailand+consumption.jpg"><img id="BLOGGER_PHOTO_ID_5147106301833295250" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFTwRFDMdjDCTaJVVvM5a6Z_8RaGLvXchwCtUpp9DsPZcPJa3HaJ61BCy7vkTuT5pUZfO-GLn7ATHeHDHdSMvS8YDZpRD1coenhiHm9NpqrhR6AVoIDLJISIB2PWEjFhFGl5m0VFGMIBc/s400/thailand+consumption.jpg" border="0" /></a><br /><br />Another notable feature of the recent trends in the Thai economy is <a href="http://thailandeconomy.blogspot.com/2007/12/thailand-conumer-price-index.html">the rather subdued rate of inflation</a> which has come down over the course of 2006 and now into 2007/2008 as well. This seems somewhat odd when you look at the figures on the labour market where it quickly becomes clear that <a href="http://thailandeconomy.blogspot.com/2007/12/thailand-employment-and-unemployment.html">Thailand is firing on all cylinders</a> at the moment with a monthly registred unemployment rate below 2% and somthing like 35 million people in work out of 64 million inhabitants. Indeed between the summer of 2005 the summer of 2007, Thailand added the best part of a million new jobs. This is really what the demographic dividend is all about, enabling rapid employment growth without provoking inflation. The demographic dividend isn't a policy, but it does produce an environment which is more favourable to the application of good policy.<br /><br /></p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCu2zSAj5WDWdot7hP_oCT3Cu82_yM91ex3S4YMc-HdjYM6F4fqC3YIL3WjXnxI-xgWsjPYSEBpQ4k804Ww723a78W7VCYLQfyyk021MR1xgBYOwrtp8k1JT6-3O2L4XB4QfO45twSOaA/s1600-h/thailand+employed.jpg"><img id="BLOGGER_PHOTO_ID_5147149771197298274" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCu2zSAj5WDWdot7hP_oCT3Cu82_yM91ex3S4YMc-HdjYM6F4fqC3YIL3WjXnxI-xgWsjPYSEBpQ4k804Ww723a78W7VCYLQfyyk021MR1xgBYOwrtp8k1JT6-3O2L4XB4QfO45twSOaA/s400/thailand+employed.jpg" border="0" /></a> This could indicate then that if consumer spending and confidence continue to enjoy a rebound, and if the political situation has reached some sort of resolution then the inflation gauge might start to tick upwards as we venture into 2008, especially in the light of the general global tendencies in base commodity and food prices. Finally, we have as I have already hinted above <a href="http://thailandeconomy.blogspot.com/2007/12/blog-post.html">the trade surplus</a> which since Q3 2005 has averaged around 15% of GDP offers Thailand a firm buffer for solid headline growth.<br /><br />This then serves us to move further into the argument in this note and as such to the more specific point on capital flows which are central for the understanding of the current changes in the global economy and thus also Thailand.<br /><br /><span style="FONT-WEIGHT: bold">Capital Flows and Thailand - To Receive or to Send? </span><br /><br />Starting out with capital flows in the global economy I recently narrated the current economic climate as <a href="http://clausvistesen.squarespace.com/alphasources-blog/2007/12/5/the-global-economy-compass-and-charts-needed.html">fairing in uncharted waters</a> given the delicate situation in which we are now finding ourselves. This uncharted waters theme should not however be misinterpreted as lack of oversight which I feel we at GEM have plenty of. Rather, we are simply noting that what happens next will be an important test for many of our theses and arguments. In this way and homing in on what is especially important in the context of Thailand we have the mounting signs and evidence that the structures and chains of Bretton Woods II are slowly but surely being worn thin. These changes however do not seem supportive of those who have spent their time arguing for a process of de-coupling in the traditional sense whereby the US hands over the baton to a train being run by a joint tag-team consisting of Europe and Japan.<br /><br />Moreso, what we are seeing is a historic process of re-coupling by which the engine locomotive of the global economy is changing from being driven exclusively by the US towards a more diverse crowd of leaders. How far this process will go on is yet to be seen. I for one don't envision for example that the US will revert entirely to growth path where a substantial external deficit is not part of the overall picture. But the main point is that the relative weight will change and perhaps more importantly that the changes we are now seeing are happening at a pace which is quite unprecented. Of course, as <a href="http://www.rgemonitor.com/blog/setser/233759">Brad Setser is set on hammering home</a> a lot lately, the recent retreat of financing from the external US balance is largely due to an almost effective stoppage of private inflows which of course has the nasty side effect that the US is now ever more so dependant on official foreign government inflows in order to keep the boat floating. As for the general situation, the following wonderful quote from Setser quite eloquently sums up how we are now situated in somewhat of an interim position<br /><span style="FONT-STYLE: italic"><br />Private investors want to finance deficits in countries that don’t want to run deficits. The countries now accumulating reserves the fastest have the least need for reserves. The country with the largest deficit is struggling to attract enough private inflows to match the increased desire of its private sector to buy foreign assets – let alone both the deficit and those outflows. And the country with the strongest traditional aversion to state-ownership is now the country most-reliant on government inflows.</span><br /><br />As I mentioned above Brad Setser seems to be focusing quite a lot on the apparent disconnect between private and government/official flows with respect to the financing of the US CA deficit. This rather specific topic should be the center of another note and here we should rather move on to the obvious question. Given that changes are taking place of almost tectonic proportions in the structure of global capital flows what will this mean for Thailand? To deliver a reasonable attempt to answer that question I will need to field some grahps of which some, I am afraid, will be plotting some rather technical stuff. But I will explain as I go along. Let us first inspect the basic graphs plotting the <a href="http://en.wikipedia.org/wiki/Balance_of_payments">CA balance and financial account</a> as it has evolved on a quarterly basis since 1995. Note that these two are inversely correlated as the former measures the headline balance between flows of funds, goods, and services whereas the latter plots the net change in foreign ownership of domestic financial assets. This basically means that if the financial account is in surplus foreigners are buying domestic financial assets more quickly than domestic agents are buying foreign assets and vice versa of course if we are talking about 'selling.'<br /><br /><br /><p><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqWJlcd1dTqw28RjichWdfSOye-NC6IJYlXNcLAqoE78a035WhNwl1Lck9RNliqCj4pTwMnR0Ib3N6WI01foqs7BHBxBv5JVN257p8vFE1sQF1pwfWklt4-2C-bgSj_62gncgZiWcbVzsb/s1600-h/CA.Thailand.jpg"><img id="BLOGGER_PHOTO_ID_5147128321142742450" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqWJlcd1dTqw28RjichWdfSOye-NC6IJYlXNcLAqoE78a035WhNwl1Lck9RNliqCj4pTwMnR0Ib3N6WI01foqs7BHBxBv5JVN257p8vFE1sQF1pwfWklt4-2C-bgSj_62gncgZiWcbVzsb/s320/CA.Thailand.jpg" border="0" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3c7ytLc7c0jzPiKZz3O3AV8qPsIXczxkYyGsbYltQW_CVeO1qw8ZPeS7AWJOKYbQ8CJxbDHk6Owgr4Ay0xEj6s2LOzcN4HOMDwaqDpj2JXZWooTvADUgKOGppQ-hWHvrqnCBUcrRPdIDA/s1600-h/Financial+Account.Thailand.jpg"><img id="BLOGGER_PHOTO_ID_5147128321142742466" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3c7ytLc7c0jzPiKZz3O3AV8qPsIXczxkYyGsbYltQW_CVeO1qw8ZPeS7AWJOKYbQ8CJxbDHk6Owgr4Ay0xEj6s2LOzcN4HOMDwaqDpj2JXZWooTvADUgKOGppQ-hWHvrqnCBUcrRPdIDA/s320/Financial+Account.Thailand.jpg" border="0" /></a>Once again, we can easily see when the Asian Crisis occured in the beginning of 1997. Other things to note is the fact that volatility seems to have returned to the overall CA balance in the recent years which is something I will talk a bit further about below. Secondly, and following from this point we see that foreign investors seems to have once more become rather fond of putting their funds in Thailand over the last couple of years as compared with the relative stagnation in the years following the currency crisis. This is can be further substantiated by a chart showing the flows of net portfolio investments.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzRsmsxdZAKn_bDJl_A7TkxTS45ZUJ4O91vu12pI9M0L6R55eTGflUU_A45EM0JEfzUW2i-IWYpepSTl3LDm3Z7A1v8FHZqaZNq20iRXW3h9TArOXTQVVExyDyT7B4zch9Z5VbZ4iLqDRW/s1600-h/NOFP.Thailand.jpg"><img id="BLOGGER_PHOTO_ID_5147132573160365538" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzRsmsxdZAKn_bDJl_A7TkxTS45ZUJ4O91vu12pI9M0L6R55eTGflUU_A45EM0JEfzUW2i-IWYpepSTl3LDm3Z7A1v8FHZqaZNq20iRXW3h9TArOXTQVVExyDyT7B4zch9Z5VbZ4iLqDRW/s320/NOFP.Thailand.jpg" border="0" /></a>As can be seen particularly well on this graph volatility has indeed returned with a venegance since 2004 and as I hinted this is bound to bring forth that 'once bitten twice shy' mantle. However, and as a testament to the new situation in the global economy the Thailand response to all this was essentially turned upside down when it came <a href="http://www.bot.or.th/bothomepage/General/PressReleasesAndSpeeches/PressReleases/news2550/Eng/n6250e.htm">the 18th of December 2006</a>. As Edward wrote just as the news was coming in off the wire, the measures to control capital were not designed to stem a potential rapid fall in the value of the Bhat as was the case in 1997. Quite the contrary;<br /><br /><span style="FONT-STYLE: italic">So now we have capital controls, not to stem an outflow of foreign exchange, but to stop an outflow of domestic currency. Oh how the world has changed. Of course, it should escape no-one's notice that with fertility now well below replacement (somewhere in the 1.6 tfr range) Thailand is now right in the middle of that Demographic Dividend/Demographic Transition process I keep talking about.</span><br /><br />Indeed, the world seems to have changed and Thailand now must decide how to position itself in this new situation. And this my dear reader brings me back to where I started and how Thailand now seems to be set a crossroads and while it may not be a question of <a href="http://en.wikipedia.org/wiki/Fork_in_the_road_%28metaphor%29">losing your horse or your head</a>, it does seem as if whatever road Thailand chooses it is a choice of some importance. In this way, Thailand seems to be faced with, at least, two interconnected choices moving forward from here. The first issue as I have hinted above is whether Thailand will be able to get the demographic house in order or not. There are of course many unknowns here either way but one thing seems fairly certain at this point. With life expectancy shooting upwards and fertility lingering at a TFR of 1.6 the next 12-15 years of economic development will be very important. If evidence from other countries is something to go by Thailand faces the imminent risk of tumbling down into the sub 1.5 TFR region which essentially constitutes something of a fertility trap. I strongly advise policy makers and others to strive so that this does not come to pass. </p><p>The second challenge which stands before Thailand relates to the whole changing structure of the international economic system and essentially the point that what we considered yesterday to be a distinction between developing and developed countries today is nothing but another anachronism ready for the big historical bin. In short, which strategy should Thailand deploy in an environment where liquidity is aflush and where the global search for yield is on? There is no straightforward question to this answer and in particular when we are talking about Thailand you cannot but expect that the old 'once bitten twice shy' dictum to be high on agenda. However, as I have also tried to argue above the times have changed immensely from 1997 and now Thailand is busy keeping money from pouring instead of pouring out. Consequently, it was only back in the beginning of December <a href="http://clausvistesen.squarespace.com/alphasources-blog/2007/11/26/the-news-this-morning-japan-and-thailand.html">that we learned</a> how authorities in Thailand were considering lifting capital control following today's elections (23rd of December). This then trickled down onto the jungle drums where echoes of double digit % Bhat appreciation were flying all over the place. Indeed, <a href="http://thailandeconomy.blogspot.com/2007/12/thai-baht-and-us-dollar-2007.html">the Bhat has been on an upwards path</a> as of late against the USD and now <a href="http://news.bbc.co.uk/2/hi/asia-pacific/7158354.stm">as the new government readies itself to take office</a> we shall see what happens.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFT_Q2nNHdpNjw2FAadvXMhpY6GsjpHuNVLw-ALmX-D3KAXv7_pu8mkk8TzpYHomCk_GyzarmNqSZUZ0d8-Lx2RJZfUPRSDsRvHUWEeqbWziHgXehXO4cFk3uos0_bAK6dFB7cFwRhnog/s1600-h/USD+baht.jpg"><img id="BLOGGER_PHOTO_ID_5147176906800674434" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFT_Q2nNHdpNjw2FAadvXMhpY6GsjpHuNVLw-ALmX-D3KAXv7_pu8mkk8TzpYHomCk_GyzarmNqSZUZ0d8-Lx2RJZfUPRSDsRvHUWEeqbWziHgXehXO4cFk3uos0_bAK6dFB7cFwRhnog/s400/USD+baht.jpg" border="0" /></a><br /><br /><br />However, what would my view be on this then? Well, I certainly don't want to come off as being complacent towards allowing money to come in too quickly since when this happens there is always the risk that those very same funds may leave just as swiftly again. Nobody would know this better than those interested in Thailand's economy. However, perhaps we should also take heart of the fact, and <a href="http://indianeconomy.org/2007/12/21/the-rise-and-rise-of-the-rupee-or-how-to-screech-a-galloping-elephant-to-a-halt-atop-of-a-dollar-bill/">as Edward so eloquently emphasised in the context of India recently</a>, that the sands and seeds of time cannot be made to run backwards. At the end of the day you could then ask the most prominent question of whether in fact Thailand has a choice or not? Of course it does, Thailand like India, Brazil, and Turkey cannot just with a simple stroke of a magic wand absorb the procedes of a full scale of re-balancing/re-coupling of the global train. However, trying to stem the tide by building barriers is not likely to do any good either.<br /><br />Conclusively, I want to finish off by adding that I see a whole lot of potential for Thailand's economy going forward. It is going to be a bumpy ride for sure and wills and wit will be tested but so it is with history and the future. Both of them are very much with us in the present. The last thing I would like to emphasise is the danger that Thailand follows the path of China not, of course, with the one-child policy per se but rather with respect to the path of growth where I clearly see an important link between the two; demographics and growth path that is. Export dependancy it seems, and not as per usual like all good things, will come to those who wait. Let that be a subtle reminder for Thailand as the country equips itself for a new year with new challenges. </p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-70295741421777713022007-12-24T14:33:00.001-08:002007-12-24T14:33:45.194-08:00Thailand's Demographic Window of OpportunityThis post is really a supplement to Claus's post <a href="http://globaleconomydoesmatter.blogspot.com/2007/12/thailands-economy-at-crossroads.html">Thailand at the Crossroads</a>, and a complement to <a href="http://www.blogger.com/post-edit.g?blogID=8991369883287712098&postID=2955341233804092641">Manuel's election coverage</a>. Now Claus points out that Thailand is in the middle of its ongoing Demographic Transition, and at the high point of that favourable moment when what has become known to economists as the Demographic Dividend process is at its height.<br /><br />The demographic transition is - in simple language - a movement upwards in population median ages. Societies (one after another) move steadily from being high fertility, low life expectancy, low median age ones (think Niger, or Mali, or Uganda right now), to low fertility, high life expectancy, high median age ones (think Germany, Japan and Italy) in a more or less steady and ongoing fashion. We know of course what the starting point of this transition is (the above mentioned high fertility societies have a median age in the 17/18 range) but we don't know where the end point is, since while Germany, Japan and Italy currently have a median age of 43 things clearly are not set to stop at this point, and we won't really know what the ceiling is in this process till we reach it. So on this count we have to watch and wait. But observing the evolution of these three "elderly" societies we can identify some of the processes which are at work as population median ages rise, so while we are waiting for the final readout there is still plenty of work to be done - in terms of policy measures to be adopted - in the meantime. Thailand is one of those fortunate countries who, having arrived on the developing economy scene rather later than others, can learn somewhat from those who have gone before. If she is ready willing and able to listen that is.<br /><br /><strong>Median Ages</strong><br /><br />Now Claus and I do put quite a lot of store by the median age reading of a society, and we do this for all sorts of reasons. Basically median ages serve as a very convenient proxy for all kinds of economically important phenomena like saving and borrowing, fixed capital formation, construction activity and export dependence, productivity, and ultimately labour and consumer supply. <br /><br />The movement up through the various median age levels involves a constant change in population structure, and at one point these changes are very favourable to economic development. These positive changes provide the background to what is known as the demographic dividend process. At the end of the day the transition from being a very low median age to being a very high one involves a shift in the dependent population, from having a very high proportion of young dependent population to having a very high proportion of elderly dependent. In the middle lie the most favourable years, which come in two stages. In the first stage there is simply an increase in the volume of people available for the transition to work in an expanding market economy. This could be thought of as the accumulation of inputs phase - during which time, as we can see in the chart below, the rate of population inctrease continues to be large - and at this point a societies ability to incorporate ever more people into relatively low-value economic activities at a rapid rate produces a growth spurt - like the one we are seeing now in many of the emerging economies. This is why, for example, Thailand can easily contemplate annual growth rates of 7 or 8 percent at this point without setting off the inflation alarms, something which, unfortunately, is not possible in Eastern Europe.<br /> <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj38lTsQbiQAsN9kq49b67slQHpRbcqoMSqkXnpi6Yst_k-S7h49dJrh2OMsxhCgXSGyP6oR6dhlFlMIJ_of1nN1-ZhzHmzbCLXZyciDoC_CYtOnjXXP7Q8PLVM-mbBUX2InEzUC2awC3Y/s1600-h/thailand+4.jpg"><img id="BLOGGER_PHOTO_ID_5146418209417770098" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj38lTsQbiQAsN9kq49b67slQHpRbcqoMSqkXnpi6Yst_k-S7h49dJrh2OMsxhCgXSGyP6oR6dhlFlMIJ_of1nN1-ZhzHmzbCLXZyciDoC_CYtOnjXXP7Q8PLVM-mbBUX2InEzUC2awC3Y/s400/thailand+4.jpg" border="0" /></a><br /><br /><br />But the dividend doesn't end just when the steady downward movement in fertility starts to make itself felt by reducing the inflow of young workers at the labour market entry point, since there is a second dividend phase were the accumulation of quantity is followed by the accumulation of quality, and this is made possible by the steadily growing share of workers in the 25 to 50 age group, and by the rising human capital quality of the new young labour market entrants. This is when you could expect a productivity driven "TFP revolution" and a steady shift through the value sectors towards the more productive and higher value ones.<br /><br />Of course there is nothing automatic about any of this, demography just provides an environment, then it is down to policy to benefit from or fritter the potential which exists.<br /><br />Thailand at this precise point in time is, as Claus indicates, at the crossroads. Labour supply means it is possible to obtain quite strong GDP growth simply by increasing employment, without necessarily achieving large scale productivity gains. But Thailand now needs to move on to the second stage, and rapidly so, since the low fertility environment means that this flow of labour is steadily going to dry up (of course migration from Malaysia and Myanmar can help offset this to some extent) and that growth will now need to become more productivity "intensive" if living standards are to continue to rise.<br /><br />Why is this such an important moment. Well let's look at Thailand's median age. <br /><br /> <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPmEKidGKaOpNyKaBOXeuMX5-zxtpX0X9_Pkc5fFJO-8eK5lfZd26d8_htrBXFcBBilfBInChwX4kPAQA_CnM2PS13srcU6o5BcNujM9gunSzSoqPncbr1bXDxq3PJRTyk_0_-OFzczCY/s1600-h/thailand+6.jpg"><img id="BLOGGER_PHOTO_ID_5146428139382158482" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPmEKidGKaOpNyKaBOXeuMX5-zxtpX0X9_Pkc5fFJO-8eK5lfZd26d8_htrBXFcBBilfBInChwX4kPAQA_CnM2PS13srcU6o5BcNujM9gunSzSoqPncbr1bXDxq3PJRTyk_0_-OFzczCY/s400/thailand+6.jpg" border="0" /></a><br /><br />As we can see, Thailand's median age has been rising quite rapidly since 1990. It is now in the early 30s - which is definitely a very favourable point - but by 2020 (according to the UN median forecast) it can have risen to 37. And this estimate is very likely rather conservative, since it anticipates a rebound in fertility from the current, below replacement level, of 1.6 TFR.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNig3nwdqA8VwM8A-pexluszerXo0QSKObSJ4b5qLE6-k5bTxXF_bvY-VphhH21Qt9saHXZVmhHGeI0FZGFrmYbJa-Xfh0_4bAgqezGLxfxK9HEBNt8ahExMDWqXBV6BC6nyQzMuLAsaI/s1600-h/thailand+9.jpg"><img id="BLOGGER_PHOTO_ID_5146429732815025330" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNig3nwdqA8VwM8A-pexluszerXo0QSKObSJ4b5qLE6-k5bTxXF_bvY-VphhH21Qt9saHXZVmhHGeI0FZGFrmYbJa-Xfh0_4bAgqezGLxfxK9HEBNt8ahExMDWqXBV6BC6nyQzMuLAsaI/s400/thailand+9.jpg" border="0" /></a><br /><br /><br />This forecast may well be overly optimistic when you think of what has happened in other developed Asian societies like Japan, Singapore, South Korea, Hong Kong, Taiwan, where fertility has fallen to the 1.2-1.3 range (and of China, where things may well be heading rapidly in this direction). Increasing education among women and rising living standards may well lead to increasing birth postponement (women having children at later ages) and we already have extensive evidence of the impact of this process on the TFR readout over extended periods of time. <br /><br />Also life expectancy has been rising, and may well continue to rise more rapidly than the median forecast anticipates.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_E4I7FjfDzbOJsSfV-9Xaj-HEE0xMcdr3NG4laUJoM0_vga3oA4kFPSJ6eeXOEDDGrtIQCY62XSXB4_MwmH05ihf_tOlgflUx6uooYUpY7Yco7ra6BCCBlN29rXD6-1C65lZoHjET1TU/s1600-h/Thailand+7.jpg"><img id="BLOGGER_PHOTO_ID_5146428654778234018" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_E4I7FjfDzbOJsSfV-9Xaj-HEE0xMcdr3NG4laUJoM0_vga3oA4kFPSJ6eeXOEDDGrtIQCY62XSXB4_MwmH05ihf_tOlgflUx6uooYUpY7Yco7ra6BCCBlN29rXD6-1C65lZoHjET1TU/s400/Thailand+7.jpg" border="0" /></a><br /><br />What all of this means is that if the upside risk to the Thai median age forecast turns out to be the case, then Thai median age could easily be brushing up against the watershed median age of 40 by the time we get to 2020. This age is important, since it seems to mark the frontier between an internal consumption driven society to an export dependent one. If Thailand hasn't made the leap from being a developing to a developed economy by this point her future could become very complicated. So the years to come are critical, which is why we are speaking of "crossroads". <br /><br />Nowhere is this situation clearer than in the evolution of the 15 to 19 age group (see chart below). Thailand has a "loval peak" in this population around 2012. So during the next few years there will be a growing number of young people entering the labour market. So this is a very good time to get the labour intensive part of the development operation done. Post 2012 Thailand can move progressively towards greater dependence on productivity and TFP (if all goes well that is).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3WELUVqBWgB9KLOkWTR3nnA1MwGTgvdQ3NbgH6lIvdaxrjDNnMsHTt42Q2HgZyG0O8rlfG6QvsPjVnm8f_NQksGdhB7n9jyL_wEL3n7TeG_GxW9Ddtlz0KzrpuUALJDm30qhxkvIW03y1/s1600-h/thai+15+to+19.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3WELUVqBWgB9KLOkWTR3nnA1MwGTgvdQ3NbgH6lIvdaxrjDNnMsHTt42Q2HgZyG0O8rlfG6QvsPjVnm8f_NQksGdhB7n9jyL_wEL3n7TeG_GxW9Ddtlz0KzrpuUALJDm30qhxkvIW03y1/s400/thai+15+to+19.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5147511583537280770" /></a><br /><br />Fortunately, as I indicate <a href="http://indianeconomy.org/2007/12/21/the-rise-and-rise-of-the-rupee-or-how-to-screech-a-galloping-elephant-to-a-halt-atop-of-a-dollar-bill/">in this post on India here</a>, the global environment is likely to be very favourable. In addition Thailand's more recent and measured entry into the low fertility club (unlike, for example, Eastern Europe) means that she is capable (as Claus noted) to run quite rapid growth rates without hitting the solid wall of substantial wage inflation. So she has the wind behind her. Much more than she did in 1998. If we just briefly look at the chart for gross fixed capital formation for a moment.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZFncnx98WGPE43Igfnzdd7aVuupiGXABIX7U5ZDbsEJ2ztWumhQPiE1IKMOuC4vdAbn6OoLSloLuLbaoq3k2AUVllFoQxtHxFwWinvklfzlR3g5u8fEMBeo2oGL1LgCdYRBmUhTffvqw7/s1600-h/thai+GFCF.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZFncnx98WGPE43Igfnzdd7aVuupiGXABIX7U5ZDbsEJ2ztWumhQPiE1IKMOuC4vdAbn6OoLSloLuLbaoq3k2AUVllFoQxtHxFwWinvklfzlR3g5u8fEMBeo2oGL1LgCdYRBmUhTffvqw7/s400/thai+GFCF.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5147455156256945906" /></a><br /><br />Now it is very easy to see the massive distortion in investment which took place during the boom of the mid 1990s, how the correction was more or less inevitable, and how Thai Gross Fixed Capital Formation is now on a much lower and more sustainable level. So to some extent the "correction" worked. Also it should be noted that in the mid 1990s Thai median age was somewhere in the mid 20s (like Venezuela, or Ecuador right now, and these are hardly shining examples of political and economic stability). So Thailand was the victim of the Asian financial markets telling themselves the wrong story. Ideas and perpsectives do matter, since they serve to orient behaviour and expectations (those famous compasses and charts that Claus goes on about). Our apparent obsession with median ages isn't simply an obsession, and it isn't all rigmarole and obfuscation, it is part of a search for the "grail" of growth theory, then underlying mechanism.<br /><br />Finally, just to illustrate what we are talking about, I present my habitual "exhibit A", Thailands population pyramids. These show the age structure transition which is taking place before our eyes clearly enough I think.<br /><br />OK, that's it. Have a nice xmas everyone, and good luck Thailand, you will need it.<br /><br /><strong>Bibliographic References</strong><br /><br />Here are some links to economic literature on the demographic dividend.<br /><br /><a href="http://www.imf.org/external/pubs/ft/fandd/2006/09/index.htm">The Economics of Demographics</a>, special issue of the IMF's Finance and Development Magazine, September 2006.<br /><br />Especially <a href="http://www.imf.org/external/pubs/ft/fandd/2006/09/bloom.htm">Booms Busts and Echoes</a>, by David E. Bloom and David Canning <br /><br />Bloom, David E., and David Canning, 2004, "Global Demographic Change: Dimensions and Economic Significance," in Global Demographic Change: Economic Impacts and Policy Challenges, proceedings of a symposium, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28, pp. 9–56.<br /><br />Lee, Ronald, 2003, "The Demographic Transition: Three Centuries of Fundamental Change," Journal of Economic Perspectives, Vol. 17 (Fall), pp. 167–90.<br /><br />National Research Council, 1986, Population Growth and Economic Development: Policy Questions (Washington: National Academies Press).<br /><br />Bloom, David E., David Canning, and Bryan Graham, 2003, "Longevity and Life-Cycle Savings," Scandinavian Journal of Economics 105, pp. 319–38.<br /><br />Bloom, David E., David Canning, and Pia Malaney, 2000, "Demographic Change and Economic Growth in Asia," Population and Development Review, 26, pp. 257–90<br /><br />Bloom, David E., David Canning, and Jaypee Sevilla, 2002, <a href="http://www.rand.org/pubs/monograph_reports/MR1274/">The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change </a>(Santa Monica, California: RAND).<br /><br />Bloom, David E., and Jeffrey G. Williamson, 1998, "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, 12, pp. 419–56.<br /><br />Mason, Andrew, 2001, Population Change and Economic Development in East Asia: Challenges Met, Opportunities Seized (California: Stanford University Press).<br /><br /><br />Mason, Andrew, 2005, <a href="http://www.schemearts.com/proj/nta/doc/repository/M2005a.pdf">Demographic Dividends: The Past, the Present, and the Future</a>, Working Paper, Department of Economics, Population Studies Program, University of Hawaii at Manoa<br /><br /><br /><strong>Pyramid Supplement</strong><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvzicWdUuyBqKwCb7L7DlCdwD95_Mds0V3mvOMdVDgWNYXvA8WTTJzKK2vGp0qgamVTGsBk-JtRqti7_3S4wy_ReL6PWt_jp8Vg7z2_i9Y_AFK5FNBOLZp7sw_8ECBg6OcxQS0nGOQKDM/s1600-h/thailand+one.jpg"><img id="BLOGGER_PHOTO_ID_5146417973194568802" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvzicWdUuyBqKwCb7L7DlCdwD95_Mds0V3mvOMdVDgWNYXvA8WTTJzKK2vGp0qgamVTGsBk-JtRqti7_3S4wy_ReL6PWt_jp8Vg7z2_i9Y_AFK5FNBOLZp7sw_8ECBg6OcxQS0nGOQKDM/s400/thailand+one.jpg" border="0" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLzIMYwMKfZLHNSZ3TqGQqQ7xJ0h8HaA090YRuqnS48Brfz-ze99GJNF2-ZtcQ98CyNvuOwVy3S5LMYEXCTn4EqFLPDe7JYK_AZd4JSJG7yxjN_EGsfqtfDvFeYYAD09FDzxZa2gr7V3Q/s1600-h/thailand+2.jpg"><img id="BLOGGER_PHOTO_ID_5146417724086465618" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLzIMYwMKfZLHNSZ3TqGQqQ7xJ0h8HaA090YRuqnS48Brfz-ze99GJNF2-ZtcQ98CyNvuOwVy3S5LMYEXCTn4EqFLPDe7JYK_AZd4JSJG7yxjN_EGsfqtfDvFeYYAD09FDzxZa2gr7V3Q/s400/thailand+2.jpg" border="0" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2lDrDN9h7LeGTXGo6i-DdrGhrhRhRYiS189THLqI9em94VzSSB1ET-huVFXSJvGhqdNeBvxFBTV-9Wmm_JZAPbe9GTb6b7QBcSvQwtonuFjR7-P9buPLp7Q81zzfM9Qvdm0cU8n8gc50/s1600-h/thailand+3.jpg"><img id="BLOGGER_PHOTO_ID_5146417513633068098" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2lDrDN9h7LeGTXGo6i-DdrGhrhRhRYiS189THLqI9em94VzSSB1ET-huVFXSJvGhqdNeBvxFBTV-9Wmm_JZAPbe9GTb6b7QBcSvQwtonuFjR7-P9buPLp7Q81zzfM9Qvdm0cU8n8gc50/s400/thailand+3.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-66320331047539091662007-12-22T14:36:00.000-08:002007-12-24T14:38:01.307-08:00The Uncomfortable Rise Of The Rupee?Well I'm afraid I'm not quite done with the Economist on India yet (see <a href="http://indiaeconomywatch.blogspot.com/2007/12/economist-on-india.html">this extensive post to read the story so far</a>), since our sterling correspondent, undaunted by the failure of all that vindaloo curry he had been eating to overheat anything more than his own digestive tracts our is now worrying about, guess what, the <a href="http://www.economist.com/finance/displaystory.cfm?story_id=10286077">rise of the rupee</a>.<br /><br />As he says, in a post whose title I have ironically cited in this one:<br /><blockquote>The rupee's rise may be less dramatic than that of the Philippine peso, Brazilian real or Turkish lira. But it is uncomfortable nonetheless.</blockquote>Quite so, just like a strong vindaloo without the obligatory mango lassi as accompaniment it a rising currency produces its own kind of dispeptic discomfort. But hold on a second, mightn't a rising currency in India actually be good news, and in any event inevitable. Nothing it seems is ever good news where India is concerned for our valiant correspondant, and everything needs to be tinged with it's due dose of schadenfreund.<br /><br />So what then is all the fuss about? Well the rupee certainly is rising. Here is a chart showing how it has risen vis-a-vis the US dollar over the last 2 years.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEJPb2wmoGSpzW6p_qqtqWMLVLY2wIRn0IHHWwvMtye_F6Uyhb7_opV-QZbUE5aa2RfBiGFnFxmzVuNfBO2JCemPeWu5A-pBASbIKinwoCITzOF8Zu8l6P4JPxA4jfKTs5skT1l0USEIGp/s1600-h/Indian+rupee+a.jpg"><img id="BLOGGER_PHOTO_ID_5144266444548262610" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEJPb2wmoGSpzW6p_qqtqWMLVLY2wIRn0IHHWwvMtye_F6Uyhb7_opV-QZbUE5aa2RfBiGFnFxmzVuNfBO2JCemPeWu5A-pBASbIKinwoCITzOF8Zu8l6P4JPxA4jfKTs5skT1l0USEIGp/s400/Indian+rupee+a.jpg" border="0" /></a><br /><br />As the Economist India corresponent points out, India's currency has strengthened by about 15% against the dollar in the last year alone, and by over 10%, on an inflation-adjusted, trade-weighted basis, since August 2006. And why is this. Again our correspondent is pretty much to the point:<br /><br /><br /><blockquote>This vigour is due to a strong inflow of foreign capital, some of it enticed by India's promise, the rest disillusioned by the rich world's financial troubles. The net inflow amounted to almost $45 billion in the year to March, compared with $23.4 billion a year earlier.</blockquote><br /><br />Although I can't for the life of me understand why the latest data he has is from back in March. Can't this guy ever do a professional job? Data up to the start of December <a href="http://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=8994">is readily available here</a>, and fascinating reading it is, as you can see it in the chart below.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFC4zwHK9Uhwcyi1DSMOJH457uKoClxrBlvzWYerxeGxenAUjjpYeGX3CPGze1aq-AoZPbb2SD4Jh6BJQfaBM3sHtmn3xNcJDIGUMeQHevvjoMhx4WZCEZW7rbI2CAynKc5o0-DNhzTuoI/s1600-h/India+Foreign+Exchange+Reserves.jpg"><img id="BLOGGER_PHOTO_ID_5145423039725482690" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFC4zwHK9Uhwcyi1DSMOJH457uKoClxrBlvzWYerxeGxenAUjjpYeGX3CPGze1aq-AoZPbb2SD4Jh6BJQfaBM3sHtmn3xNcJDIGUMeQHevvjoMhx4WZCEZW7rbI2CAynKc5o0-DNhzTuoI/s400/India+Foreign+Exchange+Reserves.jpg" border="0" /></a><br /><br />As we can see, while the net inflow of external funds in the year to March - as proxied by the level of foreign exchange reserves held at the Reserve Bank of India -was $45 billion, the net inflow between 31st March 2007 and the start of December has been $74.4 billion, or not that far from double the whole amount that entered in whole fiscal 2007/2008 in just 9 months (and $41 billion of this since 15 August). This is, of course staggering, but unfortunately, it seems, you aren't going to read about just how staggering it is in the pages of the Economist since over there we are still looking at last years data (the last time I cricised them they said I was cross, this time I am angry aren't I, does it show?). As can be seen directly from the chart, the money really started to flow in from mid-September and the very fast rate of inflow continued till mid November.<br /><br /><br />Now the locus classicus on all this is certainly Morgan Stanley's Chetan Ahya, really <a href="http://www.morganstanley.com/views/gef/archive/2007/20071113-Tue.html#anchor5802">it was this post of his which alerted me</a> to the extent and significance of what was happening.<br /><br /><blockquote>Over the seven weeks ending November 2, 2007, India’s foreign exchange reserves have increased by US$34 billion (annualized inflow of US$250 billion). Indeed, the trailing 12-month sum of FX reserves has increased to US$100 billion. This compares with the average annual increase of US$38 billion over three years prior to these seven weeks. With the current account still in deficit, the increase in reserves is being driven largely by a spike in capital inflows and to a very small extent because of conversion of non-dollar reserves into dollars. During the last seven weeks in which FX reserves have shot up, we believe that capital inflows would have been US$35 billion. Out of this, not more than 10% has been on account of FDI inflows. Non-FDI inflows including portfolio equity and external debt inflows form a major part of these inflows.<br /><br />While the inflows are pouring in at the annualized run rate of US$250 billion, in our view, currently the country can absorb only about US$40-50 billion of capital inflows annually without causing any concern on attended risks of overheating. The key question policy makers are grappling with is how to manage these large capital inflows. As the strong growth in domestic demand has resulted in overheating of the economy recently, the central bank does not want to leave such large capital inflows fueling the domestic liquidity. Not surprisingly, the central bank has accelerated the pace of the sterilization by way of issuance of market stabilization scheme (MSS) bonds and an increase in the cash reserve ratio (CRR). Over the last 12 months, the RBI has sterilized about 58% of the foreign inflows. The sterilized liquidity (excess liquidity) stock including reverse repo less repo balances, MSS bonds, government balances with the RBI and the increase in the cash reserve ratio has shot up to US$77 billion as of end-October 2007 from US$19 as of end-October 2006.</blockquote><br /><br />Now while the issue of whether or not India is overheating raises its head again here, the context is quite different, and it is clear that the Reserve Bank of India is now struggling with the problems that may arise in the wake of such a massive influx, especially if it continues, as it may well do if the problems in the developed economies experience in 2008 turn out to be greater than may appear to be the case at present, and again if <a href="http://globaleconomydoesmatter.blogspot.com/2007/08/credit-tightening-or-liquidity-crunch.html">not all the emerging economies are as sound as they appear to be</a>. Also, India is hardly to blame for this state of affairs, since the money is leaving one place (the developed economies following the sub-prime bust, rather than intentionally going somewhere. It is just that, amongst all that growing risk you can see out there, India looks to be as good a safe haven as you can find these days.<br /><br />But this is not the moment to take all this into those still uncharted waters. If you want to read more on this aspect of things, then I cannot recommend a better source than Claus Vistesen's<a href="http://globaleconomydoesmatter.blogspot.com/2007/12/global-economy-compass-and-charts.html"> Compass and Charts Needed</a>. For my part, I think all I want to register here is that something profound and important is taking place, and not simply a tepid repeat of events we have seen all to often in the past. Starting from this recognition, let the debate as to where we go next, and what to do about it, commence!Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-22127055263824294232007-12-20T14:34:00.000-08:002007-12-24T14:35:47.081-08:00China Inflation November 2007China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy. Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc72lR11Jlv0Rwaakz7RwkZXZMvoCen1umxnF8YVwfBC595obWgx84k8EcHNv62Pgjy8RG0oXfM8g1dzKGGfK7Bv2xZOnnpsRwQZd-rz5tIlfmCKi8r7cBCNWZQ67SuyMa7Z7qPaKneqQ/s1600-h/china+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc72lR11Jlv0Rwaakz7RwkZXZMvoCen1umxnF8YVwfBC595obWgx84k8EcHNv62Pgjy8RG0oXfM8g1dzKGGfK7Bv2xZOnnpsRwQZd-rz5tIlfmCKi8r7cBCNWZQ67SuyMa7Z7qPaKneqQ/s400/china+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5142675867177431074" /></a><br /><br />Surging food and fuel costs and a record $238 billion surplus in the first 11 months have prompted the government to name inflation and overheating as the biggest threats to growth. U.S. Treasury Secretary Henry Paulson is in Beijing to press for yuan gains that would narrow the trade gap and staunch the flow of money into the world's fastest-growing major economy.<br /><br /> The yuan gained by the most in a month against the dollar. The currency, which has climbed 12 percent since a fixed exchange rate was scrapped in July 2005, rose 0.22 percent to 7.3792 per dollar as of 4:46 p.m. in Shanghai from 7.3952 late yesterday. It touched 7.3770, the highest since the end of the dollar link.<br /><br />The People's Bank of China last week ordered lenders to set aside 14.5 percent of deposits as reserves, up from 13.5 percent. China's one-year lending rate is at a nine-year high of 7.29 percent after five increases this year. <br /><br />The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-biggest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.<br /><br />China's money-supply growth exceeded the central bank's annual target for a 10th straight month as a ballooning trade surplus pumped cash into the world's fastest- growing major economy.<br /><br />M2, the broadest measure of money supply, rose 18.5 percent to 40 trillion yuan ($5.4 trillion) in November from a year earlier, the People's Bank of China said today on its Web site.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-3929153276792180302007-12-19T14:38:00.000-08:002007-12-24T14:38:58.710-08:00The Economist on IndiaWell, I am revving myself up again now to come back at all those people who said that India was overheating when it was growing away at a mere 8%. In fact India grew at an 8.9% year on year rate during the last quarter (and this following 9.1% in the first and 9.3% in the second quarters of 2007), and far from inflation shooting through the roof it is currently not too far from the Reserve Bank of India's 5% target. Perhaps it is <a href="http://chinaeconomywatch.blogspot.com/2007/12/china-inflation-november-2007.html">towards China </a>that people should be directing their attention, or <a href="http://easterneuropeeconomy.blogspot.com/2007/12/polish-economy-unlimited-need-for.html">towards Eastern Europe</a>, or even - god forbid - <a href="http://bonoboathome.blogspot.com/2007/12/eurozone-inflation-november-2007.html">the eurozone</a>, but India it seems is one country where the "great overheating" argument is steadily running out of steam. Of course one country which everyone will readily admit <a href="http://japanjapan.blogspot.com/2007/11/where-is-japan-heading.html">is not overheating is Japan</a>, but I thinkwe'll leave that topic on one side for today.<br /><br />Here I just want to repost part of <a href="http://www.economist.com/blogs/certainideasofeurope/2007/07/a_fistful_of_reply.cfm">a reply I gave to the Economist </a>when they had the kindness to try to answer some points I had raised about the general quality of their economic coverage, and about what I take to be their obsession with ignoring the demographic component in economic growth. For the Economist, it seems, growth and development is a single issue item, and is all about insitutions, and institutional quality. Which makes it kind of funny that Argentina, which must be among the worst of the emerging economy pack in institutional quality is still powering away, <a href="http://globaleconomydoesmatter.blogspot.com/2007/10/time-to-cry-for-argentina.html">despite more or less openly manipulating the economic data</a>.<br /><br />Obviously institutions matter, but so does demography. This is not a one horse race, or if you prefer, this particular horse doesn't only run on one leg.<br /><br />The topic in question here is India's potential growth rate. Recent GDP performance at just under 9% must have been astounding many of India's critics, especially given the way inflation, despite all that growth, has been kept pretty much under control.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ2QDrmX70zcN8IyaP0Dmq7MzN0EjtxV5qd3QibhnVnAcWuX6M4ED9yzA1jlHjjv5KPiQR5xF3o1U1JF0VkkMuo5d_hPw6STLLcLk26A3m7efXEkkGSShsWjQArAT29u6Jbb1bNYggIPrb/s1600-h/india+CPI.jpg"><img id="BLOGGER_PHOTO_ID_5144703045153771074" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ2QDrmX70zcN8IyaP0Dmq7MzN0EjtxV5qd3QibhnVnAcWuX6M4ED9yzA1jlHjjv5KPiQR5xF3o1U1JF0VkkMuo5d_hPw6STLLcLk26A3m7efXEkkGSShsWjQArAT29u6Jbb1bNYggIPrb/s400/india+CPI.jpg" border="0" /></a><br /><br />Wholesale price inflation has been preforming even better:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibmqSZ89JBTZd8l6CsrP45e6XwbxxqeAL6kSoFr_qoLzhu4B8c0c3NdfS5eaOPi0DFXLAImYjDInJa6_nUqec4oescGPbS8cIYoPjThkYpmYU8a1Oyl3AvXwH_YabnUtxiYiMfUFvYIgAZ/s1600-h/india+wholesale+prices.jpg"><img id="BLOGGER_PHOTO_ID_5144281064616938210" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibmqSZ89JBTZd8l6CsrP45e6XwbxxqeAL6kSoFr_qoLzhu4B8c0c3NdfS5eaOPi0DFXLAImYjDInJa6_nUqec4oescGPbS8cIYoPjThkYpmYU8a1Oyl3AvXwH_YabnUtxiYiMfUFvYIgAZ/s400/india+wholesale+prices.jpg" border="0" /></a><br /><br />So to go to the start of our story, back in September 2006, I post a piece on the India Economy Blog entitled "<a href="http://indianeconomy.org/2006/09/12/uncharted-water/">Uncharted Water</a>" where I argued precisely the following:<br /><blockquote>What is clear is that the Indian economy is currently gathering steam,<br />and this at a time when there is a general consensus that the political will for<br />reform isn’t what it used to be. Strange isn’t it?<br /><br />My meaning here isn’t that reforms aren’t necessary, but that there are other<br />factors at work, and in particular demographic ones. The importance of these<br />demographic factors generally can be seen from the fact that it is now the newly<br />developing countries (China, India, Brazil, Chile, Thailand, Turkey) who are<br />pulling the global economy (and in the process pushing up energy and commodity<br />prices). The developed world - which makes up say 50% of global GDP is growing<br />much more slowly than the developing world - and some of this for ageing related<br />demographic reasons. Global GDP is forecast to grow at a 5% annual rate this<br />year, yet the US is growing at around 3.5%, Japan 2.5% and the eurozone around<br />2%. So you tell me, who is pulling who here?<br /><br />And this is why I say we are moving into uncharted territory. Economists<br />used to have a little model which worked on the assumption of each economy<br />having a certain growth capacity in any given moment. But could any one tell me,<br />what *is* the growth capacity of China or India? I certainly have no idea, and I<br />haven’t seen anyone else make a convincing case on this topic. The magnitude of<br />the growth we are now seeing in the developing world is beyond all historical<br />precedent.</blockquote><br />Doesn't look to bad at all does it, in the light of what has been happening during the second half of this year. And remember this was written in the Autumn of 2006, not Autumn 2007 when just about everyone and their auntie is saying something like this. Of course this whole debate is ongoing. Nandan Desai had an excellent piece on IEB which <a href="http://indianeconomy.org/2007/02/02/an-overheated-debate-about-india-overheating/">put things pretty much in perspective </a>and in October 2006 I had <a href="http://indianeconomy.org/2006/11/29/sizzling-or-just-right/">another piece in the IEB</a>, basically in response to the Sizzling India article in the Economist. I said this:<br /><blockquote>I am even brazen enough to believe that trend growth may well<br />have moved up beyond 8.5% going forward, and that indeed within 5 years we may<br />well see India overtaking China in terms of average quarterly growth rates (of<br />course this may well vary from one quarter to another, a phenomenon known as<br />volatility, and of course 5 years from now the Chinese economy may not still be<br />sustaining the very high growth rates we see today).</blockquote><br />Again, I am really comfortable standing by this, and even the point about China, since the inflation problem really does seem now to be getting a grip (remember they have had nearly 30 years now of the one child per family policy, and at some point soon their labour market is going to tighten and tighten, for what may well happen next see my recent article on the growing problem we now have in Russia: "<a href="http://globaleconomydoesmatter.blogspot.com/2007/11/inflation-in-russia-too-much-money.html">Russian Inflation, Too Much Money Chasing Too Few People</a>" (not too much danger of this getting to be a problem in India in the near future, now is there?). <p></p><br /><p>Since this time of course, the whole recoupling/decoupling issue has really taken off as a live debate. My latest thoughts on this <a href="http://globaleconomydoesmatter.blogspot.com/2007/11/global-recoupling-japanese-exports-and.html">can be found here</a>, and Claus Vistesen's post - <a href="http://globaleconomydoesmatter.blogspot.com/2007/12/global-economy-compass-and-charts.html">The Global Economy, Compass and Charts Needed</a> - follows up on and continues the "uncharted waters" theme.</p><br /><p>Now for the Economist. What I said in my response to them was as follows:<br /><br /><strong>To The Economist</strong><br /><br />Well, at the risk of having to assume some kind of modern "j'accuse" mantle (for which of course there are ample precedents in the early origins of your own magazine) I am going to put up yet another comment. Maybe this is because I would like to participate in that "severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress" which your contents page so boldly announces.<br /><br />Maybe it is also because I want to pin down quite clearly for future reference just what the issues are, and just why it isn't "absurd" to suggest that the Economist currently systematically fails to factor-in the demographic components in economic growth (or the lack of it). Well, saving the best (or should that be the worst) to the last, I would like now to come to the case of your India correspondent. This gentleman (and I sincerely hope that despite his evident predilection for strong Vindaloo curry he is one of these) has been systematically re-adjusting upwards India's potential trend growth rate in recent months. In fact his estimate seems to have shot up from 6.5% in November 2006 to 7% in February 2007, to 8% in June 2007. Now that's an upward adjustment of around 25% in trend growth in roughly 8 months. Quite an achievement, especially since he offers absolutely no explanation whatever for these adjustments, but what he does not fail to tell us - oh, he never lets a moment rest without beating this drum - is that: "India's economy, like Delhi this week (or Vindaloo curry perhaps, EH), remains far too hot."<br /><br />Now just in case what I am suggesting here is questioned I would like to quote chapter and verse, since the issue is an important one.<br /><br />In November 2006 the Economist's India correspondent estimated capacited growth for India at around 6.5%.<br /><br />23 November 2006 <strong><a href="http://www.economist.com/finance/displaystory.cfm?story_id=8326793">Too Hot To Handle</a></strong><br /><blockquote>INDIA'S curries can be even hotter than the fieriest of Chinese hotpots; likewise the temperature of the two economies. Despite widespread claims that China's economy is overheating, actually India's shows more signs of boiling over.<br /><br />In the year to the second quarter, India's GDP grew by an impressive 8.9%, while China's more up-to-date figures show even more breathtaking growth of 10.4% in the year to the third quarter. But to judge whether an economy is too hot, one needs to compare this expansion in actual demand with potential supply, ie, the sustainable rate of growth. Despite India's growth spurt in recent years, its sustainable pace is still much lower than China's, which puts its economy more at risk of overheating and rising inflation.<br /><br />India's trend growth rate has almost certainly increased but it is still<br />nowhere near as high as China's. Mr Prior-Wandesforde estimates that it is now<br />around 6.5%, up from 5% in the late 1980s. But India's recent acceleration<br />largely reflects a cyclical boom, thanks to loose monetary and fiscal policy.<br />The Reserve Bank of India has raised one of its key interest rates by one and a<br />half percentage points to 6% over the past two years, but inflation has risen by<br />more, so real interest rates have fallen and are historically low. This makes<br />the economy more vulnerable to a hard landing.</blockquote>By February 2007 the estimate had risen to "not much above" 7%.<br /><br />1st February 2007 <strong><a href="http://www.economist.com/opinion/displaystory.cfm?story_id=E1_RGNJVPD">India overheats</a></strong><br /><blockquote>"But the problem is that this new speed limit is almost certainly lower than the government's one. Historic data would suggest a figure not much above 7% - well below China's 9-10%......If something is not done, then a hard landing will<br />become inevitable." </blockquote><br />and by June 2007 it had been revised up nearer to 8%.<br /><br />June 7th 2007 <strong><a href="http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=9307297">Waiting For The Monsoon</a></strong><br /><blockquote>"This is not to deny that India's economic speed limit has increased, to perhaps 7-8%, thanks to stronger investment and economic reforms. But growth has<br />exceeded that limit. The economy still shows alarming symptoms of overheating"</blockquote><br /><br />And depispite all this, we are now in December 2007, the Indian economy has been growing at around 9% for the last three quarters, and inflation has been kept remarkably under control.<br /><br />So actually what we are all really waiting for here is not the arrival of the monsoon, but some explanation from the Economist's India correspondent about how he is calibrating all these estimates. There is nothing particularly to be embarassed about in getting this one wrong, since it is pretty difficult to put a number on where Indian growth is going, but it does seem hard to maintain the credibility of your calls if you conveniently keep ignoring what you were saying only yesterday, and more importantly fail to diagnose exactly why it is that India has been able to grow so much faster than you expected. And of course one day India may overheat, and stopped clocks do give the right time twice a day, but this doesn't make them especially useful measuring instruments.<br /><br />Back in the autumn of 2006, on the India Economy Blog, I argued that we were now entering "uncharted waters" and that no-one really had any accurate idea of what India's true mid-term trend growth rate actually was. I also asserted that it was in all probability way above the more conservative and conventional estimates. I was guessing really, but behind my guesswork was a long hard look at India's underlying demography, and it is just this kind of approach that your India correspondent discounts. Again, chapter and verse:<br /><br />1st February 2007 <strong><a href="http://www.economist.com/finance/displaystory.cfm?story_id=8625681">India On Fire</a></strong><br /><blockquote>Many Indian economic commentators say that further structural reforms, though desirable, are not essential to keep the economy growing at 8% or more because<br />of the "demographic dividend". A fast-growing working population and a falling<br />dependency rate (thanks to a lower birth rate) will ensure more workers, more<br />saving and hence more investment." "India's demographic structure is indeed<br />starting to look more like that in East Asia when its growth took off. But this<br />mechanistic view of growth assumes that demography is destiny and that economic<br />policies do not matter. In fact, open markets, education and investment,<br />especially in infrastructure, were the three chief ingredients of East Asia's<br />success. Population growth by itself does not add to prosperity, unless young<br />people are educated and new jobs are created. India needs to reform its absurdly<br />restrictive labour laws which hold back the expansion of manufacturing<br />particularly."</blockquote><br />Basically I find myself in agreement with the Indian economists he doesn't like. It isn't that these reforms aren't desireable, as he admits, we all agree on this. But the point is, even ex-reforms (and of course there have been reforms and global opening) demographic momentum would indicate that substantial growth is now going to occur. How substantial? Hard to say, but I think it is quite probable that 5 years from now India will be growing faster than China, and may even peak out at the highest annual growth rates yet seen for a significant economy over the 5 to 10 year window. I can justify why I think this with some sort of coherent argument if anyone wants. I think the big danger for the sort of view you are advancing here at the Economist is that you imagine virtually nothing is possible with institutional reform, and this is just as big a mistake as saying demography is everything. You need to systematically take the two components into account. If you don't do this you risk getting into the ridiculous position the World Bank found itself in this week, when countries like Argentina and Thailand complained that since their countries were registered as going backwards on the global governance index, while both countries were growing quite nicely, then logically the methodology used to construct the index must be wrong. IMHO the World Bank has been totally mechanistic about institutions and thoroughly deserves all the problems it creates for itself on this count. OK, so that's it. I finally rest my case. The dialogue will continue.<br /><br />And it is, undaunted by the failure of all that vindaloo curry to overheat more than his own digestive tracts our dear correspondent is now worrying about, guess what, the <a href="http://www.economist.com/finance/displaystory.cfm?story_id=10286077">rise of the rupee</a>. Continued <a href="http://indiaeconomywatch.blogspot.com/2007/12/uncomfortable-rise-of-rupee.html">in this post here</a>.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-14086306736915980902007-12-12T00:22:00.001-08:002007-12-23T00:25:15.582-08:00Japan in a 'Mild Recession?' ... Sounds about Right to Meby Claus Vistesen<br /><br />During 2007, myself and especially Feldman and Takehiro Sato from Morgan Stanley have tended to move pretty much in unison when it comes to the economic analysis on Japan (non colluding!). Of course, this is very much due to the fact that I always make sure to read, at least, what the MS' Japan analysts have to say before saying anything myself on Japan. In this way, it is one thing to actually follow other analysts whereas an entirely different thing is to agree with them. However, it just so happens that I have largely agreed with the way Sato in particular covering the day-to-day analysis and Feldman have narrated the Japanese economy in 2007. This time around however it seems that Morgan Stanley might just be <a target="_blank" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/11/4/where-is-japan-heading.html">trailing</a> <a target="_blank" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/11/4/where-is-japan-heading.html">me</a> and my colleagues at <a target="_blank" href="http://japanjapan.blogspot.com/">JEW</a> a little bit. At least, <a target="_blank" href="http://www.bloomberg.com/apps/news?pid=20601068&sid=ab9ad8x91yZY&refer=economy">the following</a> sounds very much as the tone which has been banging from the pages of Alpha.Sources' Japan pages as well as of course Japan.Economy.Watch' (JEW link above) day-to-day coverage and analysis for some time now.<br /></p><p><em>Japan's economy is headed for a ``mild recession'' that could be worsened should a bigger-than- expected U.S. slowdown halt the nation's export-led expansion, Morgan Stanley said. </em></p> <p><em> ``It's time to buckle up,'' Takehiro Sato, chief Japan economist at the investment bank, said in a report yesterday. Sato cut next year's growth estimate for Japan in half, saying ``errant'' government policy has hurt consumers and the building industry at home, and credit problems stemming from the subprime- mortgage crisis will stifle demand from abroad. The world's second-largest economy is becoming more dependent on overseas markets just as world growth looks set to slow. Policies meant to protect homeowners from building fraud and borrowers from predatory lenders have hurt an economy that's already struggling with falling wages and record gas prices. ``The foreign-demand growth scenario for Japan's economy appears to be approaching a tipping point,'' Sato said. ``Coming on top of high energy prices, the fallout from the subprime crisis and errant policies will likely cause economic activity to stagnate.'' Sato slashed his 2008 growth estimate to 0.9 percent from 1.9 percent a month ago. He considers growth of less than 1 percent ``for an extended period,'' to constitute a ``mild recession.''</em></p><p>Of course, you would be well entitled at this point to ask just what this idea of a mild recession actually means. According to Sato it is defined by growth in the sub 1 % category for an extended period as you can confirm above. The question would then seem to be whether in fact not Japan might be heading for negative growth rates too? Difficult to say but the risk is definitely there I think. Also, I really want to warn against the discourse which is emerging about all this being the result of errant government policy. Institutions matter for sure but Japan's economy is faced with a far more potent driving force in its population structure and the last thing we need here is really that this is neglected while politicians are taking the heat even if those very same have not exactly put in a stellar performance. The thing is, people need to get their economic reasoning straight. Back in the beginning of 2006 and as we moved onwards from the ending of ZIRP in Japan myself and my colleague Edward Hugh were literally amazed to how the majority of the economic punditry came out exclaiming that now Japan was back amongst the leaders to paraphrase the FT's otherwise excellent Martin Wolf. And now suddenly it is the <em>blame the politicians</em> for the fact that it did not came to pass and not by a long-shot too. Something does not smell right here and I would be very discomforted to see if all this shored up yet again on the shoulders' of the 'institutions matter' paradigm since can these shoulders really take on more load as it is? You know, there is another side to this story too and far from being mutually exclusive we need both of them; institutions, policy and governance ... oh yes and demographics? Yes please!</p><p>Ok, sorry to be a rant here in the month of Christmas but I do feel rather strongly about this I am afraid. <br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3625789250703033817.post-624576960549822742007-11-04T00:25:00.001-07:002007-12-23T00:27:37.098-08:00Where is Japan Heading?by Claus Vistesen<br /><br /><br />[This is a big one and if you are not in the mood I recommend that you just skip down to my summary which should give you the main thrust of my argument and analysis. This note also features over at my personal weblog <a href="http://clausvistesen.squarespace.com/alphasources-blog/2007/11/4/where-is-japan-heading.html">Alpha.Sources</a>.] </p><p>I would imagine that the answer to the question above remains quite at the forefront of many an investor's and economic analyst's mind. In this entry I will try to most modestly give interpretation of the road which lies immediately ahead for Japan's economy as we are about to receive Q3 GDP numbers on the 13th November. <a mce_real_href="/alphasources-blog/2007/9/28/finally-some-good-news-from-japan.html" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/9/28/finally-some-good-news-from-japan.html">As per usual</a> I am basing my analysis on the firmly established principle of standing on the shoulders of giants as well as I will field my traditional array of monthly charts updating the evolution of prices and household spending. Moreover, I will also, in the light of comments received outside the walls of the JEW and Alpha.Sources as well as the general interest in the subject, give my interpretation of where the Yen is going to be positioned in the months and quarters to come. Lastly, I will note the rather large and ugly downside which has emerged in the realm of the housing market and residential investment since this might just be the push which shoves Japan into a near recession path as we get to Q4 2007. I will finish off with a summary including remarks on the future course of policy at the BOJ as well as some brief comments on what seems to be clear signs of reform fatigue in Japan as well as the potential of uncertain times at the BOJ with respect to governance.<br /><br />As you will see, Edward already has some snippets up (on JEW) on September <a mce_real_href="http://japanjapan.blogspot.com/2007/10/japan-exorts-september-2007.html" href="http://japanjapan.blogspot.com/2007/10/japan-exorts-september-2007.html">exports</a>, <a mce_real_href="http://japanjapan.blogspot.com/2007/10/japan-industrial-output-september-2007.html" href="http://japanjapan.blogspot.com/2007/10/japan-industrial-output-september-2007.html">industrial production</a>, and <a mce_real_href="http://japanjapan.blogspot.com/2007/10/japan-retail-sales-september-2007.html" href="http://japanjapan.blogspot.com/2007/10/japan-retail-sales-september-2007.html">retail sales</a> as well as the <a mce_real_href="http://japanjapan.blogspot.com/2007/11/japan-unemployment-september-2007.html" target="_blank" href="http://japanjapan.blogspot.com/2007/11/japan-unemployment-september-2007.html">labour market</a>. If we take a brief look at what these data releases have to say we can see that the outlook is steadily beginning to look ever so wobbly for Japan although, as I will also show below, household spending seems to be making a most welcome comeback. In terms of the external position we had one of the most negative news points as exports slowed quite significantly. Yet, we must always remember that there are two sides to the trade balance and an offsetting decline in imports helped to keep the trade balance to a record surplus. Yet, this does confirm the general outlook that the external environment just might be cooling off into the rest of 2007 from what has also been a red hot frantic pace. What remains is clearly that since external demand constitutes the main driver for Japan's economy any faltering on this account will translate swiftly into growth rates. On industrial production the picture is still somewhat clouded by the earthquake a few months back and as such the decline in September's IP comes on the back of a surge in August and should really be read accordingly. What should be noted however, as you can also see by the graph Edward fields is that IP still remains high relative to the beginning of the year which suggests that the readings should be taken with a pinch of salt. In this way I would not be surprised to see a further drop in October which would pair the surge seen in August and bring us back to a point below the high levels of Q4 2006. Finally, on retail sales Edward reported that they managed to push up a small 0.5% increase y-o-y thus showing some very welcome numbers outside the red for the first time in 2007. Yet, two things need to be remembered here. Firstly, as Edward notes there is a low base effect here since sales in September 2006 were comparatively low; this will become even clearer below. Secondly, the m-o-m evolution showed that retail sales extended a four month decline which goes to show the dynamics restricted on 2007.<br /><br />Thus enlightened on what has already been noted at JEW why don't we move on to the new stuff. In tradition with my previous notes let us begin with the evolution of prices. Before I show you the chart we should dispense with the non-event that the <a mce_real_href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw9kJBllanlc" href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw9kJBllanlc">BOJ chose</a> to hold rates steady the day before yesterday. <a mce_real_href="http://www.boj.or.jp/en/type/release/zuiji07/k071031.pdf" href="http://www.boj.or.jp/en/type/release/zuiji07/k071031.pdf">The statement from the BOJ</a> as well as the recently published <a mce_real_href="http://www.boj.or.jp/en/type/release/teiki/tenbo/gor0710.htm" href="http://www.boj.or.jp/en/type/release/teiki/tenbo/gor0710.htm">Outlook Report</a> (<a mce_real_href="http://www.morganstanley.com/views/gef/archive/2007/20071031-Wed.html" href="http://www.morganstanley.com/views/gef/archive/2007/20071031-Wed.html">Takehiro Sato</a> has a round-up over at MS' GEF) did not really reveal much as to where we are going in terms of a rate outlook but did explicitly and quite as expected cite the global economic trend in credit markets as a source of uncertainty. In reality, a recent small but concise article from <a mce_real_href="http://www.economist.com/finance/displaystory.cfm?story_id=10064770" href="http://www.economist.com/finance/displaystory.cfm?story_id=10064770">The Economist</a> pretty much sums up the situation in its title sentence; <span style="font-style: italic;">The Bank of Japan would like to raise interest rates, the economy won't let it</span>. And one of the obvious reasons can be seen below ...<br /><br /><a mce_real_href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKhlhVv4LIgnrf3pbZRPUPLIG1vaUftBfUdRHXQ-7T5uLd3lSaZqkh74X7gcTEHK9dDMhXWZ04-vhCK54PjEdZyYeB8YgyTWS1WhACo17EORtDmXFA5t8HMIV45oYkVZUl_lFL-DRFR3FG/s1600-h/japan.prices.jpg" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKhlhVv4LIgnrf3pbZRPUPLIG1vaUftBfUdRHXQ-7T5uLd3lSaZqkh74X7gcTEHK9dDMhXWZ04-vhCK54PjEdZyYeB8YgyTWS1WhACo17EORtDmXFA5t8HMIV45oYkVZUl_lFL-DRFR3FG/s1600-h/japan.prices.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img mce_real_src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKhlhVv4LIgnrf3pbZRPUPLIG1vaUftBfUdRHXQ-7T5uLd3lSaZqkh74X7gcTEHK9dDMhXWZ04-vhCK54PjEdZyYeB8YgyTWS1WhACo17EORtDmXFA5t8HMIV45oYkVZUl_lFL-DRFR3FG/s320/japan.prices.jpg" id="BLOGGER_PHOTO_ID_5128247511957984034" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKhlhVv4LIgnrf3pbZRPUPLIG1vaUftBfUdRHXQ-7T5uLd3lSaZqkh74X7gcTEHK9dDMhXWZ04-vhCK54PjEdZyYeB8YgyTWS1WhACo17EORtDmXFA5t8HMIV45oYkVZUl_lFL-DRFR3FG/s320/japan.prices.jpg" style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 342px; height: 194px;" /></a>As can readily be observed Japan remains mired in deflation with all three indices tugged firmly in negative territory. Regarding the officially deployed price index (core CPI) which is the CPI excluding fresh food (green line) we can see that this is virtually flat at -0.1%. In this respect, do also note that you, my dear reader, are getting a special treat here at Alpha.Sources (and JEW) with the inclusion of the index stripped of energy and fresh food. In this way we should be especially focused on <span style="font-style: italic;">this</span> measure in the light of the fact that oil and gas are trading at very high levels at the moment. This of course does not mean that this can be used to anything as regards to economic/financial position making but it does go to show the 'real' price dynamics in Japan in the sense that it tends to be biased toward the effects of <span style="font-style: italic;">internal</span> demand and activity in Japan. In general and on the probability of a positive yearly inflation reading in 2007 this has been somewhat of a mute point and as such a virtual improbability since the figures for the summer months came in. Regarding the official forecast, the just published Outlook Report sliced the previous F3/2008 forecast from 0.4% as it was made in April to 0.0%. If you are in to the more arcane matters of inflation forecasting the Outlook Report also fields projections for inflation readings in 2009 based on estimates of the output gap. Morgan Stanley's Takehiro Sato also ventures the official in house projections from the US investment bank. The bottom line seems to be that we are going to see a 0.4% inflation rate by F3/2009. In my honest opinion, I believe that such forecasts are complete word salad since no-one can say what will happen during 2008 let alone as far ahead as 2009, yet this is the forecasts as they are and we should keep them in mind. On balance, I don't see Japan escaping deflation anytime soon and this most emphatically goes if we home in on the core-of-core index (i.e. excluding fresh food and energy). An upside to this call would a be a pass through of high energy and base commodity prices but so far such effects have been muted, the anecdotal evidence on Tokyo's mayonnaise prices notwithstanding.<br /><br />If we move on to indicators for domestic demand (living expenditures) the figures noted above on retail sales promise to bring some good news relative to what we are accustomed to in this area. Below I field the traditional three charts; one of the bread-and-butter y-o-y figure reported by the media, one of the seasonally adjusted m-o-m evolution, and finally a real monthly index (100=2005) to give the big picture.<br /><br /><a mce_real_href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTlTjCb9NzkZXYs4NT8H0gqwkz7G8GGxk3NsJyjpvIQkDYciPVUskQWoHjCoMUPL5UtTReDIChL0bTAJpwNykJ9Mg3K80tB57Fc1B1Ucc7tpHS842HW7GtiXn8NBRx0PGXLhozQC2IyBj4/s1600-h/japan.yoy.cons.jpg" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTlTjCb9NzkZXYs4NT8H0gqwkz7G8GGxk3NsJyjpvIQkDYciPVUskQWoHjCoMUPL5UtTReDIChL0bTAJpwNykJ9Mg3K80tB57Fc1B1Ucc7tpHS842HW7GtiXn8NBRx0PGXLhozQC2IyBj4/s1600-h/japan.yoy.cons.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img mce_real_src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTlTjCb9NzkZXYs4NT8H0gqwkz7G8GGxk3NsJyjpvIQkDYciPVUskQWoHjCoMUPL5UtTReDIChL0bTAJpwNykJ9Mg3K80tB57Fc1B1Ucc7tpHS842HW7GtiXn8NBRx0PGXLhozQC2IyBj4/s320/japan.yoy.cons.jpg" id="BLOGGER_PHOTO_ID_5128256720367866674" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTlTjCb9NzkZXYs4NT8H0gqwkz7G8GGxk3NsJyjpvIQkDYciPVUskQWoHjCoMUPL5UtTReDIChL0bTAJpwNykJ9Mg3K80tB57Fc1B1Ucc7tpHS842HW7GtiXn8NBRx0PGXLhozQC2IyBj4/s320/japan.yoy.cons.jpg" style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" /></a><a mce_real_href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRkif1b9m3a6ArdhA_nJIMWexHi-KnAwdxEm4PS33uTrckYPoG-MRslDGo9eg7VXpCS4CxJuSgDWvWY2ZbI_JavGcdMnbWVaaC9VqVSN9Io9SVLOMuTRYzKqTT5UtRyKMZDS7rwaSlVQ3K/s1600-h/japan.mom.cons.jpg" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRkif1b9m3a6ArdhA_nJIMWexHi-KnAwdxEm4PS33uTrckYPoG-MRslDGo9eg7VXpCS4CxJuSgDWvWY2ZbI_JavGcdMnbWVaaC9VqVSN9Io9SVLOMuTRYzKqTT5UtRyKMZDS7rwaSlVQ3K/s1600-h/japan.mom.cons.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img mce_real_src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRkif1b9m3a6ArdhA_nJIMWexHi-KnAwdxEm4PS33uTrckYPoG-MRslDGo9eg7VXpCS4CxJuSgDWvWY2ZbI_JavGcdMnbWVaaC9VqVSN9Io9SVLOMuTRYzKqTT5UtRyKMZDS7rwaSlVQ3K/s320/japan.mom.cons.jpg" id="BLOGGER_PHOTO_ID_5128256720367866690" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRkif1b9m3a6ArdhA_nJIMWexHi-KnAwdxEm4PS33uTrckYPoG-MRslDGo9eg7VXpCS4CxJuSgDWvWY2ZbI_JavGcdMnbWVaaC9VqVSN9Io9SVLOMuTRYzKqTT5UtRyKMZDS7rwaSlVQ3K/s320/japan.mom.cons.jpg" style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" /></a><a mce_real_href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtob9DXgkjflKYPpYtmx__l2j8v12JwU0ZuddzHwVOOpwNvVER1_e2p8TKY526xp2Cu7dK56sPT35eCwFS-FqesjsfrTpH8lbRwf6K7sCQ__Z1ep-MjasJqz95GbxqTv632LCxZrEgZkjZ/s1600-h/japan.real+index.cons.jpg" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtob9DXgkjflKYPpYtmx__l2j8v12JwU0ZuddzHwVOOpwNvVER1_e2p8TKY526xp2Cu7dK56sPT35eCwFS-FqesjsfrTpH8lbRwf6K7sCQ__Z1ep-MjasJqz95GbxqTv632LCxZrEgZkjZ/s1600-h/japan.real+index.cons.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img mce_real_src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtob9DXgkjflKYPpYtmx__l2j8v12JwU0ZuddzHwVOOpwNvVER1_e2p8TKY526xp2Cu7dK56sPT35eCwFS-FqesjsfrTpH8lbRwf6K7sCQ__Z1ep-MjasJqz95GbxqTv632LCxZrEgZkjZ/s320/japan.real+index.cons.jpg" id="BLOGGER_PHOTO_ID_5128256724662834002" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtob9DXgkjflKYPpYtmx__l2j8v12JwU0ZuddzHwVOOpwNvVER1_e2p8TKY526xp2Cu7dK56sPT35eCwFS-FqesjsfrTpH8lbRwf6K7sCQ__Z1ep-MjasJqz95GbxqTv632LCxZrEgZkjZ/s320/japan.real+index.cons.jpg" style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" /></a>If we look initially at the first figure which displays the headline number from the official statistical sources we note that the last two months have shot up significantly (although commentators seem to be attributing this to the illusive 'weather' effect). More importantly however, at this point we need to go back and consider what Edward said about a low base effect regarding the retail sales. In this way, the September reading on living expenditure has 'low base effect' written all over it but nevertheless we should not deny that it was an overall positive reading which as I said is most welcome reading. If we turn to the m-o-m figures however which are furthermore seasonally adjusted we indeed note a positive reading which extends a two month consecutive positive reading after three negative readings. Also do note that the recent two months' positive readings are below 1% which should not be interpreted as bad in itself but merely a reflection of the relative measures here. Finally, we need the big picture I think to finish off and in this way we can see that the long term index edged up but is still below the levels of Q4 2006 and the first months of 2007. As a very final data point <a mce_real_href="http://www.japaneconomynews.com/2007/11/02/finally-japans-domestic-auto-sales-up-20-in-october-first-increase-in-28-months/" href="http://www.japaneconomynews.com/2007/11/02/finally-japans-domestic-auto-sales-up-20-in-october-first-increase-in-28-months/">Ken Worsley</a> also informed us that auto sales rose in October by 2.0% which is the first gain in a very long time. In summary, on domestic demand and although the figures above form a clear basis for, at least a slight, optimistic sentiment household spending in Japan is still, by all measures, sluggish. The point is quite clearly that given the nature of Japan's demographic profile we are unlikely to see domestic demand be the main driver of growth which is then to say that on the margin the Japananese GDP account is not going to be carried by households spending. Regarding actual forecasts I put forward the notion a while back that I didn't think the official and widely reported figure for living expenditures would exceed 1% on a y-o-y basis. So far we are looking at a rolling average of 0.92% which of course includes the last two months' rather above par performance. I am consequently sticking to my prediction.<br /><br />Before moving on to an analysis of the Yen and where it might be heading I want to touch upon another aspect which is weighing significantly on the short and medium term outlook in Japan. Normally and even though global financial and economic analysis has been littered with accounts struggling housing market practically everywhere we have not been hearing a lot about housing in Japan. Of course, we have had steady reports about a bubble in office building prices in downtown Tokyo but that of course masks a much more diversified picture; The Economist linked above marks it down well ...<br /><br /><span style="font-style: italic;">Although land prices appear to be booming, prices nationwide are falling once sales in Japan's three biggest cities are stripped out.</span><br /><br />More generally we need to understand that the housing market and construction in general have not been the driver of the recent 'expansion' in Japan as it has been the case in many other countries; at least not directly although in many ways the issues are interlinked here since the global housing boom has permitted many countries to really wamp up consumer spending which in turn has benefited Japan's export sector and corporate sector in general. The lack of housing dynamic in Japan may be due to various institutional factors but most prominently I think is quite simply the prolonged path which Japan has taken in the demographic transition. These structural points notwithstanding it was recent changes in regulations concerning and essentially delaying housing starts which suddenly made all kinds of skeletons come rattling out of the closet as Housing starts <a mce_real_href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agjjxX6.2dYU" href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agjjxX6.2dYU">plummeted 43 percent in August</a>; Quote Bloomberg.<br /><br /><span style="font-style: italic;">Japan's worst housing slump in four decades and rising oil prices threaten growth in the world's second-largest economy, Cabinet ministers said. </span> </p><p style="font-style: italic;"> ``There is concern that a decline in housing investment will become a factor pushing down gross domestic product,'' Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo today. ``I'm more focused on the downside risks to the economy.'' </p> <p><span style="font-style: italic;"> Housing starts fell 44 percent in September and 43.3 percent in August because of stricter rules for obtaining building permits. The government this week said it would relax the regulations after industry criticism that they were too onerous. </span><br /></p><p>This of course looks pretty bad at face value. In order to substantiate this further and as a service to you my dear reader I am featuring below some comments from a Japan mailing forum which I am lucky to be a member of and which contains a lot of very smart observers of Japan and essentially 'people' on the ground. I cannot divulge the name of the commenter but this should matter little in this context ...<br /></p><p style="font-style: italic;">Some worse news is hidden in these figures: housing starts on condominiums have fallen 74.8% and even worse, starts on condominiums in the Tokyo area, the locomotive of Japan's real estate business have fallen 85.9%. As well as the worried voices within the industry itself, such as building materials, other voices have begun to be heard expressing clear worry about the knock on effect of these falling housing starts. Some economists are wondering out loud how much falling condominium sales will effect the sales of automobiles, for instance. Real estate in Tokyo, and to a lesser extent several other big cities such as Nagoya, has been the only spot of joy in a general murky panorama of Japan's internal economy.</p><p>As should be pretty clear and although the full extent of this is not known it has basically opened up a virtual abyss of downside regarding Japan's economic performance going forward.<br /></p><p>As the final topic in this installment I promised above to also have a look at the Yen; where it is now, what drives it, and most importantly where it is likely to go. Let us begin with a chart to get us started which plots the Yen against the USD, EUR and AUD; remember that the y-axis is denominated in Yen which means that movements up means that Yen <span style="font-style: italic;">depreciates</span> against the target currency.<br /></p><a mce_real_href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEij2dLvTN7HyGFBafdDznt1WBjqpzI17P_7DGEuEz-HW5UOUdtfvPB1_pveAwq9rkPp1OZScUECUwKE0c0bKombQrMl0GhXqCMjbX2zYgxGxN8dJVost60WEfOwr3aJGcgBvftD-f1Kpj7x/s1600-h/japan.USD.YEN.jpg" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEij2dLvTN7HyGFBafdDznt1WBjqpzI17P_7DGEuEz-HW5UOUdtfvPB1_pveAwq9rkPp1OZScUECUwKE0c0bKombQrMl0GhXqCMjbX2zYgxGxN8dJVost60WEfOwr3aJGcgBvftD-f1Kpj7x/s1600-h/japan.USD.YEN.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img mce_real_src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEij2dLvTN7HyGFBafdDznt1WBjqpzI17P_7DGEuEz-HW5UOUdtfvPB1_pveAwq9rkPp1OZScUECUwKE0c0bKombQrMl0GhXqCMjbX2zYgxGxN8dJVost60WEfOwr3aJGcgBvftD-f1Kpj7x/s320/japan.USD.YEN.jpg" id="BLOGGER_PHOTO_ID_5128955825079538562" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEij2dLvTN7HyGFBafdDznt1WBjqpzI17P_7DGEuEz-HW5UOUdtfvPB1_pveAwq9rkPp1OZScUECUwKE0c0bKombQrMl0GhXqCMjbX2zYgxGxN8dJVost60WEfOwr3aJGcgBvftD-f1Kpj7x/s320/japan.USD.YEN.jpg" style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" /></a>Regarding the immediate position of the Yen we can see that it has fallen steadily against the three currencies in questions during the past 1 1/2 year although of course the recent assertion against the USD on the back of the expectations and now real evidence of the Fed's rate cuts. This also underlines the rather peculiar situation at the moment in global FX markets where the Dollar is taking a beating against almost everything which moves. In this immediate context it means that a wedge has now developed between the USD/YEN which for all intent and purposes could look as a good buy (long position) and the EUR/YEN which looks more like a sell (short position). Such traditional logic however should be applied with extreme caution since when we are talking about Japan where a whole gamut of structural and cyclical factors tend to exert a rather unique influence on the movements in the Yen. I am surely not able to give an exhaustive account of all these factors but here are nevertheless some remarks. As a very first frame we need to consider the probability that the BOJ is going to raise rates and more importantly close the interest differential gap with the rest of the OECD. I think this is unlikely which as an initial intro should give you an impression to where I see the Yen. Apart from this there are three factors I want to emphasise.<br /><br />The first issue which should immediately be noted is the carry trade which is an inbuilt and lingering phenomenon of wide global interest differentials. A lot of things have been said about the Yen carry trade, whether it can continue to keep the Yen subdued and subsequently what will happen if it unwinds? One thing which is important to note here is the distinction between an overall normalization of interest rates in Japan which in itself would effectively flush out carry trading and then the potential for unwinding of carry trades at any given point in time. In this way, it is crucial to understand that even though the structural pre-requisites for (Yen) carry trades are likely to linger you can <span style="font-style: italic;">still</span> get burned! This has perhaps best been substantiated since Spring where the credit market turmoil began and where volatility returned to markets. In this way, the carry trade and thus also the Yen tend to be synonymous with risk taking and as such considerable volatility in the Yen seems de driven by the general risk appetite in the market. In general on the carry trade we should also note that flip side of shorting the Yen where especially the Aussie and Kiwi (NZD) have been all time favorites for Japanese retail investors and others as currencies being 'carried'; the chart above of AUD/YEN substantiates this. The bottom line is that the carry trade still seem to be weighing on the Yen (except it seems against the USD at the moment) albeit with the important qualifier that the recent market turmoil has made gung-ho tactics substantially more hazardous.<br /><br />The second thing I would like to emphasise is related to the issue of carry trade and concerns the structural decline in Japanese home bias whereby Japanese investors, retail as well as institutional, tend/will tend to move funds into foreign denominated assets which would then tend to hold the Yen down. Now, the argument for the decline in home bias is essentially vested in a <a mce_real_href="/alphasources-blog/ageing-and-financial-markets-going-for-yield.html" href="http://clausvistesen.squarespace.com/alphasources-blog/ageing-and-financial-markets-going-for-yield.html">long</a> <a mce_real_href="/alphasources-blog/2007/9/24/stephen-jen-on-demographics-and-financial-markets.html" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/9/24/stephen-jen-on-demographics-and-financial-markets.html">term</a> <a mce_real_href="/alphasources-blog/2007/8/27/ageing-and-financial-markets-a-revisit.html" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/8/27/ageing-and-financial-markets-a-revisit.html">view and</a> <a mce_real_href="/alphasources-blog/2007/5/27/ageing-savings-and-financial-markets.html" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/5/27/ageing-savings-and-financial-markets.html">economic analysis</a> but signs of a decline in home bias can also be found in the present. The most enticing evidence comes of course from those notorious Japanese housewives who, equipped with some basic FX trading software, have been hard at work to bet against the Yen and as we have seen especially <a mce_real_href="/alphasources-blog/2007/7/16/kiwis-still-on-the-menu.html" href="http://clausvistesen.squarespace.com/alphasources-blog/2007/7/16/kiwis-still-on-the-menu.html">Kiwis seem to have been a favorite dish</a>. Anecdotal evidence of the housewives seem to have abated somewhat in the recent months but what remains is a trend which indeed should be watched both as regards to retail investors and thus those savvy housewives as well as of course institutional investors such as pension funds and perhaps even a sovereign wealth fund (SWF) if and when it comes.<br /><br />The last thing I would like to note is something which has emerged on the back of the recent rather violent decline in the USD against almost all currencies and thus also the Yen. In this way and in the context of how external demand and in this way also the US economy is crucial to Japan's growth prospects we must also consider the probability that the authorities in Japan are going to intervene if the Yen drifts up too much. A week ago I voiced this probability noting that anything close to a USD/YEN rate of 100 would bring out the ropes and lassos. Recently, Morgan Stanley's Stephen Jen also put the limit at 100. What is more important however than the limit itself is of course the idea of intervention. More generally, which I will treat in more detail in my summary below the whole structure of the BOJ is entering somewhat of a limbo as we move closer to the time where the current governor Toshihiko Fukui is to be replaced.<br /><br />The bottom line on the Yen is that structural forces are likely to keep the Yen down. First and foremost is of course the whole inbuilt economic situation which effectively seems to hinder any attempt by the BOJ to raise rates although as well will see below markets are mumbling about a quick December raise. In general, I don't want this to come off as an endorsement of a sure bet on the carry trade and mindless short Yen positions. Especially, the re-emergence of risk aversion would almost surely make such positions (highly leveraged as they usually are) very expensive to keep on the books if the Yen were to shoot up. In line with my promise above and a call on the Yen for the remainder of 2007 I don't see a raise from the BOJ which should serve as a principal indication. Sudden market woes and credit risk sparks notwithstanding an interesting play could be to go for a move of the USD/YEN towards 118-120 from its current level of about 114-115 although of course any talk about Dollar <span style="font-style: italic;">strength</span> at this point and until the end of 2007 and beginning of 2008 seems rather contrarian. As for the EUR/YEN it is trading awfully high at the moment as a result of a Euro on helium and I would really not want to stick my neck out here. If you want more technical advice on FX trading <a mce_real_href="http://www.dailyfx.com/" href="http://www.dailyfx.com/">Dailyfx.com is my weapon of choice</a>.<br /><br /><span style="font-weight: bold;">In Summary - Movements at the BOJ and Political Risks?</span><br /><br />As I have already ostensibly hinted above I don't see how the BOJ will be able to raise rates in 2007. There are two principal reasons for this. Firstly, deflation is not likely to dissipate and especially not with economic momentum destined to slow down. This then brings me to the second reason which relates to the extent of the economic slowdown which seems certain to be rolling in at this point in time. It is really difficult to say at this point. Industrial production as a leading indicator of corporate capex and activity seems to be holding up as well as household spending has been showing some positive signs lately. Yet, coupled with what seems to be a slowdown in external demand as well as a looming correction in residential investment it seems as if the ground is getting shaky indeed. Moreover, I am uncertain for reasons stated above that domestic demand will remain much of a driver of growth since the momentum measured exclusively on 2007 is one of a down trending path. On industrial production we will just have to wait and see how much downward it has to go on the back of the earthquake rebound in August. The bottom line on the economic side of things seems to indicate that as regards to economic fundamentals the BOJ will find much difficult to wring that 0.5% refi rate upwards. Moreover and to add to the uncertainty, it seems as if the political situation might also be turning somewhat sour.<br /><br />Consequently and before I sign I want to briefly mention another risk which is emerging and which is contributing to the uncertainty is the general political situation both in terms of domestic policy and also most emphatically within the ranks of the BOJ and thus monetary policy decision making. Concerning the former we need to think back to the ousting of Abe which really put the spotlight on a political life in Japan riddled with scandals and what can only be interpreted as poor and half made decisions. Moreover and very important the sacking of Abe also revealed a public which by and large had lost confidence in the politicians' ability to do something with the issues facing the Japanese society and economy. Of course this is past us at this point with Fukuda entering as new Prime Minister but as <a mce_real_href="http://www.morganstanley.com/views/gef/archive/2007/20071102-Fri.html#anchor5763" href="http://www.morganstanley.com/views/gef/archive/2007/20071102-Fri.html#anchor5763">Robert Alan Feldman</a> brilliantly puts down in just a few words there is now a significant risk of 'political backsliding' and essentially stalemate. The first point I would like to point out is the paralysis which may emerge as a function of a split majority divided on the two chambers in Japan's bicameral system ...<br /><br /><span style="font-style: italic;">Policy paralysis risk has already emerged in some areas, such as defense policy. In seeking to force a general election, the opposition party, the Democratic Party of Japan (DPJ), is using all possible methods to pressure the government. A key part of this strategy is to use the power of the Upper House, where the DPJ recently won a majority, to stall appointments of candidates for government posts. Many such appointments require the approval of both houses of the Diet, and so the capture of the Upper House by the DPJ gives that party veto power over appointments.</span><br /><br />Yet, much more significant is the stalemate and as Feldman puts it 'the backsliding' as Fukuda sees it appropriate to roll back a lot of the initiatives instigated during Abe's reign.<br /><br /><span style="font-style: italic;">The biggest policy risk is backsliding. Already, the Fukuda government has reversed course on several important reforms. The new government wants to freeze the legislated increase of medical user charges, continue road tax earmarking, and focus on tax hikes (rather than spending cuts) as the main source of deficit reduction. Moreover, there is persistent talk of a major supplementary budget, in order to pay for policy changes. Once the momentum for a supplementary budget grows, it is very likely that many politicians – who face a general election soon – will opt for more spending.</span><br /><br />On top of the current rigid state of domestic policies another slight risk has emerged that the BOJ might end up without a governor come spring time 2008. The reason for this shores up, <a mce_real_href="http://www.morganstanley.com/views/gef/archive/2007/20071031-Wed.html" href="http://www.morganstanley.com/views/gef/archive/2007/20071031-Wed.html">as Takehiro Sato tries to explain here</a>, on the same political quagmire Feldman refers to above where the Democratic Party of Japan holds a majority in the upper house and Fukuda's Liberal Democratic Party which still controls the lower house (the Diet). Normally and according to Japan's constitution the Diet holds precedent but not in this case as regards to the appointment of the BOJ's executive posts. This has thus created a situation in which the DPJ might use their majority in the Upper House to stall the appointment of new BOJ executives as the current members are up for replacement in the spring. The concrete situation as it may unfold is this;<br /><br /><span style="font-style: italic;">But if the selection of the next BoJ leaderships is postponed because of a general election, the Bank would inevitably face its own form of political vacuum. It would have to conduct the MPMs in April (8th-9th, 30th) and May (19th-20th) without a sitting Governor or Deputy Governors (i.e., with a six-person board), or under Article 23 it is possible that the Cabinet would extend the terms of the incumbents in the interim.</span><br /><br />What this means for the BOJ policy is difficult to say but I tend to agree with Sato that under such conditions anything but an abrupt change in economic fundamentals (one way or other) I would meand that policy changes would/should be suspended. This however opens a new risk in the sense that the current and presiding board at the BOJ might see its December or January meetings as the only possibility to raise for quite some time thus ending/entering the year at 0.75%. The reason for this scenario would seem to be Morgan Stanley's high probability forecast that Q3 GDP numbers due on the 13th of November will show a respectable growth clip. As I have argued above I am somewhat uncertain about this but given the underlying political dynamics I concede that the risk has emerged for a hike to 0.75% in December or January although I am not ready to take it aboard in my general forecast.Unknownnoreply@blogger.com0