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Friday, May 23, 2003

Japan, Hong Kong, Taiwan: Indefinite Deflation

Obviously things look pretty different in Hong Kong to the way they seem in New York, Washington, Brussels and Frankfurt. Andy Xie again:

Excess supplies of labor and capital continue to exert powerful deflationary pressure on East Asia. Export performance or the credit cycle may give the appearance for short periods that inflation is returning. When cycles peak, inflation tends to disappear quickly and deflation either gets under way or resumes. Korea’s inflation in 2002 was largely due to its rapid credit growth. The high oil price nudged inflation higher in the first quarter of 2003. It is now trending down and is likely to reach new lows. China is experiencing some inflation because of the increase in its raw material costs. The surge in investment demand is the main cause. As we have observed previously, deflation usually follows investment driven-inflation. A high savings rate, surplus labor, and lack of entry barriers always allow the benefits from productivity gains to be passed on to consumers in China. Japan, Hong Kong, and Taiwan seem to be in deflation almost indefinitely. Their interest rates are already near zero. They do not appear to have income drivers to solve their demand problems. It is difficult to visualize any scenario under which deflation in these economies would end. East Asia must resist currency revaluation. There are no obvious policy tools for combating its contractionary effect. Interest rates are close to zero except in Korea. Fiscal deficits are quite large already. A major revaluation would just crush the economies in the region, in our view.
Source: Morgan Stanley Global Economic Forum

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