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Wednesday, October 01, 2003

Tax Cuts and Fiscal Stimulus in Asia

Eddie's thoughts, following on from his Japan article, on the debate in Asia about saving, tax cuts, fiscal stimulus and ageing.

Looks like the forex market is bent on testing that 110 Yen level. But Asians appear to be holding on to their US treasuries still. So the 'big one' is stillout there. Situation seems finely balanced at the moment. There’s quite a bit of positive news from the tech front in Asia. Order flows are picking up nicely,etc. But now you have appreciating currencies. And over in euroland, USD/euro could soon be back at 120. I tend to agree with you. I just don't see why a weaker dollar should necessarily force EU and Asia to miraculously have stronger domestic demand. I think the opportunity for the ROW to have stronger demand was the last couple of years when the dollar was strong. Asia should have gone all out to kick-start, and that included weakening their currencies further. Andr eally its Japan, HK and Spore .. the dragon economies. They couldn't and their time has passed.

I’m just quite stunned. 1 in 5 Japanesehave nothing in their kitty. No savings nor insurance;simply no assets to fall back on. Its an awfully large proportion for a first world country. makes the glitter of Ginza all the more hollow. Save till you can save no more, and now there’s nothing left.There’s very little reason to invest. And I don’t see how there can be any pent-up demand to be released by ‘economic reforms’. Is it now a case where any incipient recovery is snuffed out by the vain attempt to 'try to save something' whenever households see signs of economic revival? While it’s a natural instinct for individuals, calls by the authorities to the public to‘save for retirement’ seem pointless at this stage.It’s too late for the economy to save now ... ‘Retirement savings’ will have to come from employment. but for the ageing workforce, what employment? Rifkin talks about the third sector and that may be it. A new job offering a chance at a second or third career. Government budget gets shifted from pension/unemployment benefits to pay the social wage. It just seems that govts are making the mistake in thinking that only fiscal stimulus worthwhile is tax cuts.These are permanent cuts, but they are not thinking about expenditures that will have to increase over time(by keeping ageing population employed in the third sector) Immigration could be more tolerable with lower resident unemployment. Young immigrants fit into 2 desired slots the ageing population can't fill ...physical labour and high-skilled work in new industries. Btw, my colleagues recently interviewed 40 householdsin middle-class Spore. 1 in 3 say they can’t save. It’s a small sample, but I find the results very disconcerting. As you know, the govt have reacted to the recession by calling for wage cuts and reduction in employer contribution to the pension scheme. The reduction is on a staggered basis, so we will continue to see further cuts over the next few years. Their gut instinct to a recession is to cut wages. My gutinstinct tells me we should have tried to preservewages, and then figure some other way of getting round this. As you would say, ‘no easy answers here’. A reader to the local paper recently wrote in to saythe deed is done, its water under the bridge and we should move on. It may be water under the bridge, but the situation is harder to retrieve now. There are some calls for fiscal measures to prop up the economy.But pump-priming, when you have simultaneously undermined confidence with wage and pension cuts, just seems so fruitless.

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