Japan's Trade Surplus

The recent drop in oil prices and the low value of the Yen seem to be sending Japan's trade balance once more spiralling into surplus:

Japan’s trade surplus rose nearly 100 per cent in August, showing that net exports were still contributing to overall economic growth and that the effects of high oil prices were slowly waning.

Although the leap was smaller than expected, economists said the numbers showed that exports to the US, China and Europe continued to expand. Because exporters tend to take a summer break in August, the trade surplus is generally small, making big changes in percentage terms quite common.

Singapore and Thailand

Singapore would seem to be the main party affected by Thaksin's recent demise:

Singapore could suffer the most among countries in the region from the military coup against Thaksin Shinawatra, the Thai prime minister, who forged close ties with the city-state and sold his telecommunications group to Singapore’s state-investment company.

It was the $1.9bn sale of a 49 per cent in Shin Corp by Mr Thaksin’s family to Temasek Holdings in January that triggered the political crisis that led to the coup after it was revealed the family paid no taxes on profits from the deal.

Mr Thaksin was seen by Singapore as its strongest supporter for closer economic integration of the Association of South-east Nations, which provoked talk of a Singapore-Bangkok axis within the group.

The ousted leader also expressed admiration for Singapore’s political system, telling Singapore officials he wanted to model his Thai Rak Thai party on the long-ruling People’s Action party.

Whither The US Economy?

Well, recent news from the US certainly looks like the start of a slowdown. The big news of the wekk was surely the rapid drop in new housing starts. Then there was the fact that this decline, and the steady increase in interest rates has meant that the rate of increase in new credit is now slowing:

The net wealth of U.S. households rose in the second quarter but domestic debt grew at the slowest pace since the first quarter of 2002 as household mortgage and business debt growth moderated, the Federal Reserve said on Tuesday.

Energy prices are falling, but this seems to be largely as a result of an expectation of slower growth, which is why the federal reserve presumeably thought inflation was sufficiently under control to keep interest rates on hold for the time being.

More backing for the slowing inflation view comes from producer price data, since core producer prices have started to fall back:

US wholesale prices edged up 0.1 percent in August, the government said on Tuesday in a further sign of easing inflation pressures. The Labour Department report on the producer price index (PPI) was tamer than the 0.3 percent increase expected by analysts. Over the past 12 months, the PPI is up 3.7 percent, while the core rate is up just 0.9 percent. The August report marked the first time since 2002 that the core PPI has declined for two consecutive months. Additionally, the core index -- excluding food and energy -- fell 0.4 percent, despite expectations for a 0.2 percent rise.

One important part of the core price component was a decline in car and truck prices:

The decline in the core producer price index, which strips out volatile food and energy costs, reflected a 2.6 percent drop in auto prices and a 3.4 percent decline in the price of light trucks and SUVs, the Labor Department said.

Also the Conference Board Composite Index of Leading Economic Indicators declined 0.2 percent in August, following a 0.2 percent decline in July, and a 0.1 percent rise in June.

This weeks new signings for unemployment increased ever so slightly:

The number of newly laid-off workers filing for unemployment benefits rose last week by the largest amount since early August, providing further evidence that economy has slowed. The Labor Department said that 318,000 workers filed claims for jobless benefits, up by 7,000 from the 311,000 benefit applications filed the previous week. It followed two weeks of small declines in claims and was the biggest increase since jobless claims had risen by 10,000 in the week ending Aug. 5.

And now the latest report from the Philadelphia Fed on U.S. Mid-Atlantic factory activity is also showing a decline:

U.S. Mid-Atlantic factory activity retrenched for the first time in over three years in September, the latest sign of a rapidly-slowing economy.The Philadelphia
Federal Reserve Bank said on Thursday its business activity index tumbled to -0.4 this month from 18.5 in August, far below forecasts of around 14.8.

It was the first reading below zero since April 2003, indicating a sharp decline in regional manufacturing.

On another from interest rates on 10 year treasury bonds are also falling:


U.S. Treasuries rose, sending yields on 10-year notes to six-month lows, after a report showing manufacturing growth in the Philadelphia area unexpectedly contracted added to expectations the economy is slowing.

Yields on 10-year notes fell about 8 basis points, or 0.08 percentage points, to 4.65 percent at 1:03 p.m. in New York, according to broker Cantor Fitzgerald LP. It's the biggest drop since July 17.

All in all the picture is one of a slowdown, the big question seems to be how fast and how far rather than whether.

More Problems For the Prodi Coalition

Following hot on the heels of the opionions expressed by George Kopits(see my last post on Italaian Economy Watch)to the effect that:

The new Italian government is composed of a loose coalition of divergent political parties holding only a razor-thin majority. Any initiative to reduce the budget gap through spending cuts (as the government is rightly committed not to raise taxes but even to trim payroll taxes) requires painstaking consultations and negotiations with individual coalition partners.

today's news that the Italian senator Sergio De Gregorio has left the Prodi coalition can hardly be considered welcome, especially with the vote on the 2007 budget looming:

Political power on Tuesday seeped away from Romano Prodi, Italy's centre-left prime minister, after a senator defected from his ruling coalition, leaving its majority in parliament's upper house hanging by a thread.

The effect of Sergio De Gregorio's departure became instantly clear on Tuesday, when Mr Prodi's coalition lost a full vote on the Senate floor for the first time since it won a narrow general election victory in April.

With the two houses co-equal in powers, the defection means that the government will devote all its efforts to passing the 2007 budget, which is already under attack from the coalition's leftwing elements.

This adds to the pressure on Mr Prodi whose government is already in turmoil over a controversy involving Telecom Italia, the country's biggest telecommunications company, which has exposed the prime minister to criticism from his coalition's two main political parties.

The government will face more difficulties next week when it puts the final touches to the 2007 budget, which contains €15bn (£10bn, $19bn) of deficit-cutting measures that leftwingers in the coalition want to water down.

Declining Oil Prices

The decline in oil prices is good news, isn't it? Well if it relflects an increase in supply it is, but if it is as a result of slowing economic growth then the news may not be as welcome as it seems. That is the subject of this article:

It should only be this simple: Oil prices plunge 20 percent, leading businesses and consumers to ramp up their spending, which gives a nice jolt to the economy. That seems to be the conventional wisdom on Wall Street right now, where the pullback in energy prices is being cheered by investors. But some contrarians think that view could be missing the point.

While the decline in prices will provide some relief to motorists, it also reflects the country's weakening economic outlook. In other words, any benefit from falling pump prices may be outweighed by higher interest rates and a stagnating real-estate market.

Moreover, the economy did not crater in the face of soaring fuel prices — because energy costs are only a small portion of the average U.S. household budget — so why should the reverse be true?

"Lower oil prices don't mean that the economy is going to improve," said David Resler, chief economist at Nomura Securities in New York.

More Falls in German Investor Confidence

For regular readers of this blog this should come as no surprise:

German investor confidence dropped to the lowest in more than seven years in September as higher interest rates and a planned tax increase dimmed the outlook for growth in Europe's largest economy.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 22.2, the lowest since January 1999, from minus 5.6 in August. Economists expected the index to slip to minus 8, the median of 38 estimates in a Bloomberg News survey showed.

The decline bolsters expectations that German growth will slow next year from the fastest pace since 2000. The European Central Bank has signaled a further rate increase to curb inflation in the dozen euro nations and Chancellor Angela Merkel's government plans to raise a sales tax in 2007

Not entirely unconnected with this investor sentiment is today's warning from the IMF that the current global cycle may have peaked:


Global economic growth is at risk of peaking because of high oil prices and rising protectionist sentiment, warned Rodrigo de Rato, the International Monetary Fund’s managing director, on Tuesday.

“The global growth cycle may be close to its peak,” Mr de Rato said in his opening statement at the joint IMF and World Bank plenary session in Singapore.

“The best hope for continued high growth lies in further increases to international trade. If this does not happen, the outlook is less encouraging.”

Economic Growth Accelerating in Brazil

This is basically a follow on to an earlier Brazil post. Henrique Meirelles, President of Brazil's Central Bank is confident that, after a sustained series of interest rate reductions, Brazil's economic growth will accelerate in the months ahead:

Brazil's economic growth will accelerate in the months ahead as 10 interest-rate cuts in the last year have yet to take full effect in spurring consumer and company spending, central bank President Henrique Meirelles said.

A pickup in job creation and increases in wages and bank lending may sustain the expansion in Latin America's biggest economy, Meirelles told a Brazilian-American Chamber of Commerce gathering of executives in Singapore. Inflation is contained and will probably end the year below the bank's 4.5 percent target.

Meirelles' comments suggested the central bank may be almost done with slashing interest rates in Brazil, which has endured some of the world's highest borrowing costs for decades. Policy makers have cut the benchmark lending rate by 5.5 percentage points since September 2005 and on Aug. 30 trimmed it by half a percentage point to 14.25 percent, the lowest in at least 20 years. They're scheduled to cut the rate again by at least a quarter of a point next month, economists predict.

``What he tried to say is that there's a lot of stimulus in the pipeline and that the monetary easing is perhaps no longer necessary,'' Maristella Ansanelli, chief economist for Sao Paulo-based Banco Fibra SA, said in an interview in Singapore. ``They don't want to overdo it with interest-rate cuts.''``The monetary flexibility has not yet been fully felt,'' Meirelles said in the meeting. ``There is significant impulse to the economy''

And in fact Lula wasn't responsible for the slowdown noticed earlier in the year, the World Cup and the tax inspectors were:

Meirelles said a slowdown in the second quarter was temporary, in part caused by the World Cup soccer tournament -- which reduced the hours that employees worked and hurt retailers and construction companies -- and by a strike of federal tax inspectors that slowed the entry of imports and shipment of exports in June. He said inventory accumulation will add to economic growth.

Brazil's economy grew 1.2 percent in the second quarter from the year-earlier period after expanding 3.3 percent in the first quarter. Both the central bank and Finance Minister Guido Mantega forecast growth this year of about 4 percent, faster than last year's 2.3 percent expansion.

Japan, At Last Some Sense

This article about the extent to which the Japanese treasury is dependent on company profits for income is interesting, but beyond that I'm not sure how to interpret the fact since I am not sufficiently knowledgeable about the Japanese fiscal system.

However, a number of points do stand out. Corporate profits now fund the revenue:

Japanese corporate profit tax receipts are poised to overtake personal income tax contributions for the first time in 18 years, a shift that could influence debate among contenders vying to succeed prime minister Junichiro Koizumi.

Wages seem to be flat:

The figures highlight the strong return to profitability of Japanese companies, which have retained most of their gains without passing them on to workers in the form of higher wages. Although the labour market has become tight - with more jobs than job-seekers - wages have hardly risen, although bonuses have improved.

Consumption taxes are soon set to rise:

The finance ministry wants to rebalance the tax system largely by increasing consumption taxes. A central plank in the prime ministerial campaign platform of Sadakazu Tanigaki, finance minister, is a doubling of the sales tax to 10 per cent.

Although not everyone agrees:

Shinzo Abe, who is likely to win the leadership contest, is influenced by policymakers who argue that raising taxes could damage consumption and harm overall economic activity. His policy is to cut spending and try to increase the government’s tax take through promoting growth.

But funding through growth is just what has been tried and failed, that's why the debt is where it is. This view rings hollow.

Most Lopsided Economy in the G7

And then along comes Andrew Smithers:

Andrew Smithers, an economist at London-based Smithers & Co, has said in a recent report that the swing in corporate profits might need to be reversed in the interests of domestic consumption. He argues that Japan is the most lopsided of the G5 economies - the US, UK, Japan, France and Germany - with the lowest consumption and highest investment ratios; the largest current account surplus and budget deficit; the worst demographics and the lowest interest rates.

“These oddities are almost invariably ignored,” he says. “They illustrate how far the economy is from any likely equilibrium and this conflicts with the conventional wisdom which holds that Japan has corrected the past distortions of its economy and is now set on a path of balanced growth.”

Moreover the household savings rate has been falling steadily: from nearly 12 per cent of GDP in 1997 to just over 2 per cent last year. This is also perplexing, does this mean that, following the Life Cycle Theory people do finally get to dis-save in the end. I have long entertained doubts about this, but household saving in Japan is definitely something to watch. But what this seems to suggest is that after the reforms the Japanese are not only not spending, they aren't even managing to save like they used to.

Bernanke and Inflation Targeting

Ben Bernanke has never made any secret of the fact that he would like to introduce an inflation targeting procedure down at the Federal Reserve: From this article it would seem that he might benow about to move his agenda forward. As the article also points out this is a rather tricky (not to say delicate) moment. I am not myself convinced of the necessity (or even of the desireability) of inflation targeting per se, but given the level of uncertainty surrounding so many key linchpins in the global and US economies it does seem to me that this is a somewhat more inopportune moment than most. Rich Miller seems to agree.

Federal Reserve Chairman Ben S. Bernanke is stepping up his push for an inflation target at a time when hitting it might damage the U.S. economy.

Bernanke, long a proponent of setting a numerical goal for inflation, has penciled in an in-depth discussion of the Fed's communications strategy, including targets, for next month's Federal Open Market Committee meeting. With targeting enthusiast Frederic Mishkin joining the FOMC, Fed-watchers including former Governor Laurence Meyer say the central bank might agree to shift strategy by mid-2007.

A move toward targeting, perhaps starting with regular publication of inflation reports, would answer criticism that Bernanke's Fed has been blasé about mounting price pressures. The risk is it might also lead central bankers to raise interest rates high enough to push the economy, which they already expect to be weak next year, into a recession.

``You tie your hands a bit,'' says former Fed Vice Chairwoman Alice Rivlin, a senior fellow at the Brookings Institution in Washington. ``You create an expectation that if inflation goes up another notch, you would immediately respond, even if that's not good for the overall economy.''

I agree with Alice Rivlin, right now you need to build in as much flexibility as you can.