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Friday, September 20, 2002


The deflation problem isn't absent from forseeable UK scenarios either. According to the latest figures from the Office for National Statistics RPIX - retail price inflation excluding mortgage payments - dipped from 2 per cent in July to 1.9 per cent in August. The broader RPI measure fell back similarly from 1.5 per cent to 1.4 per cent, in line with expectations. However, within this picture it is noticeable that the slow level of worldwide growth continued to depress goods prices, while the more robust domestic economy was reflected in accelerating services prices. The annual fall in goods prices increased from 0.9 per cent in July to 1.1 per cent in August but inflation in services, including package holidays, restaurants, insurance and motor repairs, continued to rise, from 4.5 per cent to 4.6 per cent - the fastest growth rate for almost nine years.

Clothes fell by the most, with prices down by 5.9 per cent compared with August last year - the biggest fall since the RPI series began in 1947. Although the price of clothing and footwear rose by 1.4 per cent in August compared with July after the summer sales, this was almost half the increase of August last year.

David Page, economist at Investec, said the weak rebound in high street prices "implies to us some lack of pricing power for retailers against a background of slowing consumer activity".If Thursday's official retail sales volumes for August prove as weak as Investec expects, "we believe that a slowdown in domestic household expenditure will persuade the [Bank's] monetary policy committee to ease rates once more to 'insure' against a more pessimistic outlook coming to pass", Mr Page said. RPIX is well below the Bank's target of 2.5 per cent but above June's 1.5 per cent recent low. Inflation is likely to pick up in coming months as the flooding in Europe is expected to push up the price of fruit and vegetables, and as last autumn's drop in petrol prices falls out of the index.
Source: Financial Times


This piece from David Barker in the Financial Times draws attention to the fact that the country with the greatest immediate exposure to deflation Japan style may not, in fact be the US, but Germany. I couldn't agree with him more.

The bursting of the bubble in US equity prices, particularly for technology, media and telecommunications stocks, has led some commentators to draw parallels with the Japanese situation at the end of the 1980s. The US may suffer a decade of lost growth, just as Japan did during the 1990s, they argue. But when looking for a country most likely to be sucked into a deflationary trap, people should focus on Germany, not the US.Domestic final sales - gross domestic product excluding the contribution to growth from stockbuilding and net trade - are a good measure of the underlying ability of an economy to generate its own growth. German domestic final sales fell 1.9 per cent year on year in the second quarter of this year, worse even than the low point of the 1993 recession. In Japan, sales were 0.8 per cent down on a year earlier during the same period, after an even worse performance during the first quarter.

Both Japan and Germany have lost control over real short-term interest rates. For Japan, this is because nominal short rates have reached the lower limit of zero and inflation is stuck in negative territory. For Germany, the European Central Bank has to set interest rates to achieve price stability across all eurozone countries. Though the cause is different, the effect is the same: interest rates are too high for both Germany and Japan. One method for determining the right level for interest rates - the so-called Taylor rule - would imply that interest rates in Germany should be as much as 3 percentage points lower than in the rest of the eurozone.

Demographics show that Japan and Germany will suffer from a shrinking and ageing population during the next 40 years, although German demographics are not quite as bad as Japan's. Not only do ageing populations have an increased incentive to save, reducing consumption growth, but they also place increased strain on pension systems.
Source: Financial Times


Perhaps the best introduction to this latest faux pas in the unwinding Japan saga is the comment from Merrill Lynch bond strategist Masuhihsa Kobayashi who is quoted as saying: "It seems that fiction is becoming a reality." The backdrop to this rather painfully reality recognition (actually life has always been stranger than fiction) is todays withdrawal the Y1,800bn on auction offer since the bid volume was only Y1,185bn. This latest embarassment - following the BOJ sally into the terrain of share buying earlier this week - only serves to underline the instability of the whole situation. This is the first time ever a bond offer has been withdrawn (of course the bonds themselves have been fully subscribed by the contracted underwriters) and gives the awful impression that there are few buyers for Japan government debt. Of course the reality might just be an internal factional shooting war, hitting back at the BOJ, and attempting to undermine its authority, in the wake at the share buying initiative, which could, in its turn have been only a way of turning up the pressure. Who outside of the Byzantine world of Japanese institutional finance knows? The only painfully obvious truth is that this cannot continue indefinately.

Investor confidence in Japan suffered another blow on Friday after a Y1,800bn auction of 10-year Japanese government bonds was undersubscribed for the first time in its history. Traders were unnerved by the unprecedented lack of demand, but chalked it up to a case of incredibly bad timing. Earlier this week, the Bank of Japan said it would buy shares directly from commercial banks in an effort to reduce their massive exposure to stock markets, a move which sent shock waves through the markets.

Masaru Hayami, governor of the BoJ, was unconcerned. "I am not that worried. I believe investors' appetite for JGBs is unchanged," said Mr Hayami. He added that 10-year JGBs were in a correction phase and that some market instability was inevitable.But investors thought otherwise, and the auction's failure sent the JGB market reeling. The yield on the benchmark 10-year JGB rose 12.5 basis points to near two-month highs and the key 10-year JGB futures contract fell more than a point to 139.04 in intraday trade.
Source: Financial Times


The horror and tragedy associated with the devastating loss of innocent human life attributed to that chilling phrase 'collateral damage' should not blind us to the fact that just as 'all that glitters is not gold', so all that is 'collateral' is not unavoidable. Fortunately side by side with the increasing resort to armed force as a way of resolving local and regional disputes, and the 'strong' interventions on the part of the international community which normally follow in order to terminate them, we also have a growing body of international jurisprudence which seeks not only to limit the quantity of suffering any would-be tyrants can inflict on their citizens, but also to let them, as well as those who would bring them down, know that there will be a subsequent price to pay for any who would make light of the value of human life and liberty.

The economist Paul Krugman has, in another context, drawn attention to a phenomen known as a 'backward induction' point which he tells us comes from a game theory inflection point that rapidly shifts the odds of potential outcomes due to anticipatory action on your opponent's part. It is to be hoped that the laudible activities of the Mary Robinsons and Physicians for Human Rights of this world serve in some measure to create a kind of backward induction point analogue, where the rather gruesome players in this macabre game - in the current case the future Dostums and Mohamed Omar's - anticipating consequent action on their opponents part rapidly shift their actions towards a different set of potential outcomes. That being said, perhaps a more classic, behaviouristic concept known as dissuasion could serve our purpose just as well.

The United Nations will investigate alleged war crimes and mass graves in Afghanistan, where many people died under suspicious circumstances, a top U.N. official said on Thursday. Up to 1,000 Taliban or al Qaeda fighters reportedly suffocated in airless container trucks after surrendering to Northern Alliance forces under Uzbek warlord Gen. Abdul Rashid Dostum late last year. Dostum denies deliberately killing Taliban prisoners, but admits around 200 may have died while being transported to a prison near Dostum's northern stronghold of Shiberghan. Lakhdar Brahimi, the U.N. special envoy for Afghanistan indicated the probe would encompass several sites, including some suspected victims of the Taliban, the Islamic group that ruled most of Afghanistan before being ousted by U.S.-backed forces after the Sept. 11 attacks on the United States. Physicians for Human Rights, the Boston-based human rights group that discovered the grave at Dasht-e-Leily and has helped the U.N. mission in Afghanistan carry out a preliminary assessment of what happened there, welcomed Brahimi's statement and volunteered to assist in any investigation.
Source: Yahoo News

Thursday, September 19, 2002


Japan's Nissan Motor and Dongfeng, the third largest Chinese auto company, are expected to announce today the biggest foreign investment in a state-run company since Beijing joined the World Trade Organisation last year, creating a vehicle manufacturer to rival Chinese market leader Volkswagen. Nissan's 50 per cent stake represents the maximum that foreign partners are allowed under China's WTO accession agreement, and signals the intent of Dongfeng to embark upon a restructuring strategy of significant proportions. Nissan, which is 44 per cent owned by Renault, is due to appoint half the management staff at Dongfeng Motor, ceding the Japanese company a level of management control hitherto unseen among foreign partners in a Chinese vehicle joint venture. One significant little detail that has emerged from all this, in the first seven months of this year, China's car sales reached 599,445 vehicles, up 44 per cent from the same period last year. So someone, somewhere is growing.

Details of the deal, which was arranged by Goldman Sachs over several months, stipulate that the new company will emerge stripped of much of the debt carried by its state-owned parent. Later, a plan to streamline operations by shedding staff and upgrading technology is to be launched. Industry analysts said that government approval for the acquisition showed Beijing's resolve to introduce competition and force a rationalisation in the overcrowded vehicle market.Dongfeng controls 12 per cent of the Chinese vehicle market. In August, Toyota, Japan's largest carmaker, agreed a joint venture with First Automotive Works (FAW), China's biggest car company, to produce up to 400,000 cars annually by 2010. The venture was valued at $1.27bn, compared with today's $2.06bn deal.
Source: Financial Times


Having started the year in complete chaos with the incompetent and theatrical introduction of the Euro - remember the Foreign Minister had to resign due to lack of support for the currency among his colleagues, Italy's star has not stopped going down. Of course we can all remember the sight of Italy's 'immigration minister' Umberto Bossi threatening to sink a shipload of stateless Kurds in mid-sea. Well in the light of all this the latest news that the Italian economy will only grow by 0.6% this year will perhaps be seen by some as disappointing but for others it is all too predictable. At a time when everyone else is obsessed with deflationary fears, the Italian economy continues to reveal mild inflationary tendencies. This plus a productivity performance below the European average don't add up to anything good. It remains to be seen how this all pans out in time. However if I am only halfway right that demographic factors have an important part to play in the unfolding Japanese story, then, against all expectations, it is to Italy that we should look for the next chapter to be written. Remember this year - despite all promises to the contrary - the Italian public debt as a percentage of GDP will once more start to rise.

Italy's centre-right government on Thursday cut its economic growth forecasts for this year and 2003 but insisted it would respect its European Union commitment to bring the budget close to balance. Giulio Tremonti, finance minister, told parliament that the government was reducing its 2002 growth forecast to 0.6 from 1.3 per cent. Growth next year would be 2.3 rather than 2.9 per cent, he said. Italy's darkening outlook was underlined by a survey which showed consumer confidence falling in September to its lowest level since July 1997. In addition, annual inflation has begun to edge upwards and, according to the harmonised EU index, now stands at 2.6 per cent, compared with a eurozone average of 2.1 per cent.

The government is due in the next 10 days to present its 2003 budget, a document that will indicate how it plans to square its promise of tax cuts for lower-income Italians and no reductions in welfare expenditure with its pledge to the EU to bring down its budget deficit. Mr Tremonti said the government would honour its deficit-cutting pledge. But he said Italy's deficit this year would be just under 2 per cent of gross domestic product, a higher estimate than the 1.1 per cent forecast sent to Brussels this month.
Source: Financial Times