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Friday, October 25, 2002


Japan's economy minister doesn't seem to be getting much rest these days. According to the latest news from Tokyo:

Financial Services Minister Heizo Takenaka said Friday he will meet again with top executives of Japan's major banks to discuss steps to accelerate the disposal of nonperforming loans."I want to talk more about various issues" with the top executives, Takenaka said during a regular news conference. Government officials said a meeting between Takenaka and the bank officials is likely to take place later in the day.
Source: Japan Today

The latest meeting follows his apology yesterday in the Japanese parliament. "I will be careful in future," he is reported as saying to meeting of the lower house budget committee, referring to the sharp fall in share prices after his initial remarks about the bad debt problem. According to the Financial Times:

Mr Takenaka told the budget committee that he had postponed the announcement of his plan to accelerate the disposal of bad loans this week after objections from members of the ruling Liberal Democratic party. His proposal, which calls for drastic action to clean up banks, would now be rolled into a broader "anti-deflation" package, expected to be released next week.

"We had to deal with the safety net issue at the same time," said Mr Takenaka, referring to an array of measures designed to offset the likely recessionary impact of aggressive action on the banks. Yesterday, a report by Nikko Salomon Smith Barney suggested that more rigorous appraisal of banks' bad loans could push real gross domestic product down 3.4 per cent over two years and affect 2.4m workers. The delay has led many commentators to conclude that Mr Takenaka will be forced to water down his proposals. But Takao Toshikawa, a prominent political analyst, said he thought the bulk of his strategy would survive. "The original plan should be promoted and carried out because Mr Koizumi has already endorsed it."
Source: Financial Times


Japan seems to be on track to enter its fourth consecutive year of deflation - something not seen in any post-war industrialised country - as the country's core consumer price index dropped for the 36th consecutive month in September. The core nationwide CPI fell 0.9 per cent in September, year-on-year, according to government sources. In October, the Tokyo CPI fell 0.8 per cent from the same month the previous year, its 38th consecutive monthly decline.

Heizo Takenaka, the country's embattled economics minister, said on Friday that further debate was needed regarding the Bank of Japan's possible adoption of an inflation target.

"The (Bank of Japan) has said it will keep up its efforts until prices stop falling, and you can call that loosely an inflation targeting. In any event, there are various opinions among experts and we need to further debate this issue." Mr Takenaka - who was this week forced to postpone the announcement of his plan to accelerate the disposal of bad loans after objections from members of the ruling party - has stressed it would be difficult to pursue aggressive moves to clear up bad debts in the banking sector, conservatively estimated at Y43,000bn ($347bn), without equally strong efforts to tackle deflation. Consistently falling prices whittle away at revenue and undermining companies' ability to repay loans.
Source: Financial Times

Thursday, October 24, 2002


The increase in nonfarm business output per hour over the past year will almost surely be reported as one of the largest advances, if not the largest, posted over the past thirty years. We at the Federal Reserve, along with our colleagues in government and the private sector, are struggling to account for so strong a surge. We would not be particularly puzzled if the increases in output per hour were occurring during a period of very rapid economic growth, such as has often attended recoveries from steep recessions. Historically, such recoveries have allowed overhead and maintenance employee hours to be spread over a rapidly increasing level of production. But during the past year we averaged only modest economic growth.
Source: Federal Reserve Board


News from Japan these days is contradictory. There seems to be no consensus whatsoever about whether Takenaka and his team of 'hard landing' specialists are going to get the political backing they need. Risking a revolt in his own party, Japanese Prime Minister Junichiro Koizumi has today ben giving the appearance of standing firm in support of his besieged banking regulator, amidst heavy signalling from the Bank of Japan that it would operate monetary policy to try to help ease the pain of the tough-love reforms being proposed. Of course the consequences for all of us should the Takenaka proposal prosper are far from clear ( See: WILL HISTORY TREAT THE NAME TAKENAKA THE WAY IT ONCE TREATED YAMOMOTO, blogged Saturday October 5, 2002).

The critical nature of Japan's situation can be sen from the fact that when the names of the reform task force (especially that of Kimura) were made public the Nikkei crashed to a 19 year low, the market then began to slowly recover as things went quiet, and no that there's real talk that the reforms may be sidetracked, well, the market is going back down again. This seems to suggest that Japan is near to going critical, and for this reason my guess (and it's only a guess) is that the reforms will go forward. So watch out.

Japan's ruling Liberal Democratic party on Tuesday appeared to have staged a last-minute rebellion against plans to deal with the country's troubled banking sector, accusing Junichiro Koizumi, prime minister, of pursuing a "unilateralist" and economically damaging strategy.The Financial Services Agency was forced to postpone the announcement of its plan to accelerate the disposal of banks' non-performing loans, citing "political reasons". It would release details of its plans in the next few days, it said.

There had been speculation ahead of the announcement that Mr Takenaka would issue a much watered-down version of his plan because of strong political opposition from those who say a hard landing could tip Japan into economic crisis. But legislators were clearly still uneasy about some aspects of the plan. Attention has focused on possible proposals to deal more strictly with the categorisation of bad loans as well as to reassess what banks can count as capital. In particular, a proposal to deal more strictly with deferred tax assets - potential tax refunds counted by banks as Tier 1 capital - could have a devastating impact on some of the country's biggest banks. If banks' capital adequacy ratios fell below international requirements of 8 per cent as a result of such changes, they
would be exposed to a possible enforced injection of state funds and nationalisation. Mr Koizumi said that an injection of state funds was not fundamental to improving the health of banks, but could result from a stricter categorisation of bad loans.Until last month, when the Bank of Japan called dramatic attention to the lingering banking crisis, the FSA and the banks were adamant that they could write off bad loans by 2004 from profits.
Source: Financial Times


Economic growth in the third quarter of this year was again driven by globalization processes. Foreign direct investment utilization, for example, surged 30.2% Year onYear to US$15 billion (to 4.7% of GDP) while exports grew by 28.5% (domestic consumer demand growth, on the other hand, lagged amid increased savings due to fears over job security- produced by the shake outin the state sector -and rising service costs). The incremental export-to-GDP ratio rose to a record 89.6%, indicating the dependence on external demand. The expansion of foreign-invested enterprises was evident, given their 13.6% growth in value-added output. Overall production for export delivery jumped 25.2% YoY in 3Q, accelerating from 22.3% in 2Q. This exceeds overall industrial output growth of 13.1% and 12.5%, respectively, for 3Q and 2Q. Put simply structurally based, export lead growth in China is now one of the leading motors driving the increase in global consumption, and one of the key factors in understanding the downward, deflationary presseure on prices.

After the robust September trade and production data released yesterday, China unveiled the full 3Q02 economic report today. Real GDP expanded 8.1% YoY, in line with expectations, up from 8% in 2Q and 7.6% in 1Q. Although growth could ease in 4Q02, as global demand slows and shipments have been disrupted by the West Coast ports strike, we believe we are on track to reach our 7.8% growth forecast for the year. Nominal GDP growth continued to track below real GDP growth, illustrating persistent deflationary pressure. The economy expanded 7.7% YoY in nominal terms, 0.4 percentage points below the real growth rate, although that gap has narrowed from 1.5 percentage points in 2Q.
Source: Morgan Stanley Global EConomic Forum

Folding@home TO THE RESCUE

Thousands of desktop computers working together in their spare time have resolved a long-standing biological puzzle, in a breakthrough in data processing, the British journal Nature reported yesterday. A team led by Vijay Pande of Stanford University in California put out a call two years ago for PC owners to make idle computers available to one hell of of a problem: how the atoms of a protein cause it to fold into a 3D knot. Understanding this could help drugs designers come up with molecules to attack Alzheimer’s and the human form of mad-cow disease, both of which are caused by misfolding, rogue proteins.



* Biophysics Program and Department of Chemistry, Stanford University, Stanford, California 94305-5080, USA
‡ Departments of Chemistry and Physics, and Center for Biophysics and Computational Biology, University of Illinois, Urbana, Illinois 61801, USA
† These authors contributed equally to this work

Protein folding is difficult to simulate with classical molecular dynamics. Secondary structure motifs such as -helices and -hairpins can form in 0.1–10 µs (ref. 1), whereas small proteins have been shown to fold completely in tens of microseconds. The longest folding simulation to date is a single 1-µs simulation of the villin headpiece; however, such single runs may miss many features of the folding process as it is a heterogeneous reaction involving an ensemble of transition states. Here, we have used a distributed computing implementation to produce tens of thousands of 5–20-ns trajectories (700 µs) to simulate mutants of the designed mini-protein BBA5. The fast relaxation dynamics these predict were compared with the results of laser temperature-jump experiments. Our computational predictions are in excellent agreement with the experimentally determined mean folding times and equilibrium constants. The rapid folding of BBA5 is due to the swift formation of secondary structure. The convergence of experimentally and computationally accessible timescales will allow the comparison of absolute quantities characterizing in vitro and in silico (computed) protein folding.
Source: Nature

Or, for those of a less technical inclination:

Stanford University scientists have shown that distributed computing, using thousands of low-end PCs, can have real results Scientists at Stanford University have demonstrated tangible proof that scientific experiments can be conducted using thousands of low-end PCs wrangled together into loosely linked networks. A group of chemists -- including Stanford assistant professor Vijay Pande -- said they successfully predicted the folding rate of a protein using calculations worked out on a so-called distributed computing network. Their research, conducted last year, was published this week in the science journal Nature.
In an interview, Pande said the demonstration was an important proof of concept for the use of distributed computing in the lab.
Source: ZDNet


In The Age of Intelligent Machines, which he wrote in 1986-1989, Kurzweil predicted that a computer would defeat the human world chess champion by the end of the 1990s. He also noted that computers were gaining about 45 points per year in their chess ratings whereas the best human playing was essentially fixed, and so projected the cross-over point at 1998. In fact, Deep Blue did defeat Gary Kasparov in a highly publicized tournament in 1997. However with this week's final game, we have the current reigning computer program, Deep Fritz, only able to achieve a 4-4 tournament tie with world chess champion Vladimir Kramnik, so what IS happening. Well............

The Deep Fritz computer chess software only achieved a draw in its recent chess tournament with Vladimir Kramnik because it has available only about 1.3% as much brute force computation as the earlier Deep Blue's specialized hardware. Despite that, it plays chess at about the same level because of its superior pattern recognition-based pruning algorithm. In six years, a program like Deep Fritz will again achieve Deep Blue's ability to analyze 200 million board positions per second. Deep Fritz-like chess programs running on ordinary personal computers will routinely defeat all humans later in this decade.
Source: KurzweilAI.net

Wednesday, October 23, 2002


The recent remarks by EU Commission President Romano Prodi about the stability pact continues to make waves. Yesterday he staunchly defended his description of the stability and growth pact as "stupid", claiming he was only saying in public what others were saying in private. When questioned by the European parliament on the topic he explained that in his opinion the euro's tough fiscal rules could not be rigidly applied when the world was on the brink of deflation. No apart from the fact that someone in authority in the EU is prepared to publicly admit deflation might be a problem, the overall impact of this 'gaff' is decidedly negative.

"What a tragedy it would be if, in winning the battle for stability, we lost the trust and backing of our citizens," he said. Although some of Mr Prodi's colleagues privately admit that his use of the word "stupid" last week was misjudged, the Commission chief claimed that he was striking a blow for a more open political debate in Europe. "The public mistrusts us and the institutions precisely because they suspect that only minor matters are aired in public and the truly important decisions are taken behind closed doors."

"Europe's citizens must be sure that the system is in safe hands - hands that are capable of giving consistent guidance to the system, both in quiet periods and, even more so, in times of difficulty and crisis." Mr Prodi's comments last week stunned EU finance ministries and infuriated many smaller countries, which claimed he was discrediting the pact in an attempt to make life easier for big countries such as France, Italy and Germany, which all have budget problems. "We see a Commission bending over to help the big countries, but when we had the same problems they held a gun to our head," said one EU ambassador from a smaller member state.

Despite Mr Prodi's defiance yesterday, even his closest aides admit use of the word "stupid" to describe the stability pact detracted from his basic message: that the pact needs reform and Brussels needs more power to enforce it. "He has an Italian political style, where you can throw up ideas for debate," said one of Mr Prodi's aides. "Perhaps a European setting is not the right place to do it."
Source: Financial Times

What exactly is the point of the stability and growth pact?. Well ever heard of Enron anyone? The principal Euro group countries, and especially Germany, Spain and Italy, all have enormous off-balance sheet undeclared liabilities: they're called unfunded pension and health care claims with rapidly ageing populations and imploding dependency ratios.

The stability pact was an attempt not to get into more debt before things really started to get tricky. Ever heard of rosy cash-flow massaging (think of all those dot-com venture capitalist plans). Well take a look at the growth numbers projected by these same countries for this decade, and look at the realities. The big danger in all this "stupid pact" talk is that ECB policy becomes a political toy. Of course changing the objectives from price stability towards growth oriented policy sounds nice (as if we weren't all trying to achieve growth already), the problem is when you get to read the fine print.

Sure, Germany needs more budgetary flexibility to be able to tackle the growing deflation dangers, but then there is the problem of inflation in Greece, Portugal, Spain, Ireland and Holland. I don't know whether a quick band-aid fix exists for all this, somehow I doubt it. But simple demogogic talk about 'stupid' pacts is easy and dangerous.
Perhaps the real problem is that the Euro decision was a political and not an economic one in the first place.