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Saturday, February 01, 2003

Bonobo Land Adds Commenting

Following a recent surge of interest in this blog (thanks again to Brad Delong), I've finally decided to stick my neck out and do what I probably should have done months ago: add commenting to selected blog entries.


What in the World is a Bonobo?

Good question. So to clarify things a bit I reproduce an extract from the Bonobo Initiative Website. Remember, while we're busy busting our guts trying to save humanity, we could also try and take a bit of time out to do something of behalf of our 'nearest known relative'.

It is difficult to answer the question: What is a Bonobo? Bonobos are complex beings with profound intelligence, emotionality, and sensitivity. It’s like asking the question: What is a human? And, how do you answer? Philosophers, scientists, and mystics have been trying to figure it out for thousands of years!
Biologically speaking, bonobos are the closest you can get to being human without being human. Bonobos look more like humans than other apes, and display many behavioral similarities as well. Bonobos and people share 98.4% of the same genetic make-up (DNA). Bonobos and their cousins the chimpanzees, are more closely related genetically to us than they are to gorillas! But, like gorillas, they dwell only in the equatorial forests of central Africa, the cradle of humanity itself.

Bonobos are great apes, along with chimpanzees, orangutans, and gorillas. Because we share so many characteristics with these simian species, some scientists contend that humans should be classified as apes too. Indigenous people who have dwelled among bonobos in the Congo forest have many legends about how bonobos and man were brothers in the distant past. They tell stories about how bonobos showed people what foods to eat in the forest, how a bonobo saved a man who needed help, how bonobos themselves are trying to become human.

Japan Actively Intervenes to Keep the Yen Down

So much of the speculation was right. The Japanese yen definately isn't accompanying the euro on it's climb upwards - some things in life you just have to do alone - and they have spent this month alone 5.6 million dollars (in yen of course) to back their determination. The curious thing is that they tried to keep quiet about it. My feeling is that it is now only a matter of time before the ECB gets the message and starts to intervene itself, whether by dropping rates or selling euros, before we have the curious spectacle of three of the four major currencies trying to beat themselves down. Sterling could then be the one with the problem, since with house prices rocketing the BofE certainly won't be looking to bring rates down, except that with Blair backing Bush on Iraq, so the petro dollars won't be heading for London any time soon.

Japan's Ministry of Finance intervened in the foreign exchange market this month to weaken the yen, but did not tell investors until monthly data on Friday uncovered the transactions. The Bank of Japan used some Y678bn ($5.6bn) in a series of actions to buy dollars for yen to stem the Japanese currency's appreciation. An official on Friday said the move was designed to stabilise the yen rather than actively weaken it.Despite the weakness of Japan's economy, the dollar's renewed slide has led the yen to strengthen in spite of officials' attempts to talk it lower. The Japanese currency has gained some 6 per cent in the past two months, prompting concerns about the damage a stronger currency will do to exporters' balance sheets and its possible impact on Japan's struggle against deflation.

The dollar stood at Y119.3 against the yen on Friday, up from three-month lows at Y117.5 earlier this month. Analysts said the covert nature of the BoJ's actions was a surprise. The bank, which holds massive reserves, has frequently intervened publicly in the market to limit yen strength and last acted in a series of moves between May and June last year.
Source: Financial Times

Friday, January 31, 2003

Is There a Critical Level For The Euro?

What is the level beyond which the rising Euro means things start to turn nasty, or, indeed is there such a level in sight? Morgan Stanley's Stephen Jen argues that there is - and that that level is 1.08 dollars (pretty much the current level). Jen's argument, and it looks pretty sound to me, is that any further Euro upside would have to be met by the ECB with an extremely aggressive bout of rate cutting, a bout which would be more than welcome in Germany, but would leave the euro zone's inflation prone mediterranean fringe looking helplessly skywards. This is all the more the case since the tacit acceptance by all parties of a more-or-less stable dollar-yen parity means that the euro is about to do the heavy lifting.

We believe the US dollar's structural descent will continue, and expect the euro to be one of the biggest beneficiaries. This euro/dollar ascent is decidedly a rally by default, not by merit, in our view. Because this rally in the euro reflects capital repelled by the US rather than capital attracted to Euroland due to Euroland-specific factors, a strengthening euro will have important economic and policy implications. At this juncture, the investment strategies of the two major groups of currency players -- (1) the Asian central banks and (2) the owners of petrodollars -- are likely to remain positive for euro/dollar for some time, despite the inferior cyclical fundamentals in Euroland. This rise in euro/dollar is so far rather "healthy." However, we note that euro/dollar has already reached an important level for the Euroland economy. Not only is $1.08 what we believe to be the PPP fair value of euro/dollar, it is also a level, if maintained for the rest of the year, that could in theory force the ECB to push the refi rate below the federal funds target rate of 1.25%.

In our view, the main reason that the Euroland policy makers prefer a strong and appreciating euro is to help contain inflationary pressures. However, in light of the extraordinarily weak cyclical economic fundamentals in Euroland, the only source of persistent inflationary pressures is structural. (We would classify high oil prices as a cyclical pressure.) For most of the rest of the world, the challenge of the monetary authorities has shifted from fighting inflation to forestalling outright deflation. In a sense, Euroland is forced to fight "yesterday's war" only because it has unresolved structural issues.

Euroland’s strong-currency bias is one reason why the euro may rally against both the dollar and the yen in the coming months (though we believe that eventually the yen will catch up to the euro in this dollar descent). Since the beginning of 2002, the Fed’s major dollar index has declined by some 11.3%, while the broad dollar index has shed some 3.5% of its value. So far this year, this ratio of 3:1 has largely held. In addition, we recall the result of our back-of-the-envelope calculation that, if dollar/yen is held fixed by the Japanese Ministry of Finance, then, all else equal, to achieve a 1% decline in the major dollar index, a 1.8% rise in euro/dollar is required. Combining these two ratios, we find that to generate 1% decline in the broad dollar index, euro/dollar will need to rise by 5.4%, with all the assumptions mentioned above.

My colleague Joachim Fels and I have pointed out that interest rate cuts could potentially offset the effects on growth of a strong euro. As a rule of thumb, a 10% trade-weighted appreciation of the euro is equivalent to a 150 bp hike in the refi rate. Since euro/dollar averaged $0.95 in 2002, if the euro remains at current levels for the rest of the year, the ECB, in theory, would need to trim its refi rate by some 150 bp just to neutralise the contractionary effect on GDP growth. Such cuts would bring the refi rate in line with the federal funds target rate, currently at 1.25%. That said, the ECB is officially an inflation targeter, not a growth targeter. Using the same rule-of-thumb approach, however, suggests the ECB would need to trim its policy rates much more aggressively to offset the impact on inflation of a 10% euro TWI appreciation. Theoretically, the bank would need to cut the refi rate more than three times more aggressively than if it only tried to offset the effect of a strong euro on growth.
Source: Morgan Stanley Global Economic Forum

Why Japan Matters

Morgan Stanley's Robert Alan Feldman points out, at a time when many seem to have forgotten that Japan exits, why Japan continues to matter.

Yet another way Japan matters is in helping to integrate China into the world economy. Compared to other countries, Japan trade with China is more complementary. Japan produces many things that China cannot produce for itself yet, and China produces many things in which Japan has no comparative advantage at all. The gains from trade between capital-intensive Japan and labor-intensive China are huge. Of course, the commodity producers will also reap major gains from trade with China. However, compared to many manufacturing-oriented economies, Japan is in a rather good position, even if there are still some industries where Chinese products will replace Japanese ones. In addition, Japan is one of the few countries that benefit from the interaction of demographics and trade. The working-age population in Japan has already begun to decline, and so inexpensive Chinese products are crucial in supporting the Japanese standard of living. The business opportunities from this trade complementarity are legion. True, many in Japan are scared of China. Surprisingly to me, these fears are shared -- and amplified -- in other countries. My colleagues who cover Latin America were particularly anxious about Chinese competition in some of their industries.

Finally, Japan has a prominent place in the debate about how macroeconomic theory should be applied in financial markets. Is deflation solely a monetary phenomenon, or is it also a real phenomenon -- e.g., due to insufficient structural adjustment that has prevented the absorption of redundant workers? Countries around the world, faced with structural rigidities (e.g., Germany) or rising imports from China (everywhere), will face the same problem that Japan has grappled with for a decade. Japan’s experience is precious. Moreover, investors in many markets now face the issue of valuation of equities in a deflationary world. Who has more experience in this than Japan?
Source: Morgan Stanley Global Economic Forum

The Bad News From Japan Continues

Unemployment up, GDP and consumer prices down, there certainly doesn't seem to be any end in sight for Japan's economic woes. Add to this the fact that industrial production contracted in December for the fourth consecutive month, and that the Nikkei touched 20 year lows this week, and it's easy to see there's little cause for optimism. Nevertheless some still seem able to call bad news good, even if the little glimmer of hope, the changing ratio of applicants looking for work to jobs, may be more a reflection of the fact that older people are leaving the job market than anything else. The good news, that is, is that the unemployment problem can be thought by some to be improving because as the population gets older more peolple are retiring, or staying at home to care for the elderly!!

Unemployment in Japan reached a post-war high in December while the deflation that has racked the economy for three years showed no signs of alleviating. Economists are forecasting the economy to contract in the fourth quarter. December unemployment reached 5.5 per cent. Though the ratio of new job offers to applicants rose to 1.04, its highest level since June 2001, the percentage of employed people in the workforce and those actively seeking work declined to 60.6 per cent. In a comedy of errors, Masajuro Shiokawa, the country's finance minister, initially said the jobless figure was "good news". He then retracted the comment after a ministry official whispered in his ear, presumably that the news wasn't so good. Mr Shiokawa said the rise in employment in certain sectors was a positive development.

The core consumer price index for December fell 0.7 per cent, year-on-year, though it held steady from the previous month. For the year, the CPI fell 0.9 per cent, its biggest year-on-year decline. Falling prices have plagued the economy for three consecutive years, making it harder for businesses to repay loans. "Deflationary pressures are still very strong, and with the cut in winter bonuses, final demand will be subdued for some time," said Ryo Hino, economist at JP Morgan in Tokyo. Peter Morgan, economist at HSBC in Tokyo, said that the Japanese CPI underestimated the actual degree of deflation by about 0.7 percentage points. Economists have long questioned the accuracy of Japanese economic data, which led to a re-vamp in the way gross domestic product is calculated. "The main reasons are that CPI does not include prices for short-term sale items, despite the fact that such sales are becoming increasingly common, and it does not adjust adequately for quality changes," said Mr Morgan.
Source: Financial Times

Thursday, January 30, 2003

UK: The Housing Bubble Goes On And On - Till It Doesn't

UK house prices rose by 26.5 per cent in the year to January, the fastest growth rate in 13 years, and debt levels have hit a new record high, according to figures released by Nationwide, Britain's second-biggest mortgage lender. This increased level of personal indebtedness was also confirmed by figures from the Bank of England which show that personal borrowing grew by 9.4bn pounds (1.1 per cent) in December, 600m pounds more than the rise in November. This puts the annual rate of increase at 13.6 %, up just a touch from the 13.5% registered in November, the highest rate of increase since the Bank starting recording the data in April 1993. And just to pile it on a bit thicker the figures also show that consumer credit grew at a rate of 15.1% year on year. Clearly these numbers are not sustainable, and in one moment or another something is going to snap. The worry has to be that the debt deflationary backlash could be really important, and its not clear what either the Bank or the Treasury can do at this stage to avoid the crash, since pricking a bubble at the best of times is a tricky issue, and right now fears of provoking an even deeper recession cannot be taken lightly. All in all, it seems that last weeks unfortunate London tube train might not be the only thing to come flying off the rails.

Nationwide said there appeared to be little sign of a slowdown in mortgage lending. It lent a gross £216bn last year. The majority - £83bn - was in remortgaging, while £43bn was lent to first time buyers and £77bn to existing home owners. "With the current trend in growth very stable and strong we would expect the annual inflation rate to remain around 25 per cent for the next couple of months," said Alex Bannister, Nationwide group economist. Despite concerns about Britons' record levels of household debt, Mr Bannister said homeowners appeared to be more insulated from the effects of falling house prices than in the past, mainly because buyers were putting down larger deposits. In 1989 almost 300,000 - or nearly half of first time buyers - put down a deposit of 5 per cent or less. Nationwide estimate that only 125,000 put down a deposit of 5 per cent or less in 2002, increasing the number of people who had a buffer against falling house prices. The record level of borrowing last year was driven by equity withdrawal, as households took advantage of sharply rising house prices to increase borrowings against the value of their homes. The Bank has left interest rates at a 39-year low of 4 per cent for 14 consecutive months. Its monetary policy committee will meet next week and is widely expected to leave rates on hold again. Charles Bean, the Bank's chief economist, said on Wednesday night consumers were underpinning the economy. Growth at only slightly below trend had been achieved by boosting domestic demand - and especially consumer spending -to offset the external weakness, Prof Bean said in a speech to the London School of Economics.
Source: Financial Times

Euro Rise, Curative Therapy or Very Bad News?

The dollar's decline brings with it the euro's rise. But is what may be good news for some bad news for others? Certainly a falling dollar will produce a bit of much-needed inflation in the US, but in the same way will tend to have a deflationary impact in Germany. According to Joachim Fels & Elga Bartsch of Morgan Stanley (here) the euro has appreciated by 10% against a trade-weighted basket of currencies, and an appreciation of the euro of this magnitude should shave roughly 0.7 percentage point from euro-area GDP growth, mainly via the dampening impact on exports. Using another rule of thumb they calculate that it would take about 150 bp of ECB rate hikes to produce the same effect on GDP. Hence, they estimate the appreciation of the euro over the past year as being roughly equivalent to a 150 bp tightening of monetary policy (in which case the 4% appreciation since early December has already more than fully eaten up the expansionary impact from the 50 bp ECB rate cut). In other words the euro rise is a form of monetary tightening. Add to this the likely impact of such additional tightening on the CPI in Germany and it's easy to see where we might be headed. Let Morgan Stanley's Stephen Jen explain:

On our estimates, a 20% depreciation of the trade-weighted USD (major index) generates around 2.4% import price inflation in the short run, and this translates into 0.75% CPI inflation in the long term for the US economy. Although limited, this should help to alleviate deflationary concerns to some extent, together with the cumulated monetary easing and the ongoing fiscal campaign in the US. On the global balance sheet, the USD depreciation is likely to transfer a similar amount of CPI inflation from the major economies to the US economy, despite the fact that this is unlikely to be a zero-sum game.

Canada’s import price deflation seems to be the most vulnerable to the USD depreciation. If the CAD appreciates 20% against the USD, this results in 8.4% import price deflation in the short run, translating into 2.8% Canadian consumer price deflation over time. Similarly, Italian consumer prices decline about 2.1% in the long term, while the impact for the UK is around 1.1%. For the Euro-3, the overall impact is relatively muted. A 20% USD depreciation causes about 0.86% consumer price deflation for Germany and 0.95% deflation for the Euro-3 in the long term (on a GDP-weighted basis). The impact of USD depreciation is significantly low for French consumer prices.
Source: Morgan Stanley Global Economic Forum

So German prices could be pushed down 0.86% by a 20% dollar rise, or just enough to go below water. Meantime the situation could be even worse in some countries (Italy, Spain?) if we start to thing in terms of asymmetric impacts. What may be seen as positive for the euro zone en bloc, may well be much less so when you go country by country.

A strong currency is rather like cod-liver oil; it might be unpleasant but it is ultimately good for you. By making it harder for an economy to export, a strong currency requires greater productivity. Once the short-term discomfort of currency strength has passed, an economy is in fighting-fit shape and ready to take on the world. That, at least, is the theory - a theory that is about to be put to the test in the eurozone. This week the euro touched $1.0907 against the dollar, within a whisker of its highest level since March 1999 and not far off its starting point in January 1999 at $1.17.

In a relatively closed economy such as the eurozone, where exports make up just 15 per cent of gross domestic product, it is generally better to have lower interest rates than an undervalued currency. Pedro Solbes, European monetary affairs commissioner, yesterday said that, while the fall in the dollar was too rapid, the eurozone could "adapt to the new context". European exporters have already shown they can cope with some strengthening in the euro. Its 15 per cent rise last year did not prevent eurozone exports from rising 1.1 per cent. But to some economists, such arguments appear strikingly complacent. Exchange rate changes only affect exports with a time lag, and if the recent rise in the euro continues, they argue, it will soon start to hit eurozone exports.This threatens to strike the eurozone at its Achilles heel - Germany. The country was only saved from recession last year by net exports, which grew around 1.4 per cent. By contrast, domestic demand contracted by 1.1 per cent.

Weak internal demand in the eurozone overall has resulted in an increasing dependence on exports. For smaller businesses, which tend not to hedge their exposures, this is already a problem. "Some exporters are suffering," said Ludolf-Georg von Wartenburg, director general of the Federation of German Industries. "They are fighting in dollar markets with very thin margins." Many also doubt that a stronger euro will really spur faster structural reform.

Statements from council members are less than encouraging. Otmar Issing, the ECB's influential chief economist, told the BBC recently that he did not currently see a risk of deflation, and suggested that a bigger danger might be letting inflation stay too high. John Llewellyn, global chief economist of Lehman Brothers, argues that it is deflation, not in-flation, which is the greater threat. "Our estimates suggest a 10 per cent rise in the exchange rate causes a 1 per cent fall in prices. So if we get a 20 per cent rise from where we were at Christmas, inflation would be roughly zero. In some places, prices would be falling." If they fail to respond adequately with rate cuts and structural reform, eurozone policymakers could turn the long-predicted and unavoidable correction of the currency markets into a serious problem for Europe.
Source: Financial Times

Strong Dollar: He Would Say That Wouldn't He

John Snow's performance before the Senate Finance Committee fails to convince. Using language echoing that of former Treasury chiefs Robert Rubin and Lawrence Summers he declared himself to "favor a strong dollar" indicating that "a strong dollar is in the national interest." whilst adding that "sound, pro-growth economic policies" and "open markets" were the foundation on which the strong dollar was built. But such similarities seem to end at the rhetorical level, since the appropriate action seems totally lacking. Now it could be that the second comment provides the caveat which explains why, in fact, a weaker dollar is OK right now, since the "sound pro-growth" policies have yet to do their work, or it could be that it's a case of watch what I do not what I say. Either way as far as the dollar goes right now it is certainly a case of caveat emptor.

U.S. Treasury Secretary nominee John Snow on Tuesday declared he backs a strong dollar, erasing suspense over his stance on the currency, and said the U.S. economy is on the mend after a series of setbacks.Speaking at his confirmation hearing before the Senate Finance Committee, the wealthy rail executive gave a ringing endorsement of a sweeping set of tax-cut proposals put forth by the White House."I do know, and I believe this deeply, (that) this is a well-conceived growth package ... that the country needs," Snow said in response to questions early in the committee hearing.

The dollar has suffered in recent weeks on fears about an Iraq war and the soft economy, falling to three-year lows against the euro earlier this week. It gained some ground against major currencies as Snow's words reached the markets......U.S. manufacturers, who have protested that a lofty dollar makes their goods too expensive abroad, had hoped the industrialist might be sympathetic to their calls for a cheaper currency. But Snow's remarks aligned him closely with long-standing U.S. policy in support of a strong dollar reaching back to the opening years of the Clinton administration. Analysts said Snow's remarks suggested he was sticking to traditional economic and currency policy, raising the level of interest in his personal style after O'Neill's sometimes abrasive manner in appearances before Congress. "I don't think there will be any significant change in rhetoric from the administration," said economist David Gilmore of Foreign Exchange Analytics. "What remains to be seen is if Snow is more comfortable talking about the policy, like Rubin and Summers were but O'Neill was not. But it is more an issue of style than substance." Snow, who in the past was a vocal advocate of strict fiscal discipline, said Bush's $674-billion economic stimulus program would give the economy a needed boost.
Source: Reuters News

Meanwhile the dollar seems set to continue its gentle slide. As I have indicated in this column before, the belligerent background of an Iraq war in prospect is providing something of a smokescreen behind which the dollar is quietly allowed to drop. Remember that the three principle preoccupations for US economic policy are the current account deficit, what Brad DeLong calls 'the jobless recovery', and the ever present deflation trap. Perhaps the most perceptive comment I've seen in the press these days comes from one Ashraf Laidi, chief currency analyst at MG Financial, who is quoted in the Financial Times as saying that "The dollar could face renewed damage against the European currencies in the event that France and Germany step up their opposition to US war intentions." (here) Put another way it is the anti-war posturing of some European powers and the pro-war posture of Washington which is in fact the most direct influence the relative values of the relative Euro/Dollar values.

Wednesday, January 29, 2003

Bonobo What?

Many thanks to Brad Delong for some extremely flattering comments about me today (here), so just in case anyone should walk in unsuspecting: what exactly is Bonobo Land. Bonobo Land is my day-to-day web diary, where I try to bring together my thoughts about economic, technological or other topics which catch my eye. In particular I am interested in the ways in which the process of global aging is affecting our economic and social structures. It is my opinion that it impossible to really understand why we are witnessing continuing economic problems in Japan, or why Germany finds growth more and more difficult to achieve, or why the Euro zone is having so much difficulty with the stability pact if you don't take the changing demographic environment into account. I feel it is no accident that we are facing what Steven Roach calls global deflationary headwinds at the very moment when our populations have started to age. It certainly didn't seem to surprise us too much when rapidly rising populations - especially those post baby boom impacts - were accompanied by strong inflationary pressures. So my view is that all the emphasis on structural reforms to produce growth is misplaced if we don't incorporate at the centre of our programmes that most important structural reform of all, the migratory (or immigratory) one. At present the population and savings imbalances which characterise our planet are indeed producing massive population movements, but these movements are largely disorganised and chaotic, and often take an irregular or even clandestine form. We in the West (or East in the case of Japan) have to stop being hypocrites here, and face up to the scale of our responsibilities. The freer movement of population, and a global framework to make this possible, is one of the most urgent structural reforms on our collective agenda, otherwise our reform process will only be another re-run of the proverbial Hamlet absent the prince.

Finally, my identification with bonobos. While the name itself is probably a metaphor, it is also true that I cannot help but be drawn towards these near relatives of ours, in particular towards their ludic and non-aggressive techniques for defusing tension and resolving conflicts.
Japan - The Chinese Connection

The news that China is now the world's number one exporter to Japan has provoked considerable commentary inside Japan. From calls for a revaluation of the Chinese Yuan to recognition that the economic futures of the two countries are now inextricably linked. In particular proponents of the latter view draw attention to the fact that demand from China allowed Japan to increase its trade surplus in 2002, for the first time in four years. Among the factors that have caused the value of Japanese imports from China to rise for four straight years since 1999 is the trend among Japanese manufacturers to shift production to China to take advantage of cheap labor and resources or, to put this another way, to increasingly rely on Chinese outsourcing. And while Chinese products grab an ever greater share of global markets, as their economy shrinks under the impact of deflation Japanese products are gradually losing theirs. Japan in 2001 supplied the United States with 11 percent of its imports, down 1.4 percentage points from the year before. Over the same period, its share of South Korea's import total fell 0.9 point to 18.9 percent.

Some see a threat, others opportunity. But all agree-China can't be ignored. Already in Japan, made-in-China goods are everywhere, accounting for 18.3 percent in value of all imported goods last year. At one major supermarket chain, a full third of all imports come from China, having replaced the United States as the top source five years ago. A company executive said technical assistance from Japanese trading houses helps ensure the quality of the cheap Chinese products. The phenomenon affects all industries. Machinery accounted for 33.5 percent of total import value from China last year. Computer imports from China grew 81.7 percent in 2002 from the previous year, while semiconductor imports grew 21.5 percent.

Masaki Yabuuchi of the Japan External Trade Organization said Chinese manufacturers have become more competitive ever since a strengthening yen drove Japanese manufacturing to their shores in the latter half of the 1990s. Japanese direct investment in China surged in 1995, when the yen appreciated to 79 against the U.S. dollar, he said. The result was a massive increase in manufacturing capacity. One Japanese firm taking advantage of that capacity is NEC Corp. The company plans by March to import about 1.2 million Chinese-made personal computers, or 70 percent of its consumer PC sales for the fiscal year. By fiscal 2004, the electronics giant intends to raise that figure to 85 percent.
Source: Asahi Shimbun

The constant inflow of Chinese products whose low prices reflect China's cheap labor and other manufacturing costs may intensify Japan's deflation problem. To cope with rising imports from China, government officials intend to seek a revaluation of the Chinese currency. Japanese calls for such a move may draw international attention. According to a preliminary report on the nation's trade in 2002 released by the Finance Ministry on Monday, imports from China rose 9.9 percent from a year earlier to 7.72 trillion yen, surpassing those from the United States at 7.22 trillion yen. Such sharp rises in imports of cheap Chinese products have provoked some observers to voice strong concerns, saying inflows of cheap Chinese goods may exacerbate deflation. Although China has enjoyed high growth rates, its inflation rate has remained almost zero. In addition, the value of the Chinese yuan is "too low compared with the currency's actual capacity," said a senior Finance Ministry official. If China's exports continue to rise, this would be tantamount to China exporting deflation to other countries, the official added. At a meeting of finance ministers and central bank governors of the Group of Seven leading industrialized nations, to be held in Paris next month, the ministry intends to place the value of the yuan at the top of the agenda, as calls mount for a concerted effort to see off the growing threat of deflation in the world economy.
Source: Daily Yomiuri

Preoccupation Grows at Japan Government Debt

Judging by the historic low yields on Japanese government bonds (JGBs), the deflation that has racked the country's economy for almost four years is set to continue indefinitely. In interest rate terms it seems more a question of 'how low can you go'?

Expectations of a sustainable recovery are clearly nowhere in sight: the yield on the benchmark 10-year JGB on Tuesday fell to an intra-day low of 0.775 per cent, a level last seen in October 1998. It was nearly three years ago that Japan overtook the US to win the dubious honour of being the world's leading issuer of debt. This year's budget, set to total Y36,450bn ($308bn), is to be 45 per cent financed by the issuance of new bonds. But despite concern regarding the sustainability of Japan's debt - set to total a staggering 150 per cent of gross domestic product this year - JGB yields have been skirting new lows for nearly 11 months. That underscores the voracious appetite of investors, particularly banks, for government debt despite the minuscule returns. Each successive dip in yields has merely been the precursor of another rally in prices as investors bet on deflationary pressures to continue in the near-term. But that may be a brave gamble considering that the governorship of the Bank of Japan will be up for grabs in March when the incumbent, Masaru Hayami, steps down amid debate as to whether the central bank should adopt an inflation target.

Japan's city banks increased their JGB holdings - most of which are shorter-term - by one-third from January last year to about Y43,000bn at the end of December, fuelled by a dearth of attractive investment options and a decline in loan demand. Ahead of the fiscal year-end in March, banks are due to unwind cross-shareholdings and further increase their JGB purchases, which now comprise about 10 per cent of their total assets. The adoption of an inflation target would probably result in a 25 basis point rise in both the two-year JGB yield, now close to zero, and in the five-year yield, which closed on Tuesday at a record low of 0.245 per cent, according to Mr Kato. "While the banks may be the greatest linchpin of the JGB market, they are also one of its greatest sources of instability due to their weak capital structures, poor operating results and overhang of non-performing loans," says John Richards, director at Barclays Capital in Tokyo.
Source: Financial Times

Koizumi's Now You See Me, Now You Don't On Inflation Targeting

Japan watching can be a very frustrating business for economists. Last year we had economy minister Takenaka prjecting himself as a hard-landing specialist to sort out once-and-for-all the country's non performing loan problem. Then everything went quiet and we are still waiting to see whether the current round of inspections will prove effective or not. Now it's the turn of the Bank of Japan to draw the headlines. World opinion has it that the new governor should be an 'inflation targeter'. Now leaving aside the fact that, as dedicated followers of this blog know, my opinion is that Japan's deflation problem could prove much more intractable than the now popular 'inflation targeting' mantra assumes, it seems the Japanese themselves are not really buying it. Or at least this could be the interpretation to put on Koizumi's latest comments on the topic. Speaking to a parliamentary budget committee, he said: "A target of merely achieving higher prices is not desirable." A new BoJ governor will be appointed for a five-year term from March 19, and this has triggered a great deal of speculation that Japan may be about to embark on a more aggressive monetary policy. The prime minister himself had stoked such speculation at the end of last year by saying the battle against deflation, now in its fourth year, was the most important challenge of 2003. He also allowed several close colleagues to talk openly about the benefits of an inflation target, a policy strongly opposed by the BoJ. Now it seems that opponents of this policy (or opinion polls) are having more success in winning Koizumi's ear. Of course, this oposition to provoked inflation political could be far more political than economic, in a country where there are a lot of old people (and hence votes), and where many of these have savings which would be devalued by any inflationary process.

However yesterday, Mr Koizumi said that unless higher prices were accompanied by increased economic activity, it would erode living standards. "If salary levels stayed the same and only prices rose, there would be side effects. That is why I am pursuing economic reform to reinvigorate the economy." The LDP is also thought to be concerned that an aggressive inflation policy would be electorally unpopular, since it would erode the savings of many retired Japanese on fixed incomes who are benefiting from deflation.The prime minister's comments are the clearest indication yet that he is not keen to appoint an aggressive inflation-fighter as BoJ governor. When the name of Nobuyuki Nakahara, who advocates an inflation target, was floated, Mr Koizumi received a flurry of e-mails and faxes claiming Mr Nakahara was unsuitable for the job. Several BoJ officials have said privately that Mr Nakahara, or a similar candidate, would have difficulty in leading the central bank, since the six remaining members of the board are suspicious of an inflation-or-bust policy. Of the nine-member board, the governor and two deputy governors come up for re-election in March. Minutes of the December policy board meeting, released this week, show that all but one of the existing board are opposed to an inflation target, which would set a specific goal for price rises within a specified time.
Source: Financial Times

Sweden Delays Euro Entry Date

In a decision which for once speaks of wisdom and sense of judgement Sweden on Tuesday ruled out an early move to join the euro, even if voters give their backing to the single currency in September's referendum.Gunnar Lund, the minister responsible for euro issues, said the country would adopt the euro in 2006 to give its banking system, government agencies, and large companies plenty of time to prepare for the currency switch in the event of a "yes" vote in the referendum. The government had previously indicated that January 1 2005 was its preferred date for joining the single currency, with notes and coins to be introduced a year later. It is now planned that, in the event of a referendum yes both events will take place simultaneously. A bit more time for the institutions to prepare, and a bit more time to see whether the Euro's current ills are (as many of us fear) endemic to the system, or whether they are mere teething problems. In any event the opinion polls offer no clear forecast for September, with opinion divided roughly 50-50.

Mr Lund said the central bank and the country's leading banks had indicated that a 15-month transition period between the referendum and January 2005 was too short for them to change their IT systems and test them fully.He said: "A big bang solution will be smoother and more secure for everybody involved. It will also be cheaper because banks and companies will not have to invest in systems that only need to be in place for a year."Klas Eklund, chief economist at SEB, one of Sweden's leading banks, said that it was impossible for banks and companies to start preparing their systems before the referendum, given that the outcome of the September 14 poll was likely to be close.The latest opinion polls have shown the "yes" and "no" camps running neck-and-neck.A Temo opinion poll last week gave euro opponents 44 per cent support, and supporters 43 per cent. Another poll gave the "yes" camp a 39.5 per cent to 39.3 per cent lead. Swedish opposition to the single currency increased during the autumn before stabilising this month. The "no" side is benefiting from perceptions of Germany's economic weakness and the fact that the Swedish economy is doing better than the eurozone's. Opponents also expect to benefit if Gordon Brown, the British chancellor (finance minister), decides the time is not right for the UK to apply to join the euro, when he presents the results of his five economic tests by June.
Source: Financial Times

Tuesday, January 28, 2003

The Internet: What the Economist Gets and Doesn't Get

An interesting piece from the economist, which apart from the occasional gaff, at least applies itself to thinking positively about impending changes. The gaffs? Well try "over the next few decades, the internet and related technologies really will profoundly transform society": the dimension relating to the pace of change is way of beam, I think were talking about THIS decade here. In fact a strong case could be made that many of the changes are already well under way, as usual we're just not noticing and identifying them enough. I have the feeling that my life changes in some small but important way at least once every three months. Despite the frustrations there are pluses, like the comment from Victor Zue, director of MIT's Laboratory for Computer Science, who expects high-speed access to the internet to be virtually free in rich countries within five years. Free broadband in five years does sound pretty revolutionary, as does the comment about "tiny tracking chips called radio-frequency identification devices being used as pet passports. Soon they will be small, powerful and cheap enough to be implanted into everything from humans to milk cartons, recording and transmitting real-time medical data or serving as a form of inventory control". Now soon-available cheap implants to allow direct communication with my computer hard drive, that would be something. Still, the Economist's wish to be on the side of the good and just without offending anyone leaves it all too often with a mixture of sound analysis and unconvincing conclusions.

Far from being over, the computer and telecoms revolution that created the internet has barely begun. These technologies will change almost every aspect of our lives—private, social, cultural, economic and political. In some areas, the changes may be marginal, but in most they will be profound, and unprecedented.

This is because new electronic technologies deal with the very essence of human society: communication between people. Earlier technologies, from printing to the telegraph, have done likewise, and have wrought big changes over time. But the social changes over the coming decades are likely to be much more extensive, and to happen much faster, than any in the past, because the technologies driving them are continuing to develop at a breakneck pace. More importantly, they look as if together they will be as pervasive and ubiquitous as electricity. Whether this will be for good or ill is impossible to predict, because how they are applied will be a matter of social and political choice. Many of these choices will be difficult and divisive.

The reason to think that the internet revolution will not only resume but accelerate is that advances in its underlying technologies show no signs of slowing down. The power of computer chips continues to race ahead. Moore's law—according to which the power of a computer chip will double about every 18 months (see chart 1)—has proved to be true since 1965, when it was first propounded by Gordon Moore, a co-founder of Intel, a chip maker. Intel is confident that it will be able to maintain this pace of improvement in silicon for another 15 years. Recent breakthroughs by researchers at IBM and Hewlett Packard in molecular electronics lead many experts to believe that Moore's law will continue to apply for perhaps another 50 years. Similarly dramatic advances in storage and transmission technologies are also in prospect.
Source: The Economist

China Now No1 Exporter to Japan

In another sign of China's growing importance in world trade, figures released this week officially confirm what was aready becoming obvious, China is now the world's number one exporter to Japan. Given the size of the Chinese economy, and its rapid growth rate this picture is likely to be repeated across the developed world. China, despite its currently low per capita incomes is enormous due to its population size. Currently the world's number six economy, this decade should see China steadiliy climbing the ratings on all fronts. Meanwhile in Japan the deflationary forces continue their along their energy draining path as retail sales mark a 2.3% drop Y on Y in 02. Of course with the Japanese economy shrinking at 1 - 2 % a year and the Chinese one growing at 7 - 8% a little work with the calculator will show that the day when China's economy is bigger than Japan's is not too far off.

China outsold the United States in Japan for the first time in 2002, according to yearly import-export statistics released by the Finance Ministry on Monday. In a year that saw imports from China jump 9.9 percent to 7.72 trillion yen, U.S. imports fell 5.9 percent to 7.22 trillion yen. China's success was driven in part by brisk machinery sales while U.S. sales were hurt by a stagnant information technology sector.Though Chinese exports to Japan rose nearly 10 percent, Japan did even better, lifting its sales to China by 32.3 percent-a figure that helped reduce Tokyo's trade deficit with the Asian giant by 15.9 percent to 2.75 trillion yen last year.
Source: Asahi Shimbun

Department store sales and supermarket store sales in calendar 2002 fell 2.3 percent and 2.1 percent, respectively, industry associations announced Friday. Sales at 292 department stores operated by 103 association member companies last year fell to 8.34 trillion yen, the Japan Department Stores Association said. Sales at 9,137 supermarket stores run by 102 member companies last year dropped to 14.37 trillion yen, the Japan Chain Stores Association said. In December alone, department store sales fell 4.9 percent to 972.1 billion yen, marking the ninth straight month of year-on-year decrease, the association said. Sales of clothing, especially high-priced clothing, were sluggish. Sales dropped 6.5 percent from a year ago, marking the fourth consecutive month of decline.
Source: Daily Yomiuri

Monday, January 27, 2003

Japanese Government Bonds at Four Year Low

The yield on the benchmark Japanese 10 year government bond returned to a four-year low of 0.795% on Monday after the central bank governor reiterated his long-standing opposition to inflation-targetting. More built-in deflation expectations to work with.

Bond sentiment remained bullish after Masaru Hayami, BoJ governor, repeated his objections against the central bank adopting an inflation target earlier in the day. Mr Hayami said the measures will create a "substantial risk of destabilizing the financial market and the overall economy." Investors have been concerned that the successor to Mr Hayami, who is retiring from his post in March, may adopt an inflation target, which is seen as bond negative. Analysts said that bond prices are also supported by a pessimistic outlook for the economy and a lack of attractive investment alternatives for domestic institutional investors.
Source: Financial Times

Fiat's Death Agony Drags On

The death of Giovanni Agnelli on Friday, a day on which, in one of those strange coincidences of history, the future of his Fiat group was to have been 'finally resolved'', now propels his younger brother Umberto onto centre stage in the Fiat drama, with a dénouement to be expected within weeks. Umberto, who is 68, had assumed the family mantle in recent months while Fiat's honorary chairman battled cancer. Now it is he who must make far-reaching decisions for the Agnelli clan without any possibility of consulting the brother who had eclipsed him for so long. This strange, and macabre, twist in the Fiat crisis seems to be telling us something about the state of the world in Italy. For those who know how to look that is:

Fiat's board is expected to be convened within two weeks to review a recapitalisation and refinancing plan that could loosen the family's hold on the carmaking and industrial group.On February 28, Fiat's board could endorse a finalised plan, in addition to approving 2002 results that will include a €1.35bn ($1.46bn) operating loss for Fiat Auto and a slight drop in group revenues to €55bn. By then, however, Fiat might be a very different company if its creditor banks impose a new financial plan.The plan must accomplish several tasks deemed of national importance. For starters, it must stave off bankruptcy for Fiat Auto, the company's deeply troubled automobile division. The plan must also seek to avoid a sale of the division to General Motors, reversing Fiat's previous intentions to sell Fiat Auto to GM at the start of 2004 thanks to the exercise of a put option.

The plan, being worked out by Fiat's four largest creditor banks - Banca Intesa, Capitalia, Sanpaolo IMI and UniCredito Italiano - also must take into account government wishes that Fiat Auto should not fall into the hands of GM. Such a finale, the government fears, would be a national embarrassment and endanger the jobs of Fiat workers and of the hundreds of thousands of workers at Fiat's suppliers.In addition, the plan must take into account the ability of the Agnelli family itself to partake in a refinancing of the group. Currently, the plan involves the sale of several Fiat assets that would raise €3bn to be ploughed back into Fiat Auto. Another €2bn to €3bn would be raised on the markets. Fiat Auto could be spun off.In anticipation of such a plan, the Agnelli family's trust, Giovanni Agnelli & C, on Friday said family members agreed to a €250m capital increase, the first step the family must take if it is to remain a key shareholder of the company Umberto's grandfather founded in 1899. The trust also could raise cash from selling parts of Exor, an investment company it controls and which owns Chateau Margaux, the famed winery, and a significant stake in Club Mediterranée. Cash from the trust could then be used to partake in capital increases at IFI and Ifil, the two Agnelli- controlled holding companies that in turn own a combined 30 per cent of Fiat.Fiat's various subsidiaries in turn own another 4 per cent of Fiat group stock, giving the Agnellis effective control of 34 per cent of the company.
Source: Financial Times

Sunday, January 26, 2003

Italy at the Crossroads, or Up on the Cross?

Sometimes things get pretty frustrating for me. What I have in mind is the capacity of people to pass extraordinarily close to a problem, and still not really see it. The piece below (which comes from the Independent) is bang on target about the magnitude of the looming economic and social problem in Italy, he can see it coming, its just that he can't draw, or bring himself to accept, the pretty self-evident conclusions. If the population decline is so serious, then some part of the solution, at least, must lie in the area of stimulating immigration, along the lines recommended in the UN policy documents referred to in the text. But all we are offered is another exaltation to structural reform along the already all too familiar lines - all this puts me in mind (yet again) of the old saying about sowing dragons and harvesting fleas.

This, and the film Amen, where an unlikely duo - an SS officer and a catholic priest - fail to convince the world the the holocaust is happening, because it's too big to conceive, have set me thinking. "!0,000 a day", says the attache at the American embassy, "better make that figure 500 and then they might believe you". All this sends me running for the textbooks in evolutionary psychology (Darwin's Dangerous Idea and all that). Is there some evolved mechanism that prevents us from perceiving the danger before it has already struck? 11/09 is of course another splendid (this expression is not meant in poor taste!) example of this phenomenon. Reports of possible attacks were on everybody's desks, but no-one put the thing together.

Economic View: The pros and cons of Italy
By Hamish McRae

The death of Gianni Agnelli will doubtless clear the path to a break-up of Fiat, with the ailing car division being separated from the mostly successful other activities. But this is much more than just a business story. Agnelli was Italy's most famous business figure, to be sure, but he was also one of the key people who created Italy's post-war economic miracle.For most Britons, including our Prime Minister, Italy is the place for a holiday: culture, food, music and style have been interwoven into a way of life that is hugely seductive for many British people. Alongside the obvious attractions is the wonderful "slow food" project of a clutch of Italian towns, which are trying to get people to pace their lives in a more healthy and relaxed manner – for example, to walk rather than drive as well as to eat traditional food instead of junk.

But there is of course another Italy. This is the country that delivered explosive growth during the immediate post-war era and which during the mid-1980s passed the UK in terms of the total size of its economy. For the past decade Italian economic performance has languished, but even now there are parts of northern Italy that are richer than much of Britain. This Italy has great strength in its smaller engineering companies as well as in the better-known luxury industries. For example, the only company that could apparently make the convex glass in the gondolas of the London Eye was Italian.But core Europe has a problem and Italy is a member of core Europe. It is still the seventh-largest economy in the world, just behind China, but if you take GDP per head it is the poorest of the large industrial countries. Nor is there any great sign of improvement, for in recent years Italy has vied with Germany for the wooden spoon in the European growth league.

This poor economic performance raises two questions that have relevance for all of Europe. One is whether there is really a clash between a comfortable lifestyle and a competitive economy. The other is what will happen to population and birth rates in Europe.Until about 1990 there were no serious concerns about Italian economic performance. The wealth generated by companies such as the Fiat group pulled the whole economy along. There were legitimate worries about the distribution of that wealth and in particular about the gap between the north and the south. But despite this uneven performance, the overall numbers were impressive.

But there has to be a growing concern that this is no longer sustainable. While the country was industrialising rapidly, with a large supply of labour coming off the land and moving north, it could achieve high growth rates. Once that process tailed off, the growth engine ground to a halt. Companies that had been slow to adapt, like the car division of Fiat, found they had little comparative advantage in a harsher world.Now, there are several unusual features to the Italian economy. One is that the number of hours worked is relatively low. But more remarkable is the low labour participation rate: less than 60 per cent of the people of working age are in jobs, compared with 76 per cent here. You could say that the country manages to achieve a high standard of living – as well as a high quality of life – without having to work too hard. Many would find that a rather attractive combination – if it were sustainable. Sadly, I fear it is not.

You can see why in the next two graphs, which come from United Nations population estimates. The first shows the likely changes in population for selected countries over the next half century. Even if you take those with a pinch of salt, which you should with all such projections, there is a prospect of Italy losing a significant proportion of its population. The ratio of people of working age, relative to over-65s, will shift from the present 2.2 to 1 ratio to a 0.8 to 1 ratio in 2050. In other words there will be fewer workers than pensioners.The reason for this is shown in the final graph, showing estimated total fertility rates for 1995-2000. Italy has the lowest of the G7 and vies with Spain to be bottom of the EU league. Italians are said to love children – they just don't have very many of them. In the coming months all eyes will be on the Fiat empire, which is so indebted that its future is really in the hands of its bankers. The Agnelli family is only in nominal control, so the group will be broken up. The intriguing issue is whether this acts as a catalyst for wider economic reforms in Italy. You could say that this is a matter for the country's Prime Minister, Silvio Berlusconi, himself an industrialist though of a rather different reputation to Agnelli. To some extent it is: governments matter, even in Italy. But accepting basic economic realities, such as the fact that the Fiat car division is too small to survive as an independent entity, is also crucial. The more that big business delays reform, the harder it is for smaller companies to pick up the pieces.
Source: The Independent

One Small Step For a Woman, but a Great Leap for Mankind

Women in Afghanistan have started taking driving tests. This may not seem like a big deal, but in a country where women have suffered, and continue to suffer so much, it is a heartening and positive sign. At a time when we seem surrounded by so many large scale problems - Iraq, terrorism, deflation, recession etc - it is sometimes helpful to sit back and look at the little things. Two years ago what is reported below would have been impossible. Right now only a few women are involved, but every day they will be more. The issue: mobility and independence. That once famous city, after all, wasn't built in a day. All this puts me in mind of an old Sean Connery film: "So this is the hill sergeant, and I fear you're going to make me go up it". Well this is the hill, and we're all going up - together. What is it they say: god (or the devil, according to your taste) is in the little things.

Zai Kakal leapt out of the beat-up Toyota flashing a Cadillac-size smile. Under the watchful eyes of a traffic officer, she had just completed her road test, the final step toward earning what few women in Afghanistan have had in more than a decade: a driver's license. ``I feel very great today,'' said Kakal, 48. ``It was like a dream for me, and now my dream has become true.'' Kakal, an accountant at the Women's Affairs Ministry, was the first of 12 women Saturday to take the test. They had to steer a yellow Toyota Corolla about 25 yards along an L-shaped course near Kabul Stadium, then repeat the course in reverse. Those who passed will get their licenses in six days. Women have not been allowed to drive in Afghanistan since 1992, when Islamic groups seized the capital, Kabul, and began to restrict women's public roles. Confinement of women became even more onerous in 1996, when the hard-line Islamic Taliban militia took control and banned women almost entirely from the workplace and classroom.

The driving program is sponsored by the German private aid group Medica Mondiale, dedicated to helping women in war-torn countries. It provided classroom materials and paid the salaries of two Afghan men from the Traffic Authority who taught the classes. Rachel Wareham, a program manager with the group, said several Afghan women first approached her agency in the spring for help learning to drive. Her office now gets 10 requests a day, she said. The effort is well worth it, said one hopeful, Omira. Having a license is a type of liberation, she said. ``We won't have to wait any more for a man to come by,'' said Omira, 20, who goes by just one name.
Source: The Guardian