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Friday, November 11, 2005

Japan Continues To Grow

I think there is a pretty fair and balanced assessment of the current Japan situation by David Turner in today's FT. He makes the following points:

1/. Japan’s economy continued to grow slowly but surely in the third quarter, supported by heavy investment by companies and moderate growth in consumer spending.

2/. The world’s second largest economy was expanding despite a negative contribution from trade. The country’s trade surplus in the period had narrowed on high crude oil prices, reducing overall GDP by 0.1 per cent.

3/. Corporate investment remained one of the high points of the economy, as companies took advantage of continuing high profits. Capital spending rose 0.7 per cent.

4/. The real-term rise in third-quarter GDP was also the slowest this year, compared with the 0.8 per cent growth in the June quarter. Recent data on household spending, such as retail sales, have disappointed economists. Although Japanese consumers are spending more, the country is still far from a consumption boom.

5/. There have been encouraging signs which point to the end of deflation. Property prices are at last rising in Tokyo....At the same time, residential property prices continue to fall throughout most of Japan. Moreover, the Cabinet Office said on Friday that the GDP deflator – which some economists favour as a broad measure of inflation – was 1.1 per cent down on the year.

Migrant Workers in the US

The Congressional Budget Office in the US yesterday released a report on the role of immigrant workers in the US. The thrust of the report is perhaps clearly captured in this statement:

"The United States is known as a nation of immigrants— a characterization that is more appropriate today than at any time since the 1930s. Census Bureau data for 2004 indicate that 34 million of the nation’s 288 million people — 12 percent of the U.S. population—were foreign born. That was the highest percentage of foreign-born people the Census Bureau had recorded in 70 years."

and this:

In 2004, among workers age 25 and older who lacked a diploma, nearly half were foreign born, and most were from Mexico and Central America. At the same time, many other immigrant groups were highly educated. The educational attainment of foreign-born workers from other regions was slightly higher than that of natives; in particular, a higher percentage of those immigrants had taken graduate

"A flexible labor market will adjust over time to the presence of more foreign-born workers. The U.S. economy should attract more capital as investors see opportunities to increase their returns. Increased investment, in turn, will tend to raise workers’ productivity and earnings. Ultimately, lower production costs should increase employers’ profits and lower prices for consumers. Even after such adjustments occur, however, the earnings of native workers whose education and skills are most like those of immigrants could be adversely affected by the increased competition. Over even longer time periods, some of those workers may be motivated to obtain additional education to receive the increased labor market payoffs associated with greater education."

The Ft has an article summarising the report, which draws attention to this point:

"Commonly cited statistics on earnings growth can be misleading if used as indicators of progress during a period in which an increasing share of the workforce is foreign born," the CBO said in a study of immigration and the US labour market commissioned by the Senate finance committee.

Thursday, November 10, 2005

Inflation Targeting 'Wholly Inadequate"?

This is the view of Morgan Stanley's Joaquim Fels who argues - in a very interesting piece on Mortgan Stanley - that it is excess liquidity, not excess savings, that is driving the low interest environment. The whole article is worth a read, but here is a taster:

"While there are good fundamental reasons to be bearish on bonds (higher inflation) and risky assets (slower economic growth), excess liquidity is likely to remain plentiful, which should cushion any sell-off in some asset classes and could even pump up new bubbles in others (equities?). And, turning to monetary policy, central banks need to find new approaches to deal with the liquidity monster. An old-fashioned concept like inflation targeting is certainly not the answer, in my view — in fact, it may be part of the problem."

"According to our calculations, global excess liquidity has been on a steep upward trend since about 1995. Between 1995 and 2005, the credit-to-GDP ratio has risen by 25%, broad money-to-GDP by 32%, and narrow money to GDP by no less than 55%. The steep rise especially in narrow money reflects the fact that this aggregate is particularly sensitive to short-term interest rates, which were reduced sharply following the bursting of the equity bubble in 2000. Thus, monetary easing has produced an unprecedented amount of liquidity not needed to finance transactions in the real economy and available to chase bond, equity and other asset prices higher."

"Against this backdrop, it strikes me that the concept of ‘inflation-targeting’, as it is commonly understood, is wholly inadequate to deal with the excess liquidity issue. Many central banks who have applied the concept directly or indirectly in the past are becoming increasingly aware of the limits of this approach. It is a great concept if you want to acquire credibility and want to bring about disinflation. But, once inflation is low and stable, credibility may become a curse as it encourages excessively low interest rates and excessively high risk-taking."

"There are two possible ways out. The first is to stick to inflation targeting in principle but extend the time horizon for the inflation forecast exercise to 3 to 5 years out, and to explicitly incorporate risks to longer-term price stability emanating from asset price developments into the forecast exercise and into the monetary policy stance derived from the process. This could imply tolerating, say, an undershoot of consumer price inflation below target for some time and pursue a less expansionary policy so as to prevent a build-up of financial sector imbalances that could give rise either to higher inflation or, if bubbles burst, to deflation over the medium to longer term."

Chinese Producer Price Inflation Eases

As oil prices fall back, making a case that global (and even local) inflation is a big issue is getting to be uphillwork. The latest example comes from China, where producer price inflation has now fallen back to a straight rate of 4% this month, down from an annualised 4.5% last month, thus registering the lowest reading since March 2004. And don't miss the fact that:

Manufacturers of producer goods priced up their products by only 1% over last year (+1.5% in Sept). Consumer goods manufacturers suffered the seventh successive month of deflation, worsening to 0.5% YoY in Oct. (-0.4% in Sep.). Mild inflation in food (+0.3%), clothing (+1.2%) and daily use articles (+1.5%) was more than offset by the continued deflation in durable goods (-3.2%).

In fact the y-o-y CPI was 1.2% in October, up just a touch on the September reading. The big-push factor was fresh vegetables which rose at an annualised rate of 17.5%.

Information from Denise Yam at Morgan Stanley

Wednesday, November 09, 2005

Don't Speak To Soon

I have been arguing continuously for some months now that Japan might not escape the deflation trap so easily as some seem to imagine. Today there are two pieces of news which should at least give the 'optimists' some pause for thought.

Firstly the news that Japan's economy most likely slowed in the third quarter, with one of the principal explanations being the lack of dynamism in the consumer sector.

Secondly Morgan Stanley's Takehiro Sato suggests that negative influences on prices may mean that y-o-y positive prices may still be quite a time away.

Based on the above, it is clear that the scenario calling for the BoJ to eliminate quantitative easing owing to a slight recovery in the core CPI inflation rate is now on unexpectedly shaky ground. Even if the BoJ is compelled to keep its commitment and eliminate quantitative easing, the factors affecting whether it will be able to follow that move fairly soon with rate hikes as currently planned are becoming even less certain over the near term.