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Wednesday, December 28, 2005

Too Much Of A Good Thing?

The IMF is in danger of becoming a 'deficit institution'. With large debtors like Argentina and Brazil steadliy paying off their outstanding loans, and few new clients knocking on their doors, they are having difficulty earning the one billion dollar cost outlay they run-up every year. Of course, as Ken Rogoff says, "The fund has the reserves to pay for its operations for the next several years", the problem really only becomes important if "It is only if the good times go on for another five to seven years and there are no major financial crises, then it is going to become a significant issue." Well, if I have to chose, maybe I prefer that the good times go on and that there are no financial crises.

A decision by Brazil and Argentina to repay their loans to the International Monetary Fund ahead of schedule raises the question of whether the institution needs a new business model.

Brazilian and Argentine repayments of about $15.5bn and $10bn respectively will wipe out another big chunk. Those repayments mean that Uruguay’s much smaller loan will be the fund’s largest exposure in Latin America. In Asia, following the financial crises of the late 1990s, governments built up huge financial reserves, in part to ensure that they never again had to go cap in hand to the IMF...

Low demand for IMF credit is mainly the result of emerging market countries’ good economic performance, and very favourable conditions in international financial markets.

But lower lending raises the questions of how the fund is going to pay its annual expenses of close to $1bn in the most recent financial year.

Tuesday, December 27, 2005

Happy Birthday Japan

Happy birthday Japan, welcome to year one of your new era. December 31st will mark the first anniversary of when your population actually started to fall, and from now on each year will see less and less Japanese citizens in the land of the setting sun. Another way of putting this would be that the proportion of robots to people is definitely set to rise there.

This turning point in human history is not necessarily a bad thing, it is, after all, partly a product of the fact that we get to live longer. The worrying thing is the blasé fashion in which we seem to be treating it. Typical of this are the statements by the Japanese Health, Labour and Welfare minister:

"Our country is now standing at a major turning point in terms of population," Health, Labor and Welfare Minister Jiro Kawasaki told a news conference. "We must take countermeasures against the falling birthrate along with measures to support and foster our future generations,"

This might have been a credible response a decade or so ago, but today it is almost laughable.

Meantime "hope eternal" struggles-on. Japan is still the best story in town we are cheerfully informed by Buttonwood in an article entitled Sweet Spot. Well if this is the best show, I'd certainly hate to see the worst one :).

Now, there are more conflicting signals in the press today:

Japan’s core consumer prices rose in November for the first time in two years, the FT tells us "sending the strongest signal yet that the world’s second-biggest economy has emerged from seven years of deflation and reinforcing expectations of a change in monetary policy".

That certainly sounds like good news, but hang on a minute:

The yen fell the most against the euro in more than two months and dropped versus the dollar after reports showed a surprise drop in Japan's household spending and an increase in the jobless rate.

Japan's currency is down 12 percent against the dollar this year as the Bank of Japan held interest rates near zero to combat falling consumer prices. Finance Minister Sadakazu Tanigaki said today deflation ``still persists'' even after prices rose last month for the first time in two years.

``The weaker data confirms it's going to take quite a while for the BOJ to be able to act, even if consumer prices rise,'' said Niels From, a currency strategist at WestLB AG in Dusseldorf, Germany. ``The yen will continue to weaken for now.''

So we aren't out of the deflation woods yet, and consumer spending - whilst being markedly better than at some moments in the past - still isn't as solid as it might be. Hmmmm. Isn't it better to hedge our bets a bit more here. Especially when there are sound theoretical reasons for doubting internal consumption sustainability.