Japan decouples from Asia

"Decoupling" usually refers to a talk on Asia's or emerging countries' economic expansion with little dependence on the West. But it looks like that decoupling is starting to take on another round in Asia: decoupling inside Asia.

A sign of stagnation is gradually looming in Japan, which has still been mired in a persistent deflation. The unemployment rate in October rose unexpectedly to 5.1% from 5.0% in September. The average estimate was 5.0%. The index of industrial production in October fell 1.8% from the previous month, a consecutive decline over 5 months for the first time since October 2008 to February 2009. The result may look like better than the average forecast of a 3.2% fall, but the fifth straight month of decline sounds more stark than the actual number.

The sagging global demand may also help drag the third largest economy down to the bottom. Nevertheless, a considerable damage on the economy is coming from the factors peculiar to Japan: the expiration of government subsidies to cars and electronic products, and the 15-year high yen which is sending a downward pressure on exports. Household consumption is no hope to underpin the economy amid sticking deflation.

Japan has so far enjoyed the four consecutive quarter of positive growth, but it now risks a contraction in this quarter. It was more or less anticipated, but it's awful nonetheless.

Miyako Suda, a member of the BoJ policy board, admits the possible downfall in this quarter.

Prolonged economic weakness may keep Japan in deflation longer than the Bank of Japan's current forecast, a member of its policy board said on Wednesday, offering the bleakest view to date by a central bank policymaker.

Board member Miyako Suda said there was a strong chance Japan's economy will contract in the final quarter of this year after strong growth in July-September, which was due mostly to expiring government stimulus steps offering incentives to buy low-emission cars.

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"Considering the impact from recent yen rises and the worsening of sentiment among companies and consumers, the risk of prolonged weakness in the economy remains high."

Meanwhile, the other two Asian giants, China and India, are showing rather a sign of overheat in the economy, putting a pressure on the authorities to raise the interest rates before inflation accelerates. China is first.

China's manufacturing grew at a faster pace for a fourth straight month in November, indicating the economy can withstand higher interest rates as price pressures escalate.

The Purchasing Managers' Index rose to 55.2 from 54.7 in October, China's logistics federation said on its website today. That was more than the 54.8 median estimate of 14 economists surveyed by Bloomberg News. A PMI released by HSBC Holdings Plc also jumped.

Today's reports showed input prices surging, reinforcing the case for the central bank to boost borrowing costs again after it lagged behind counterparts from Malaysia to South Korea. Concern that monetary tightening will hamper corporate profit growth spurred an 8 percent sell-off in China's benchmark stock index in the past month.

"The risk of a sharp growth deceleration has abated, but all signs are suggesting that inflation may surprise on the upside," said Tao Dong, a Credit Suisse AG economist in Hong Kong. He called input-price data "alarming."

The logistics federation's PMI showed the strongest reading in seven months, while the measure released by HSBC and Markit Economics was at an eight-month high of 55.3.

Turning to India, the November data indicates that India's manufacturing has also grown faster than before.

India's manufacturing sector expanded at its fastest pace in six months in November on the back of robust new business and a sharp rise in export orders, a survey showed on Wednesday.

The HSBC Markit Purchasing Managers' Index, based on a survey of 500 companies, rose to 58.4 from 57.2 in October. It was the strongest level since May, when it was 59.

The November reading marked the 20th consecutive month that the key index of manufacturing in Asia's third-largest economy has been above the reading of 50, which divides growth from contraction.

"The momentum in manufacturing picked up further in November. Output accelerated and growing order books point to a continued strong momentum in the months ahead," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

According to another report, manufacturing is gathering steam in South Korea and Taiwan, both of which are less sanguine than the two giants though.

In South Korea, the HSBC PMI jumped to 50.23 from October's 20-month low of 46.75, ending six months of contraction.

Taiwanese manufacturing expanded for the first time in four months, with the HSBC PMI rising to 51.7 from 48.6.

At least, Japan's weakness clearly stands out compared to neighboring countries. The cabinet is preparing for another round of fiscal stimulus, but the effect is likely to be no less pallid. Taking an incompetent monetary policy into account, a gloomy moment is waiting for the country with few tools to overcome it.