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.

…

"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.

SKorea slows. Greek deficit grows while Spain cuts

A quick look at some news.

First, South Korea's GDP grew by 0.7% in the third quarter, short of market forecasts due to export slump, which would signal for the coming slowdown in the world economy. Asia's fourth largest economy is heavily dependent on external demand. In that sense, South Korea might want to take part in the circle of "a canary in a coal mine" along with Japan.

South Korea's economy slowed in the third quarter as export gains and global growth cooled, signaling more room to pause interest-rate increases and paring a recent surge in the nation's currency.

Gross domestic product advanced 0.7 percent from the previous three months, when it gained 1.4 percent, the central bank said in Seoul today. That was less than the 0.8 percent median forecast in a Bloomberg News survey of 10 economists. From a year earlier, GDP rose 4.5 percent.

The won's 7.2 percent third-quarter climb against the dollar was Asia's highest, adding to threats to exports from elevated U.S. unemployment and European austerity. The currency fell as much as 1.5 percent after today's data, curbing an advance that may damp accelerating inflation and give the Bank of Korea more scope to slow increases in borrowing costs.

Greece's Finance Minister George Papaconstantinou said the country's budget deficit topped 15% of GDP in 2009, which is about 1 percentage point more than previously estimated.

A review of Greece's 2009 budget showed the deficit was above 15 percent of gross domestic product, more than previously estimated, Finance Minister George Papaconstantinou said.

The revision won't affect Greece's drive to cut the shortfall this year, Papaconstantinou said at a conference in Limassol, Cyprus, today. "We are on track for the fiscal target for 2010," he said. The finance minister's budget, released Oct. 4, forecast the 2010 deficit at 7.8 percent of GDP.

"After the final revision by Eurostat to the numbers, which will validate numbers for 2009 once and for all, it will be above 15 percent," Papaconstantinou said. "Last year was a finance minister's nightmare."

Greece had to obtain 110 billion euros ($152 billion) of emergency loans from the European Union and International Monetary Fund in May as borrowing costs soared amid concerns the country wouldn't be able to reduce its budget shortfall. The revision would mean Greece overtaking Ireland as the EU country with the biggest deficit as a percentage of GDP last year. Papaconstantinou estimated the 2009 shortfall at 13.8 percent in his budget.

Eurostat, the EU's statistics service, will release the final figures for Greece's 2009 deficit and debt by Nov. 15.

Banks 'Normalizing'

Papaconstantinou said "things were normalizing" in the Greek economy, with the banking industry, which was "almost completely" reliant on European Central Bank financing, "now standing on its feet."

Greek banks' reliance on ECB liquidity to refinance operations declined in September for a second month, according to the Athens-based central bank. Lenders had a total of 94.3 billion euros compared with 95.9 billion euros in August.

The banks were locked out of markets by concerns about their holdings of Greek government bonds amid fears of a sovereign default.

The Greek government is also seeing a response to the "fast-track" process it's implementing to draw investment, especially from Chinese businesses and China's "clear commitment" to make Greece a hub, Papaconstantinou said.

Chinese Prime Minster Wen Jiabao committed to buy Greek bonds and support the shipping industry as the country sought investment to boost growth and emerge from its second year of recession.

The Greek economy is forecast to shrink 4 percent this year and 2.6 percent next year before returning to growth in 2012, according to the draft budget.

... while Spain is trimming its budget deficit faster than its peers.

Spain is cutting its deficit faster than Ireland, Portugal or Greece, seeking to reassure investors that the nation deserves cheaper borrowing costs than its peers.

Spain's central government trimmed the deficit by 42 percent in the first nine months, compared with 31 percent in Greece and a widening budget gap in Portugal. The figures were released yesterday as budget talks broke down in Portugal, and Greece said its shortfall was bigger than reported, pushing up the yield premium investors demand to hold sovereign debt of the so-called euro peripherals over comparable German bunds.

Portuguese 10-year bond yields rose 27 basis points to 5.96 percent, the biggest one-day advance in more than a month. Greece's yield jumped 73 basis points and Ireland added 32. Spain's yield gained 9 basis points, leaving the spread over bunds near a 10-week low, reached the previous day.

Spain would be happier to say, "Bye-bye, PIIG guys. No more 'S' in the term!"

G20: waste of space?

Nobody anticipated any agreement effective and enforceable enough to stop the tide of competition for weakening currency among major countries at the G20 finance ministers' meeting. So, this result is no nonsense.

A group representing the world's most prominent finance ministers wrapped up a two-day meeting in Korea Saturday with a pledge to not engage in currency wars or other economically protectionist policies.

The ministers from the so-called G-20 nations, who were meeting in Gyeongju, South Korea, discussed a wide array of challenges facing the global economy. But first and foremost was the issue of currency trading.
The United States has been vocally concerned about how some emerging markets nations, most notably China, have allowed their currencies to trade at artificially low levels. The worry is that if such currency manipulation continues, it could wreak havoc on international trade.

In their statement, however, the G-20 ministers said that they would "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies."

The ministers added that the G-20 member nations would "continue to resist all forms of protectionist measures and seek to make significant progress to further reduce barriers to trade."

The G-20 stopped short of outright banning currency manipulation though. U.S. Treasury Secretary Timothy Geithner, who attended the meeting, had urged the G-20 ministers to take strong action to make sure emerging markets nations allow their currency to appreciate in line with the free market.

This weekend's meeting is a precursor to a larger G-20 meeting taking place in Seoul on November 11 and 12. That summit will involve the heads of state from the G-20 nations. President Obama will attend.

Tensions about currency and trade are likely to be high at that meeting as well. The G-20 acknowledged in Saturday's statement that the global economic recovery is currently advancing, but it was doing so in "a fragile and uneven way."

The ministers added that "growth has been strong in many emerging market economies, but the pace of activity remains modest in many advanced economies."

As further evidence of that, China announced earlier this week that its gross domestic product for the third-quarter rose at an annual rate of 9.6%. While that's slower than in previous quarters, it is still far higher than the growth rates of the United States, Japan and nations in Europe.

China's central bank also announced earlier this week that it was raising a key interest rate for the first time in nearly three years. That comes at a time when many expect the Federal Reserve to soon announce more details about how it intends to further ease its own monetary policies.

In a nod to the increased economic clout of China and other emerging markets, such as Brazil, India and Russia, the G-20 ministers also announced a deal Saturday that would give emerging markets countries more seats on the board of the International Monetary Fund.

It's no wonder that one might see the G20 this way.

the G20, hailed only a little while back as an institutional break-through that better reflects the growing geo-political and economic power of the developing world than the old G7, is fast turning out to be a complete waste of space.

I don't think that the G20 isn't worthwhile. Some people might have excessive expectations over the meeting, which doesn't have any organizational system like the UN, the IMF, or World Bank. It would be a signal that the age of a small meeting like the G7 is over and the time is now for finding solutions at international organizations.

Asia Falling?

ADB says the growth rate of some Asian countries could almost halve in the next 20 years. I knew it today in FT. By the way, ADB doesn't cover Japan in its research. It doesn't matter anyway.

The reasoning behind it is very simple. Many Asian countries have accumulated fixed investment over the years, which is pulling them up to the economic hot spot in the world. But the contribution of productivity -measured in TFP- to economic growth is minuscule. So their aggrandizement will lose its momentum as the input stalls.

It's striking in two points. First, it looks like East Asian countries, namely China, South Korea, and Taiwan, would suffer more than other countries. Their growth rate would decrease from 9.4%, 6.3%, and 6.1% in 1981-2007 to 5.5%, 3.9%, and 3.1% in 2011 to 2030, respectively. Second, on the contrary, Pakistan and Philippines would accelerate the growth rate in the next 20 years.

I think the Asian growth model is most notable in East Asia. Invest in fixed assets and export the products to the West. But they seem to be destined to depressed domestic demand, low fertility rate, and paltry inflation rate, which depend themselves on external demand. The next 20 years would show us the end of Asia and the triumph of the West. We'll see.