Japan’s economy has been in the doldrums since 1990 when its stock bubble burst. The first decade after the market collapse has been characterized by recession, deflation, near- zero interest rate and massive fiscal pump-priming. The second decade was more of the same thing. Only now is the US$ 4.5 trillion economy showing some life. The GDP grew at an annual rate of 2.7 % & 4.8 % for the last two quarters respectively.
A direct result of the fiscal stimulus is the accumulation of the biggest public debt of the development world which amounts to almost twice the size of its economy. To help boost the economy, the government has deliberately depressed the value of its currency. The hope was the undervalued currency, near-zero interest rates and fiscal stimulus would create a self-reinforcing growth dynamic that would raise consumption, GDP and wages.
But the growth could very well be ephemeral. If the extravagant spending on public works projects is taken away, the growth could just fizzle away. Also, the revaluation of the Yen this year has stymied exports and this has helped cause one third of Japan’s factories to sit idle.
Another problem Japan has to content with is its shrinking population. The nation of 126 million people is aging fast. Twenty three percent of its people are over the age of 65 while less than 13 % are younger than 15. Coupled with a policy of strict immigration control, it would be hard for the nation to increase its production. The nation also has to compete with fast emerging economies like South Korea, China and India.
Wednesday, November 18, 2009
Monday, November 16, 2009
The Yuan Dilemma
China, the world’s third largest economy, is leading the world in emerging from the recession caused by the credit crisis. Its economy grew at a rate of 8.9 % in the third quarter of this year. Next year, it is expected to surpass Japan to become the second largest economy in the world. It has chalked up a foreign reserve of nearly US$ 2 trillion. Such is its strength of growth.
Its economic expansion is based on the mode of too much investment, too high saving and too little consumption. Its utmost priority domestically is job creation and social stability. It already has surplus manufacturing capacity. So, the only way to increase employment is to sell more. They do this by deliberately holding down the value of the Yuan. This action is generating a lot of disgruntlement from the rest of the world, in particular the USA. They are all suffering from a trade deficit with China.
The other way for them to increase production is to step up domestic consumption. This method is more desirable to the westerners as it would not add to their trade deficit with China.
But the holding down of the Yuan has its adverse consequences too. The government has to sell Yuan to keep its exchange rate low. This has resulted in a 29 % increase in the money supply in the last six months. Also, expectation of the revaluation of the Yuan has attracted a US$150 billion inflow of speculative funds in the same period. All this extra liquidity is causing asset price inflation. Apartment prices are reaching record levels and the stock market has risen 74 % this year.
Its economic expansion is based on the mode of too much investment, too high saving and too little consumption. Its utmost priority domestically is job creation and social stability. It already has surplus manufacturing capacity. So, the only way to increase employment is to sell more. They do this by deliberately holding down the value of the Yuan. This action is generating a lot of disgruntlement from the rest of the world, in particular the USA. They are all suffering from a trade deficit with China.
The other way for them to increase production is to step up domestic consumption. This method is more desirable to the westerners as it would not add to their trade deficit with China.
But the holding down of the Yuan has its adverse consequences too. The government has to sell Yuan to keep its exchange rate low. This has resulted in a 29 % increase in the money supply in the last six months. Also, expectation of the revaluation of the Yuan has attracted a US$150 billion inflow of speculative funds in the same period. All this extra liquidity is causing asset price inflation. Apartment prices are reaching record levels and the stock market has risen 74 % this year.
Tuesday, November 10, 2009
Gold Fever
Gold was at about US$ 300 an ounce in the early nineties. At an exchange rate of about RM 2.50 to US$ 1, an ounce would have cost about RM 750 then. Today, the price of gold is at a record high of about US$ 1,100 per ounce. With a current exchange rate of RM 3.40 to one US$, an ounce of gold would cost RM 3,740. This is a 400 % increase or a four bagger.
Over a period of 18 years, the price has increased four folds. This represents an annual compounded rate of increase of 8 %. Not bad for an asset that does not generate any income. All the increase is a result of capital appreciation. This rate is also higher than the inflation figure. Hence, the metal is a good hedge against inflation.
So, why is the price of gold so high? The reason is gold is priced in US$ and the dollar is an overvalued currency. There is fear of a sudden currency depreciation. When that happens, the economy will experience mega-inflation. People are buying gold to hedge against this possibility.
Over a period of 18 years, the price has increased four folds. This represents an annual compounded rate of increase of 8 %. Not bad for an asset that does not generate any income. All the increase is a result of capital appreciation. This rate is also higher than the inflation figure. Hence, the metal is a good hedge against inflation.
So, why is the price of gold so high? The reason is gold is priced in US$ and the dollar is an overvalued currency. There is fear of a sudden currency depreciation. When that happens, the economy will experience mega-inflation. People are buying gold to hedge against this possibility.
The US Dollar
The US economy is terribly out of whack. It is projected to run a trade deficit of $1.4 trillion for the fiscal year starting 1 October 2009. This will be about 10% of its GDP. The total US debt at the end of 2008 was $10.7 trillion. Half of this was incurred in the last 10 years. This huge deficit has resulted in the accumulation of vast amounts of dollars in foreign bank accounts. To keep the liquidity level at home, they have to print more dollars.
The financial crisis has retarded the economic growth. To stimulate the economy and at the same time to forestall severe deflation, the government resorted to massive spending. To finance that, they embark on the printing of new dollars.
With all the new notes printed, the assets backing backing each dollar is diluted. Economic theory tells us that the US dollars should be weaker. Indeed, it has weakened slightly this year. However, because of the safe haven status of the US, foreign nations are still buying US Treasuries. This gives the dollar support and help props up its value.
The problem of the dollar will start when the Japanese and the Chinese loose faith of the currency. When they start selling their treasuries holding, the dollar is expected to decline inexorably. The dollar will then be no more mighty.
The financial crisis has retarded the economic growth. To stimulate the economy and at the same time to forestall severe deflation, the government resorted to massive spending. To finance that, they embark on the printing of new dollars.
With all the new notes printed, the assets backing backing each dollar is diluted. Economic theory tells us that the US dollars should be weaker. Indeed, it has weakened slightly this year. However, because of the safe haven status of the US, foreign nations are still buying US Treasuries. This gives the dollar support and help props up its value.
The problem of the dollar will start when the Japanese and the Chinese loose faith of the currency. When they start selling their treasuries holding, the dollar is expected to decline inexorably. The dollar will then be no more mighty.
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