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ASIAN CENTRAL BANKS OUTLOOK

15/08/2017 Economic Outlook 5

 

Bank of Japan

 

 

Japan has become increasingly integrated in global value chains, especially in Asia. The benefits of international trade are concentrated in large firms, as few small and medium-sized enterprises export. There is a large labour productivity gap between large and small firms. It is important to note that in 1989, Japan’s economy witnessed the burst of 2 big bubbles, equity values slumped 60% between 1989 and 1992, and the real estate market dropped a severe 70% by 2001. This event drove the economy into a vicious cycle of monetary policy easing, liquidity trap and credit crunch, which defined the Japan’s Lost Decade that lasted from 1991 to 2003.

 

 

Ever since, deflation persisted as a central characteristic of Japan’s economy, which put prices into stagnation, and interest rates were set at their historical low, in a desperate hope to see inflation and growth picking up. Fortunately, the Japanese economy has been brought to life gradually lately. As described in the Bank of Japan's (BoJ) summary of opinions of the 19 July, "Japan's economy is expanding moderately. Private consumption has increased its resilience, and the economy is likely to continue growing at a pace above its potential in fiscal 2017 and 2018”. This is a very positive outlook, with a lot of optimism toward a prices pick up. The target of inflation of the BoJ is set at 2%, and is difficult to achieve, especially in an environment with ongoing stagnation in energy prices, and tight spreads between Japan Government Bond yields and global yields.

 

 

The 2Q17 real GDP data this Monday was a strong indicator of a continuing recovery path of the Japanese economy. The vanishing negative effects of the 2014 consumption tax hike, and the increase in wages and employment have led to a rise in consumption. Furthermore, the tight labor market pushed businesses to increase their investments, which led to an increase in business activity. If the upcoming quarters witness a data as positive as the GDP this quarter (4% against 2.5% estimated), Japan’s economy will be on track for a complete exit from deflation, and domestic demand will be one of the principal drivers of Japan’s economic growth. The BoJ may then consider either a rate hike or a rise in its long term yield target.

 

The People's Bank of China

 

 

 

There is a common thread and it is that China, Asia's economic engine, continues to stutter. China has seen fairly solid first-half growth but momentum is expected to fade as crackdowns on riskier forms of financing take effect. Chinese demand remains subdued, placing a cap on growth and prices across Asia, where virtually no central bank is in danger of overshooting its inflation target.

 

 

The economic cycle is the natural balance of the economy between periods of expansion and contraction. One of the most important factors to determine the current stage of the economic cycle is GDP, and for China what drives the latter, is credit growth. In the last decade, we have identified 2 complete economic cycles, one between 2009 and 2012, and the other in the 2012-2015 interval. Both of these cycles have been driven by credit growth, channeled by either the government allowing liquidity squeezes in the interbank market, or the PBoC tightening or easing its policy by taking action on the benchmark deposit/lending rates. This being said, we can clearly notice a mirroring movement between GDP growth and credit growth with a time lag.

 

 

In the actual cycle, which started in 2016, even if we have already noticed a peak in credit growth, the GDP is still persistent, led by strong housing sales, robust external demand and a stable inventory cycle. Furthermore, despite the regulatory tightening of liquidity in early 2017, the Chinese economic data have been positive recently. All the aforementioned, show that even if the economy is at the peak of the cycle, to determine the starting point of a potential recession is very hard, blurred by the evolution of liquidity and credit environments.

 

 

Bank of Korea

 

 

South Korea vowed to maintain an expansionary fiscal policy that would support job creation. The Bank of Korea (BoK) has been dovish since 2012, cutting its base rate from 3.25% to 1.25% in 2016. Ever since its policy has been neutral, waiting for the right moment to hike its rate. It is also important to bear in mind that the stance among the Monetary Policy Board (MPB) members have changed since May, turning from a discussion around a change in monetary policy to a caution on the economic outlook especially on growth and inflation. 

 

 

The majority of the members spotted a lack of effectiveness in the government’s strategy to control growth using income, especially looking at the ageing population problem in the country, which weights on consumption. In addition to that, many members argued that a 2018 core inflation forecast standing at 1.9% was too optimistic, while headline inflation have been hovering around the 2% target. Furthermore, the emergence of geopolitical risks, and more precisely, the political uncertainties domestically and abroad, make it uncertain for the MPB members to act on rates any sooner.

 

 

The South Korean government expects exports surging 10.2% this year, although private consumption is expected to grow at a slower 2.3% because of waning job growth and record household debt. Excess world capacity in some capital-intensive industries, such as shipbuilding, is forcing restructuring and driving up unemployment in some areas in Korea. The South Korean government should ensure that unemployment benefits and active labour market policies are adequate to help affected workers move to new jobs.  

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  • Nirvik Mahin

    Asia is stronger than ever :p

  • Adrien Dorsey

    China is pulling the strings backstage :D

  • Kumar Mohit

    The Asian Central Banks outlook is promising ! Next time, you should add India on that list ;)

  • Lucas Miranda

    Beautiful :)

  • Luana Delgado

    Interesting point of view !!