Year: 2010

The Bank of Japan is not doing enough to fight deflation and one possibility is for the central bank to buy more government bonds, a campaign aide to a ruling party powerbroker challenging Prime Minister Naoto Kan said.

But lower house lawmaker Banri Kaieda, an aide to Ichiro Ozawa, also said that the BOJ alone could not rescue Japan from deflation and that the central bank’s remaining policy options were limited.

Ozawa is challenging Kan in a Democratic Party of Japan (DPJ) leadership election on September 14 but the outcome is too close to call. The winner will likely be prime minister by virtue of the party’s majority in the powerful lower house.

“It is not enough,” Kaieda told reporters in an interview on Monday when asked if the BOJ was taking sufficient action against deflation.

“But it’s clear that this issue will not be resolved with just the BOJ’s policies alone,” said Kaieda, who is part of a group of lawmakers advising Ozawa on policies.

Japan’s growing dependence on China for growth grates with concerns over its expanding military reach, deepening a dilemma over how to engage with its giant neighbour even as the two trade places in economic rankings.

But while the interdependence raises the risks for the world’s second- and third-biggest economies if relations sour, it also boosts incentives to keep ties on track.

“It raises the stakes,” said Jeffrey Kingston, director of Asian studies at Temple University’s Tokyo campus.

“But … Japan has a clear interest in developing better political and diplomatic relations precisely because of the greater economic interdependence.”

News that China had surpassed Japan as the world’s second-biggest economy in the second quarter grabbed global headlines in August, underscoring China’s rise and deepening pessimism over whether Japan can even keep third place.

Even more telling is Japan’s deepening dependence on China’s dynamism for growth in a mature economy plagued with an ageing, shrinking population and a shortage of policy solutions.

Japan’s exports to China topped those to the US last year, accounting for nearly 20 percent of all its exports.

That figure will probably rise to 35 percent by 2026, when China will likely oust America from the top global spot, said Chi Hung Kwan at Nomura Institute of Capital Markets Research.

Japan’s direct investment in China has also soared, exceeding 70 percent of its investment in North America last year, with more and more goods being made for local sale, not export.

“For Japanese companies, China is becoming more and more important, not just as the workshop of the world, but as the market of the world,” Kwan said at a luncheon with reporters.

Sino-Japanese relations, long plagued by China’s memories of Tokyo’s wartime aggression and present rivalry over resources and territory, have warmed since a deep chill in 2001-2006, when then-premier Junichiro Koizumi visited the Yasukuni Shrine, seen by Beijing as a symbol of Japanese militarism.

At the end of August, a delegation of Japanese cabinet ministers met their Chinese counterparts in Beijing for high-level economic talks – the third such annual dialogue – and agreed on the need to work together for global growth.

Wary
But even as economic ties deepen, Japan is increasingly wary of China’s intentions as it spends more of its wealth on defence and shows growing willingness to project military power.

A survey by the China Daily in August showed that 52.7 percent of Chinese respondents saw Japan as a military threat, while 70.8 percent of Japanese felt the same about China.

“Japan’s military budget has been stable for 20 years and China’s military budget has grown 20 times in the past 20 years,” said Shinichi Kitaoka, University of Tokyo professor who advised the conservative Liberal Democratic Party (LDP) government that was ousted last year by the Democratic Party of Japan (DPJ).

“The big gap may create some imbalances and is already creating imbalances in the East China Sea and South China Sea.”

While a panel of experts advising the government as it undertakes a major review of defence policies gave a nod to such concerns, the wording was restrained, a reflection of Japan’s dilemma as it balances economic interests with security worries.

“Japan’s security position requires an extremely delicate policy. On the one hand, it is important to make sure that the cost of unfriendly, non-peaceful behaviour is very costly … and there has to be a very robust defence posture together with the United States,” said Chikako Kawakatsu Ueki, a Waseda University professor.

“At the same time, if you are talking about China, everyone knows that China’s well-being as an economic power is important to Japan, to the United States, the region and the globe.”

The dilemma is a delicate one for Japan’s ruling Democratic Party, which swept to power for the first time a year ago, ousting the LDP after more than 50 years of almost non-stop rule.

The party pledged in its campaign last year to forge a more equal relationship with security ally Washington while improving ties with Asian neighbours including China, sparking concerns in some US circles that it was tilting towards Beijing.

“China is becoming more and more important to Japan year in and year out. Everyone accepts that. The debate is how best to handle this – engagement or constraint,” said Phil Deans, a professor of international affairs at Temple in Tokyo.

“The pressure to pursue both strategies is increasing which is making the contradictions more obvious.”

Experts say Japan, distracted by its own economic woes and internecine strife in the ruling party, will likely respond with a mix of reliance on the US military deterrence and beefing up its own forces within the elastic constraints of a pacifist constitution, while pursuing better diplomatic ties with Beijing.

“There are three decisions they can make: contain China, engage China or … just live in a really uncomfortable situation and hope they don’t end with the worst of both worlds,” Deans said. “I think maybe they can live in this very difficult place.”

Russia, Saudi Arabia and Bahrain are home to the wealthiest expats, with Eurozone countries falling behind when it comes to paying for foreign expertise, according to a survey of expats.

The third annual report commissioned by HSBC Bank International found finances among expats were generally positive with two-thirds, or 66 percent, saying they have more disposable income to save and invest since moving abroad.

But the survey found expats in Russia, Saudi Arabia, Bahrain, the UAE and Singapore enjoyed the greatest wealth overall, having higher salaries, more disposable income and more luxury items like swimming pools, properties and yachts.

Expats in Russia topped the list for the second consecutive years with a third, or 36 percent, reporting earnings of over $250,000 a year – compared to two-thirds, or 62 percent, of expats in Spain earning below $60,000.

HSBC spokeswoman Lisa Wood said the survey, conducted by research company GfK, showed the wealth gap was widening between the east and west, with expats in emerging economies leaving their counterparts in the Eurozone behind.

“The BRIC economies have fared well over the last year and as a result we’ve seen that these expat locations are particularly strong when it comes to expat finances,” Wood said in a statement.

“Eurozone countries were the worst-performing when looking at purely financial criteria and subsequently all featured in the bottom quartile of our league table.”

Wood added it was not surprising that ongoing volatility in the Eurozone region was a major contributor to this and was driving expats to seek jobs in countries with higher salaries.

The Expat Economic survey, part of HSBC’s Expat Explorer Survey of 4,100 expats from 100 countries, ranked 25 countries on scores linked to annual income, monthly disposable income, and a measure of defined luxuries.

When it came to salaries, the survey found that about 13 percent of expats globally earned $250,000 a year or more.

Russia topped this table followed by Singapore and Bermuda with 32 percent and 27 percent of expats respectively earning this amount.

Mainland Europe took the lowest positions on the table.

While only one quarter, or 26 percent, of global expats on average earn less than $60,000, the survey found 62 percent of expats living in Spain earn below that amount, 47 percent of expats in France and the Netherlands, and 45 percent in Germany.

But Wood said this could largely be explained by the high number of expats who choose to retire in mainland Europe.

One in five expats say they are able to pay off debt while working abroad but workers in Britain and Australia are most likely to be accumulating more debt, at 11 percent and nine percent respectively.

World stocks fell on Tuesday in markets dominated by concerns the US economy is sliding back into recession, prompting further flows into safe-haven assets.

The yen – favoured for carry trades at times of economic stress – hovered back near 15-year high against the dollar after investors brushed off Japan’s attempt to weaken the currency, the Swiss franc soared against the euro and dollar, and yields on benchmark German government bonds hit record lows.

Mounting US economic concerns are likely to draw investors away from riskier assets and push up the yen, keeping pressure on Japan to intervene directly in currency markets for the first time in more than six years. Crude prices, seen as a proxy for world economic growth, also came under pressure, extending losses so far in August to 6.5 percent and staying on track for their biggest monthly decline since May.

World stocks measured by the MSCI All-Country World Index lost 0.7 percent. The index is down 4.1 percent in August and was headed towards its worst monthly performance in three months.

Tokyo’s Nikkei average shed 3.6 percent, its worst daily drop in three months, after the Bank of Japan’s move the day before to boost cheap loans to commercial banks failed to curb the yen’s strength.

US stock index futures eased 0.3 to 0.4 percent, indicating a weaker start for Wall Street ahead of the minutes of the Federal Reserve’s last meeting on August 10. On Monday, US shares fell 1.4 to 1.6 percent.

In Europe, the FTSEurofirst 300 index dropped one percent and the Thomson Reuters Peripheral Eurozone Countries Index fell 0.7 percent.

“We’ve have had a string of weak numbers, and now even second-tier economic data can have a big impact on the market,” said Joost Van Leenders, investment specialist allocation and strategy at BNP Paribas Investment Partners in Amsterdam.

“We’re still ‘underweight’ equities because of the economic outlook. We’ve been expecting a slowdown in the second half of the year with the boom from inventories and stimulus spending fading, and it has actually been a bit worse than we had anticipated.”

The VDAX-NEW volatility index, Europe’s main barometer of investor anxiety, rose 2.7 percent. The higher the volatility index, the lower investors’ appetite for risk.

Yen near 15 year high
The dollar was down 0.2 percent at 84.42 yen, not far from its 15-year low of 83.58 hit last week. The US currency fell 2.4 percent against the Japanese currency this month after sliding 2.2 percent in July.

“Japan’s ministry of finance is sending signals that is willing to intervene but clearly people remember its struggle with intervention a few years ago,” said Simon Derrick, head of currency research at Bank of New York Mellon.

“If they don’t intervene when the yen is at 84, when will they do it? Once its goes to all time lows? I think their resolve of staying away from intervention will be tested.”

Japanese Finance Minister Yoshihiko Noda repeated on Tuesday that the government would take decisive action on currencies – usually seen as code for intervention – when necessary, but reaction in the market was limited. The yen has gained more than nine percent versus the greenback so far this year.

The euro fell to an all-time low against the Swiss franc, which also hovered close to a seven-month high against the dollar.

Yields on benchmark 10-year German Bunds hit record lows at 2.085 percent, while those on 10-year US Treasuries slipped two basis points to 2.5108 percent, hovering near 18-month low.

In the commodity market, oil lost 1.3 percent to trade below $74 a barrel, while copper dropped 0.7 percent but was still up 1.5 percent this month.

Painful cost cuts and tax rises have eroded support for Prime Minister Emil Boc’s centrist coalition. His opponents want tax cuts and could even topple the eight-month-old government.

Whether Boc’s government survives or not, a divided parliament is likely to prevent much-needed reforms and leave Romania struggling to meet its commitments under a 20 billion euro bailout deal led by the IMF.

Coming on top of opposition elsewhere in eastern Europe to IMF-mandated reforms, the situation will keep investors on edge through the coming months.

“A new season of political battles starts. We will see more blood than ever,” independent political analyst Cristian Patrasconiu said. “The main risk is that balance of power may dramatically change.”

The government has pushed through unpopular measures including public wage cuts of 25 percent, axeing thousands of state jobs and hiking value added tax by five percentage points.

Support for Boc’s Democrat-Liberals has plummeted to record lows at about 13 percent. A nationwide survey by pollster INSOMAR in late July showed 51 percent of respondents in the European Union’s second poorest member want a new government.

Elections are only due in late 2012, however, and it seems unlikely the opposition Social Democrats (PSD) – who claim to have gathered one million signatures nationwide against the government – would want to force an early vote or put together another complicated coalition at such difficult times.

“A no-confidence motion satisfies all parties. It will not pass,” said Guy Burrow at consultancy Candole in Bucharest.

“But the opposition shows it tried and the government has another opportunity to emphasise some of the difficult things it is doing,” Burrow said. “No other party wants power quite yet.”

IMF rescue, leu at risk
The economy contracted by more than seven percent last year and should shrink again after the VAT hike, leaving once-booming Romania with one of the slowest recoveries in eastern Europe.

Boc’s first big test is in early September with a final vote on the VAT hike to one of the highest rates in the Europe.

Analysts predict a tight vote, as some of Boc’s allies have rebelled against his policies and could again team up with the opposition, which is only 19 short of a majority.

Discontent in government ranks has reached such a point that some may even defect permanently in the coming weeks, shifting the whole balance of power.

It is another sign of mounting opposition in eastern Europe to IMF-mandated reforms and rescinding the VAT hike would probably send the leu currency and stocks plunging and even prompt review of debt ratings, analysts said.

Hungary’s government said on Tuesday it would resume talks with the IMF and the EU in the autumn to bridge differences over a loan programme.

Talks about the review of an existing 2008 loan agreement collapsed unexpectedly last month, triggering a plunge in Hungarian assets.

A power shift in Romania would fuel concerns about whether the government can rein in its fiscal shortfall, targeted at 6.8 percent of GDP this year, and may even derail the whole rescue deal.

While most analysts believe the government can defend the VAT hike, there is still a significant risk of defeat.

“If they do reject it then we might not get a (1.2 billion euro) disbursement from the European Commission,” said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest.

“And the IMF deal is off-track,” he said. “Given fiscal consolidation is hit, then the central bank might allow considerable leu weakening to 4.4-4.5 per euro.”

Weaker government
If the government wins the VAT vote, it still faces a challenging few months and may try a small scale reshuffle before the winter in a bid to appease popular discontent.

The PSD, who say they would push for a re-negotiation of the IMF deal including scrapping Romania’s flat profit and income tax, are riding high at nearly 40 percent in opinion polls.

The party would probably prefer to wait out the coming troubles and target a working majority of its own in 2012, as wider coalitions in 20 post-communist years have a history of internal bickering and dysfunction.

“Is the PSD forcing the Democrat-Liberals to govern until their disappearance,?” said Cotidianul newspaper editorialist Petru Berteanu. “The longer they stay in opposition the greater the chances for a good result in the general elections.”