Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order.
Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82pc of the items in the producer price basket are deflating in China. The figures is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities.
Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147pc to 207pc of GDP in six years.
These countries face a Sisyphean Task. They are trying to deleverage, but the slowdown in nominal GDP caused by falling inflation is always one step ahead of them. “Debt to GDP has risen despite these efforts,” he said. If this sounds familiar, it should be. It is exactly what is happening in Italy, France, the Netherlands, and much of the eurozone.
Haruhiko Kuroda, governor of the Bank of Japan, sometimes asks close aides how he will be remembered. The central bank chief is well aware of the enormity of the challenge he is tackling.
The BOJ governor took the helm in March last year and soon after unleashed an unprecedented easing program that aimed to push inflation to 2% within two years.
If he manages to pull this off, and end the easing incident-free, Kuroda believes he will deserve the title of “great central banker.” The challenge is formidable: Japan’s growth potential is declining due to a confluence of factors, most importantly the shrinking population.
Short-term government bills, or T-bills, in recent days have been posting negative yields. That means investors are paying more money than they can expect to earn when the bills mature. In effect, they are paying simply to hold these securities.>> Read More
The Bank of Japan reiterated its stance in its monthly update on monetary policy, saying that the Japanese economy is continuing to “recover moderately as a trend,” although it acknowledged that the country’s recent sales tax hike was having some effect on production.
The BOJ said that there was “some weakness particularly on the production side….due mainly to the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike.”
Japan raised its sales tax for the first time in seventeen years in April, from 5 to 8 per cent, meaning people rushed out to buy cars, furniture and expensive items before it was implemented.
Otherwise, the BOJ added that private consumption “has remained resilient as a trend.” It maintained its 2 per cent inflation target.
Japan’s central-bank chief predicted victory in his battle to root out the deflation that has long sapped economic vitality in the world’s third-largest economy, but expressed impatience with the government’s pace in cutting red tape and encouraging businesses to invest more.
“Implementation is key, and implementation should be swift,” Bank of Japan Gov. Haruhiko Kuroda said in an interview with The Wall Street Journal. “The major work to be done is by the government and the private sector.”
Mr. Kuroda’s comments mark an important shift in tone more than a year after he was tapped by Japanese Prime Minister Shinzo Abe to engineer a newly aggressive monetary policy. The resulting “bazooka” of stimulus actions, including the purchase of trillions of yen in government bonds and other assets, has fueled Japan’s longest economic growth streak in nearly four years and a steady stream of positive inflation readings.>> Read More
The Bank of Japan’s press conference on April 8 was the first one to be broadcast live. Until recently, the BOJ did not allow the media to report on its latest monetary policy until the press conference ended. Asked whether he prepared for the live broadcast any differently, BOJ Gov. Haruhiko Kuroda stroked his sky blue necktie and said, “I did a little thinking about the color of my tie, that’s all.”
While his remark drew laughter, a rule of thumb has emerged over the last year regarding Kuroda’s choice of ties. As one BOJ official said, “It might better not to underestimate it.”
Red for dove, blue for bull
The BOJ decided to introduce an unprecedented level of monetary easing at its policy board meeting that ended on April 4, 2013. With his vivid red tie, Kuroda spoke confidently about the monetary easing, holding up cards showing the BOJ’s targets, including doubling its monetary base within the next two years. In the year since, he has maintained the stance that the central back will not take an incremental approach in its monetary policy.
The only exception is the bank’s February meeting this year. He was wearing a red tie, and while there was no additional easing, the BOJ did decide unexpectedly to double the scale of its two lending programs for financial institutions. This announcement improved lingering expectations for additional easing. The rule that Kuroda shows his dovish, pro-monetary easing side in a red tie has so far proven true.>> Read More