3

The Old Economies Strike Back

TOKYO – The impact of Abenomics on Japan’s economy is gradually beginning to be felt. Annual GDP growth in the first quarter has been revised upward, to 4.1%, exceeding market expectations and providing a strong indication that the Japanese economy is finally recovering, after two decades of stagnation. Consumer spending is particularly robust, as wages show signs of upward movement.

Moreover, the currency depreciation in the wake of the Bank of Japan’s efforts to increase the annual inflation rate to 2% is expected to benefit exporters, though a substantial effect on the trade balance is yet to be seen, probably owing to higher import costs. In particular, thermal electricity plants have replaced the country’s nuclear plants – offline since the Great East Japan Earthquake in 2011 – and the weak yen has hit the import bill for oil and gas hard.

Japan’s growth revival comes at a time of increasing economic uncertainty in much of the developing world. For example, Japan’s trade statistics for May indicate that exports to the United States increased at a double-digit pace year on year, to around ¥5.1 trillion, while exports to China were sluggish, reaching ¥4.8 trillion. Indeed, the US has overtaken China as Japan’s main export market, as America’s economy, too, recovers from half-a-decade of sluggishness.

In China, by contrast, exports in May rose by just 1% year on year – the lowest rate since last July – while imports fell by 0.3%. Exports to Japan were down by 5.7%, while exports to the US and the European Union decreased by 1.6% and by 9.7%, respectively, with both falling for three months in a row. As a result, the trade surplus continued to fall, to $20.4 billion, fueling growing concern about a Chinese slowdown.

China’s downturn appears sudden; after all, its exports had been rising at double-digit rates every month this year until May. In fact, the Chinese economy’s true condition had long been obscured, but has now been exposed by more stringent regulation of activities such as speculative trading of the renminbi masquerading as trade payments.

In particular, China’s “two systems in one country” enabled exports to bonded warehouses in Hong Kong to be used to pad trade statistics. Moreover, Chinese exports sometimes would increase in the face of a slump in the volume of cargo being shipped from ports.

The reason was simple: businesses benefit from tax exemptions or reductions for products that are exported. So, when companies from the mainland dealt with each other, they would export to Hong Kong first and then import back to the mainland, resulting in the transaction being treated as an export.

For example, trade in Guangdong Province and Hong Kong in the first quarter of 2013 increased by 91.6% year on year. In particular, there was a sudden increase in exports via the free-trade zone in Guangdong. After the regulatory authorities intervened in May, annual exports to Hong Kong rose by only 7.7%, down sharply from the 57% increase reported in April.

Economic conditions in China appear set to worsen further. The enormous investments launched in China’s interior as part of the government’s stimulus program following the 2008 global financial crisis have now become a burden and are increasingly showing up as bad debt on the balance sheets of the country’s banks.

China is not alone in finding its economy stumbling. More broadly, as the US and Japan recover, cracks are starting to appear in emerging countries that, relative to the advanced countries, had enjoyed enviable rates of economic growth since 2008. Growth in India has slowed significantly in the last two years, and large-scale street protests in Turkey and Brazil could herald hard times ahead in both of those countries.

For most of the twenty-first century, emerging markets’ rising importance – and, with it, a reordering of the global economy and international relations – has been conventional wisdom. But, today, it is the two largest “old” economies – Japan and the US – that are showing signs of increasing vitality. Japan is seeking to revive its economy through Abenomics. The US economy’s road to recovery is being built on the shale-gas revolution, a revived manufacturing sector, and a decline in the US budget deficit in GDP terms.

The “old” economies appear to be returning to the spotlight. If current trends continue, they may well become the next new thing.