Friday, November 28, 2014
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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.

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    1. CommentedWong Hoong Hooi

      1. No less than any other country, China's society, politics and economics present complicated montages that defy generalisation; particularly the generalisation of everything being fake that its detractors constantly try to promote.
      2. Therefore, while its economy does have aberrations and distortions, it did generate the surplus for those huge loans to the US and other countries as well as pulled millions of its citizens out of poverty. The money to do that couldn't have been produced just by clever machinations.
      3. If Japan's economy is indeed recovering, let's wish it all the best. But Ms Koike couldn't contain her desire to turn it into a gloat alongside her usual run-down of China. She succeeds, as usual, only in hurting her own cred.

    2. CommentedCharles XIA

      1) About GDP (WDI data):
      Japanese GDP grew at a solid 4.4% in 2010 and fell to negative 0.7% in 2011. I don't see how this 4.1% annual growth rate based first quarter figures in 2013 is so exciting. The predicted growth of Japan in 2012 is merely 0.2%. For US it is 3%, 1.7% and 2.2% in these 3 years. India and China are 10.5%, 6.3%, 6.5% and 10.4%, 9.3% and 7.8% respectively.

      2) About international trade (WTO data):
      For mercandise trade, the export to world growth ratios over 2010,2011, 2012:
      China - 27.2%, 18.5%, 7.6%
      India - 31.7%, 29.1%, -3.3%
      Japan - 28.2%, 6.7%, -3%
      US - 19.1%, 14.7%, 4.4%

      For commericial services, the export to world growth ratios over 2010, 2011, 2012:
      China - 22.7%, 12.2%, 4.3%
      India - 29.3%, 10.4%, 7.4%
      Japan - 9.7%, 2.7%, -2%
      US - 5.4%, 6.5%, 2.8%

      It seems this article is more suitable to be published in 2010.

    3. CommentedZsolt Hermann

      The signs of recovery in the two great economies is very reassuring not only for them but also for the rest of the world.
      But leaders and public alike need to be cautious, and have to take into consideration what it means to exist in a global, integral world.
      In an integral system there are no "new" or "old" economies, "developing" or "developed", as there is no "south", "north", "west" or "east".
      Such polarities, distinctions blur away in a system that is fully interconnected and interdependent.
      If countries that are in an upswing hope to sustain their momentum, they need to consider how they can turn their relatively positive position into a driving force for others too.
      In a global world we always need to take into consideration of the well-being of the whole system since we are all sitting on the same boat.
      The previously ruthless and exploitative competition has become destructive not only for the "losers" but for the 'winners" too.
      Supporting examples are all around us. We can see how Australia, a country that was envied by everyone is suddenly does not look so good as the demand for raw materials is cooling off, even their government paid the price recently, unexpectedly.
      In New Zealand as a result of them being relatively stronger than Australia, and as the NZ Dollar got stronger recently, now they are suffering with their export heavy industry as the stronger currency makes export more difficult.
      The world has become so intertwined that unless we learn how to use these multi-level interconnections positively, in a mutually considerate and complementing manner we will all lose.
      On the other hand working together as complementing cogwheels, the whole of humanity could rise to a qualitatively higher level of existence, eradicating all our present problems and unpredictable crisis scenarios.

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