Today has opened with a raft of economic news from the Far East and I intend today to compare the situation in two of its main economies Japan and China. There are plainly differences but as I look at them there are more similarities than you might think. After all is not what has become called Abenomics an attempt to move Japan towards a command economy? Also is not China moving towards becoming a more capitalist one? Will they meet in the middle?
Back in the US Presidential election Mitt Romney called China a currency manipulator leading the official US Report on the matter to say this.
the process of adjustment remains incomplete, and more progress is needed
the real exchange rate of the RMB remains significantly undervalued, and further appreciation of the RMB against the dollar and other major currencies is warranted.
So whilst not actually using the word there is quite a hint. The argument is that China has manipulated the value of the Renminbi (RMB) downwards to gain a competitive advantage. For example it fixed it in the period 2008/10 to stop it from rising.
One area where we need to take some care is that we should of course take a pinch of salt with the view of the US authorities as they with there extremely expansionary monetary policies are at the same game in many eyes! However if we move onto Abenomics and Japan let us see where we stand.
The promises of much easier Japanese monetary policy with the Bank of Japan becoming an explicit part of the government as well as looser fiscal policy have had an impact before they have even happened. The Japanese Yen has fallen heavily against some currencies and plummeted against others. It dropped to 120 Yen versus the Euro overnight which meant that it had fallen by 20% in just over two months. Against the US Dollar it has touched 90 Yen today for a fall of just under 14%. As of last nights close the effective or trade weighted index for the Yen was 157.3 as opposed to 180.2 over the same timescale,so a 14% fall here too.
So whilst Japan has not explicitly intervened she has implicitly done so via the promises of her new government and so we are left with the question,who is the main currency manipulator now? To misquote the Vapors, are the Japanese turning Chinese?
Are we all currency manipulators now?
As I type this I note that the Swiss media is alive with rumours that the Swiss National Bank will move its 1.20 cap versus the Euro to 1.25. Whatever the reality of this the exchange rate has moved there. So as I have observed before both the “currency twins” which were the strong currencies are now falling.
Mind you it is not only the “currency twins” as the UK pound sterling fell below US Dollar 1.60 and Euro 1.20 yesterday so a traditionally weak currency is falling too. As the Governor of the Bank of England said in November that such a thing would be “welcomed” we could call the UK a currency manipulator too! Adding in the United States with its apparent QE to infinity is there anybody not at the game?
Rather oddly there is the Euro standing firm in very Germanic fashion. If you look at the flip-side of its continuing rally it must have an effect similar to a brake on a Euro area economy which is already weak. You could argue that much more of it and Euro area monetary policy would no longer be expansionary. Quite why it is allowing this to happen remains something of a mystery unless of course ECB should be written as Bundesbank in my financial lexicon.
Inflation alert in Japan?
An unusual paragraph heading for a country that is mired in disinflation where the price level has been falling. But a contributor to that has been a rising exchange rate which has now been replaced by a falling one. So if we go back to just over 2 months ago and use the current oil price for Brent Crude Oil of US $111 per barrel we see that it would have cost 8650 Yen then but nearly a round 10000 Yen now. Quite a change in input costs there before we get to other commodity prices. As an aside I would just like to point out the the price of a barrel of oil has not changed much for a while in spite of a vast number of predictions that it will fall.
If you look at China when it fixed its exchange rate we soon saw quite a rally in its equity market. After following other markets down in 2008 we then saw an 80% rally in the Shanghai Composite Index in 2009. Since it let its currency float in 2010 it has performed relatively poorly.
Since Japan headed in the direction of Abenomics and implicit currency manipulation the Nikkei 225 has launched itself upwards like a rocket. It rallied nearly 3% today alone and at 10,913 is up 26% over my just over 2 months timescale meaning really good profits for buyers,well unless you are an investor in Euros!
Mind you it is not only currencies which get manipulated
Well done to Izabella Kaminsky at the Financial Times for spotting this.
BHP Billiton, the world’s No. 3 iron ore miner, bought 100,000 tonnes of the raw material on the spot market in a rare move that traders interpreted as a strategy by producers themselves to stem a decline in prices as Chinese demand thins. A rally that carried iron ore prices to 15-month highs last week was a boon for miners such as BHP , but took the market by surprise, scaring off buyers in top consumer China.
So an iron ore producer is buying iron ore! This is not a unique event by any means but it poses questions as if Chinese growth is so good why does the price need any support? And with that link here is the latest number.
According to the preliminary accounting, the gross domestic product (GDP) of China was 51,932.2 billion yuan in 2012, a year-on-year increase of 7.8 percent at comparable prices. Specifically, the year-on-year growth of the first quarter was 8.1 percent, 7.6 percent for the second quarter, 7.4 percent for the third quarter and 7.9 percent for the fourth quarter.
So according to the official view things are going rather well and Japan would love anything approaching such numbers. But who is manipulating what here? As was put in the song of some years ago.
There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know
Instead of course we learnt overnight that both industrial production and capacity utilisation fell in Japan in November which I guess is how Abenomics got its votes.
Monetary Policy Similarities
If you can make your way through the 64 word opening sentence from the Chinese Bureau of Statistics you eventually find this.
By the end of December 2012, the balance of broad money (M2) was 97.42 trillion yuan, a year-on-year growth of 13.8 percent,
We see that Abenomics wants Japan to head in this direction too and of course Bank of Japan policy is already extremely expansionary.
As I look at the economic situation in the Far East I see that two countries who have been at times the worst of enemies seem to have economic philosophies and policies which are merging. If we were to jump into Doctor Who’s TARDIS and go forwards in time a little which will be described as the command economy or perhaps both?
We will find out some more next week when the Bank of Japan meets but as you can see events these days can occur before their causes have actually taken place.
But there is of course an issue here which I have left to last. As we stand currency manipulation is a zero sum game where every winner creates a loser.
Can the British Broadcasting Corporation save the world?
Not a paragraph heading you might expect but let me quote from their report on themselves. The emphasis is mine.
In 2011/12, BBC total operating expenditure in the UK – including both public service and commercial subsidiary UK expenditure - was £4,341 million (excluding inter-group re-charges).This expenditure had a significant economic impact, generating a Gross Value Added of £8,323 million for the UK economy, equivalent to two pounds of economic value for every pound of the licence fee.
So if we gave them all our money they would double it! Why has nobody thought of this before? As the group Pilot observed in the 1970s.
It’s magic, you know
Never believe, it’s not so