In support of China's rate cut

Why do I support the rate cut in China and not in Japan?

In China, the rate cut will act like it's supposed to and truly leave more money in people's pockets by lowering their interest payments. The rate cut ties in nicely with China's previously announced $586 billion stimulus package. This package, presented with clear goals, is understandable to the markets.

Japan's rate cut exacerbates the way investors treat the yen. Amateur currency trading has exploded in recent years as Japanese investors sought better returns than their own banks were providing. Known as the yen carry trade, the idea is to sell yen to buy higher-yielding currencies. It's been very profitable until the recent market downturn. Nervous traders started buying back yen and drove the currency value up, making exports more expensive. You see where this is going...

Even though interest rates around the world are lower, Japan is still one of the lowest, so I fully expect the yen carry trade to kick into high gear again soon.

It would also be helpful if Japan provided some clarity to their stimulus package...




Source:
Wall Street Journal, November 28, 2008.

China cuts rate and the markets soar

Asian markets ended the week up, which seems odd considering the horror in Mumbai and the unrest in Thailand.

According to the Daily Yomiuri, "The market is reacting very calmly to the terrorist attack," said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong. "Investors in Hong Kong are still fixated on China's huge reduction in interest rates. There's bargain-hunting across the board."

There is a lot of optimism tied to China's most recent interest rate cut. By lowering the rate 1.08 percent, China took the largest plunge since the 1997 Asian crisis.

Plus there's been a lot of unemployment unrest in China and a government that wants to remain governing will be swift in addressing economic matters.


sources:
http://hosted.ap.org/dynamic/stories/W/WORLD_MARKETS_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_business.html

http://www.nytimes.com/2008/11/26/business/worldbusiness/26chinasteel.html?th&emc=th

http://www.nytimes.com/2008/11/27/business/worldbusiness/27yuan.html

http://www.businessweek.com/globalbiz/content/nov2008/gb20081126_344722.htm?chan=top+news_top+news+index+-+temp_global+business

China and the cyber war

I found this Aljazeera article disturbing- http://english.aljazeera.net/news/americas/2008/11/200811213360567505.html. It said the US-China Economic and Security Review Commission found that China has targeted "US government, defence contractors and US businesses" for cyber attacks. I would assume the US is doing the same thing to China, but it seems that China is further along.

In addition, according to the "Global Trends 2025" US intelligence forecast, the US global economic dominance will diminish and give way to such rising powers as China and India.

According to the report, resources will continue to be scarcer as the impact of global warming is felt.
Of note, "the global shift from West to East in terms of wealth and economic power 'is without precedent in modern history.' Of a projected population increase of 1.2 billion worldwide by 2025, Western countries would account for only 3 percent.."
http://www.nytimes.com/2008/11/21/world/21intel.html?pagewanted=print

Other Source:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/09/AR2008090903302.html

Japan's stimulus clarity needed

Japan officially acknowledged that the country is in a recession; its first since 2001. The decline in gross domestic product from July-September was the second consecutive quarter of negative growth -- meeting the definition of recession.

With an export-reliant economy, the corporate earnings projections aren't very rosy. The dependence on outside demand puts a spot light on Japan's need to stimulate its domestic economy.

Japan learned a great deal of lessons from the 90s and corporations have made tremendous improvements to their balance sheets. The Daily Yomiuri reported that the impact of 2007 troublesome domestic issues were acknowledged. Jesper Koll, CEO of hedge fund Tantallon Research Japan said "the domestic economy began faltering in the summer of 2007 under higher taxes and a credit crunch in the consumer finance industry. Regulatory debacles, including a massive pension scandal and confusion over new construction regulations, added to the worsening conditions."

Japan's recession is projected to continue for a few more quarters, but not to the same level as the U.S. or Europe. If the government can inject more cash and clarity into their domestic stimulus, Japan should be able to pull ahead of their peers. But to increase domestic demand, the government needs to put cash in the hands of all its citizens and provide the leadership to empower them to spend.


Sources:
http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_MARKETS_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_ECONOMY_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

Note: the yen closed Friday at 97.20 yen to the dollar.

Japan disappoints

It looks like Japan is playing games with how to distribute the cash benefits from their newly announced stimulus program. They had promised $20 billion to be spread among all the households in the country.

Yesterday's announcement that the government doesn't plan to set income cap limits for payout eligibility seems innocuous. But when Prime Minister Aso added that he preferred that high income earners voluntarily decline to file applications with municipal governments, I smelled trouble.

Without an income cap indicator, middle to high income earners are going to be put in a bind. Culturally, it would appear unseemly for them to show up at their municipal government office looking for a handout. This is unfortunate and will severly lessen the impact of the stimulus. This middle ground of earners are exactly the group who would spend the extra cash and impact domestic growth. The plan had meant to distribute 2 trillion yen into the economy by giving 12,000 yet to each adult and 8,000 yen to those under 18 or over 65.

And Japan could use the stimulus. Despite a large amount of cash reserves, imports have surged past exports. Imports are largely affected by oil as Japan is nearly 100% dependent on oil imports.


According to the NY Times (11/10), "exports to the United States dropped 10.9 percent and those to the European Union also fell 9 percent in September. Asia-bound shipments grew just 2.8 percent in the month. Exports alone account for about 18 percent of Japan's economy."




http://www.yomiuri.co.jp/dy/national/20081111TDY01303.htm
http://www.washingtonpost.com/wp-dyn/content/story/2008/10/30/ST2008103001994.html

China steps up to the plate

China, the world's fourth largest economy, announced a 4 trillion yuan ($586 billion) stimulus plan. This is equivalent to about a fifth of China's 2007 $3.3 trillion gross domestic product.

The Chinese are sending a message to the world that they are doing their share and are important players in the world economy game. And they are doing a much better job at it than the U.S.

The money comes from "state banks and state-owned companies that are encouraged to expand more rapidly instead of from central and local governments (NY Times 11/10). With the bulk of the two year investment in infrastructure, they'll be ready to chug along their new rails, roadways and airports when the economy picks up.

Additionally, investment in low-cost housing, health care and agricultural subsidies are being planned. An important tax revision, called the value-added tax will allow companies operating in China to deduct spending on capital equipment (WSJ 11/10) Encouraging business investment will put China in a competitive position.

The U.S. package is shrouded in vagueness. Congress agreed to $700 billion to help strengthen banks, but does not direct the financial institutions to provide new lending or invest in U.S. projects.

The markets in Asia and Europe responded enthusiastically on Monday. The US market didn't fare as well. Maybe because the Chinese package was everything the US package isn't. It's clear and focused. It's investing in infrastructure. It's a lot of money backed by a time table and resources. And there's no question that China can pay for it as they sit on a pile of cash reserves.



Sources:

http://www.nytimes.com/2008/11/10/world/asia/10china.html

http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_CURRENT_ACCOUNT_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

It's not the bottom

Asian markets closed mixed today as they waited for new economic data from the US. That data arrived and it's not good. The unemployment rate is 6.5%, a 14 year high. Add that to terrible October retail sales reports and I'm guessing Monday is not going to dawn on the up side.

Additionally, the New York Times reported today that China's "three engines of growth - exports, investment and consumption - have all slowed down." Not only are real estate and related industries down, but due to poor orders from retailers, factories are laying off workers. The Chinese economy is still expanding, but at a rate of 5.8 percent instead of last year's 11 percent.

The Chinese government, always wary of the restless unemployed, is putting together an economic stimulus package including infrastructure, exporters and aid to real estate, stock markets.

In Japan, Toyota Motors Thursday announcement that they had cut their annual profit forecast in half made a big impact. The Nikkei fell 3.5 percent.


Sources: http://www.nytimes.com/2008/11/07/business/worldbusiness/07yuan.html
http://www.nytimes.com/2008/11/08/business/08markets.html