The News this Morning: Japan and Thailand

As I noted this Friday my exams are coming up now so I might be a little short of time the coming weeks but being the news junkie I am I will still be watching current events closely. This morning a couple of things caught my eye in particular. Firstly, a couple of articles bear evidence I think that we shouldn't let ourselves forget about what is going on in Japan. As an initial hint and as I also myself emphasised in my recent review and preview note on Japan headline GDP growth needs to be watched closely as we move forward into what might very likely be a recession. Firstly and from Bloomberg ...

Japan's gross domestic product forecast was cut by economists, who said a plunge in housing starts and construction investment will slow economic growth. The world's second-largest economy will grow 1.5 percent in the year ending March 31, according to the median forecast of 33 economists surveyed by Bloomberg News from Nov. 14 to Nov. 22. A month ago, the median projection was for a 1.7 percent expansion.

``I made the sharpest downward revision to housing,'' said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, who trimmed his growth estimate to 1.6 percent from 2.2 percent three months ago. Japan's economic growth ``will likely hover at low levels for some time,'' he said.

And also from the Japan Times ...  

(...) optimism cannot be warranted for the Japanese economy. Although the effect of the subprime mortgage fiasco in the United States was not apparent in the July-September period, confusion in the financial market caused by the problem is likely to cast a cloud over economic activities. The gradual appreciation of the yen and a downtrend in U.S. consumer spending could depress profits of Japanese companies that rely on exports.


Wages are not rising. The average monthly wage paid in September by enterprises employing five or more people dropped by 0.6 percent from the same month a year before. Trends in consumer spending and housing investment, and the effect of the subprime fiasco on the real economy, must be closely watched.

Another thing on Japan I would like to emphasise is the debacle we have observed regarding those changed housing regulations which has led to a sharp contraction in housing starts and residential investment. This has many important issues attached to it not least of course the real economic effects it will have on the Japanese economy. However, and after having read Teruhiko Manu's fine piece in Japan Times this morning the following is actually what strikes out the most in my opinion; 

The housing slumps in Japan and the United States, however, are totally different. While the primary factor behind the U.S. slump was financial in nature, in Japan it was the implementation of the revised building standards law on June 20 that triggered the plunge.

Needless to say, the legal reform was prompted by an architect's fabrication of quake-resistance data used to design dozens of condominiums and other buildings to build them on the cheap.It is unforgivable to falsify crucial data on a home, which is likely the single biggest purchase a family will ever make. Many salaried workers take on debts even larger than their retirement pay to buy a condominium. Such crimes not only make the homes unlivable, but also unaffordable as the buyers fork out huge additional sums to have them rebuilt.

So, and do take note, this will have negative effects on the real economy. But another strong undercurrent seems to be a general dissatisfaction centered on the authorities in dealing with this affair. This furthermore underpins a wider problem in Japan at the moment with a political system more or less in limbo as well as a general population who is becoming more and more unsure about their elected officials' credibility and essentially abilities. Turning to the more economic side of things and if we dig even deeper into the mountain we steadily reach the core of much of Japan's economic problems; as Manu also notes ...

Housing starts will hit bottom someday, but they probably won't return to their previous levels so readily.

Teruhiko Manu does not give any particular reason for this claim as it is made at the end of his article but I might be able to take up the baton from him on that one. Evidence of Japan's deteriorating demographic profile as a result of more than 30 years of sub-replacement (TFR of 2.1) has been laid out several times at this space. Yet, if you want to refresh your memory or, as it were, mind you only need to scoot briefly over to Ken Worsley's Japan Economy News Blog and read his latest report on the recent gloomy data coming out of the Japanese Ministry of Health, Labor and Welfare.

On Friday, the Ministry of Health, Labor and Welfare announced more gloomy news for the future of Japan’s economy. According to the Ministry, Japan’s labor force stands to fall by 4.4 million workers over the next decade, and could lose up to 10.7 million workers by 2030. The ministry also stated that if measures were taken to allow women, elderly people and young people to find work more easily, the loss to the workforce over the coming decade could be limited to one million workers. The ministry reported that in 2006, 48.5% of the nation’s women of working age held jobs, a decline of 1.5% from 1996. The ministry also claimed that workers facing mandatory retirement ages see less and less of an incentive to return to work, as companies continue to re-hire them at lower wages.

Immigration was not mentioned as a potential step to take against the reduction of the size of the workforce, and thus we find little reason to suspect that any sort of immigration plan or reform will be included in government plans to prevent the size of the workforce from shrinking at a slower rate.

Well, this was Japan then. Another thing which caught my eye and which is intimately related to the very interesting tectonic shifts we are witnessing at the moment in the global liquidity and capital flows architecture was the announcement that Thailand is set to open up, ever so slowly, its capital account once again after having shut the doors this December as the appreciation of the Bhat became a bit too hefty to muster on the back of global liquidity hungry for yield pouring in; from Bloomberg ...

Thailand's central bank may lift its capital controls after national elections on Dec. 23, a move that may boost the currency by about 16 percent next year, Royal Bank of Scotland Plc said in a report. The Bank of Thailand imposed restrictions in December on foreign investment to curb currency gains, causing the baht to trade at a higher exchange rate overseas than in Thailand. Elections will help revive consumer confidence that has dropped to a five-year low following a military coup in September 2006.

As we can see, the double digit percentage figures for potential Bhat appreciation are already flying all over the place and as such you could be lead to believe that the well-known proverb 'once bitten, twice shy' does not apply in Thailand's case. This claim however would be somewhat of a fallacy I think since as history will tell us Thailand is a bit different from the rest of the emerging markets. Firstly, we need to remember that capital controls and essentially the topic of foreign inflows still represent a rather special perspective in the context of Thailand as it was Thailand who was one of the countries in the epicenter of the Asian currency crisis in 1997. Moreover, the political situation in Thailand has been rather unstable during the course of 2007 (or stable depending on who you ask I guess) on the back of the military seize of power by the Junta. In this way, I don't think that Hideki Hayashi's interpretation should be completely neglected even if it is a bit obvious and essentially difficult to verify; quoted by Bloomberg.

``The timing would be good if they lift the controls after the election because having a people-elected government may remove political uncertainty in a country where the economy looks pretty solid,'' said Hideki Hayashi, a foreign-exchange strategist at Shinko Securities Co. in Tokyo.

Yet, much more important we need to consider that Thailand's struggle with the decision to open up to foreign capital flows and essentially to which degree and extent this should occur underpins a whole gamut of issues which are sure to race to the forefront of the economic and political agenda/discourse in many countries. You see, with the USD falling and as the markup of BW II (be it temporary or permanent) is steadily eroded the money needs to go somewhere and this is going to highlight issues as those we are now seeing in Thailand even if the concrete political and economic circumstances will be vary a lot. And as Edward noted recently in the same context of the change in the direction of global capital flows ... 

Recoupling is taking place, but which of the chain links will hold, and which will break. Aha, if only we knew!