Eq: EMs
Bank of Japan governor Haruhiko Kuroda has announced that the bank is sticking to its plans to maintain its massive asset purchasing program for the foreseeable future, saying it is simply too early to abandon the program. Kuroda believes Japan is only “half way” to its inflation target, and will not get there until some time in 2015. Some analysts have speculated that the BOJ might be set to wind down stimulus, while others have speculated that they may boost it. For now, both are wrong, however, as the government will press ahead with the status quo. So far, the economy has seen minor inflation, hitting 1.5% in April, and has weathered the sales tax increase well. However, wages dropped at their fastest pace in 15 months this April, highlighting the difficulty the BOJ is having in boosting real incomes. The bank argues that as inflation becomes the norm, firms will become more comfortable boosting wages.
FINSUM: While many may consider “Abenomics” to be a moderate success, it seems in reality that the policies have done little other than exacerbate wealth inequality through asset price increases and erode working class spending power through inflation.
As the US’ ties with China have continued to devolve and labour costs have soared there, American companies have been fleeing manufacturing in China in favour of Mexico. Prices, quality, and speed are the major motivating factor for companies looking to move their manufacturing out of China. Over the last three years, Mexico has seen its trade with the US grow by 30%, a pace not seen since the introduction of NAFTA in the 1990s. Overall, Mexico’s share of the US import market reached 14% in 2013, while China’s declined. Interestingly, American companies shifting business to Mexico also comparatively boosts the US’ domestic economy. Long-term analysis has shown that neighbouring countries tend to share production to a much higher degree than distant countries. For instance, 40% of the all the goods imported from Mexico had American manufactured parts in them, compared to just 4% from China. However, despite all the optimism, many US businesses are having trouble locating appropriate facilities as they have found the Mexican market fragmented and highly divergent in quality and infrastructure.
FINSUM: This seems like a win-win situation for the US and Mexico as it helps both economies. Further, the closer-to-home production helps lower carbon emissions domestically and globally.
In this article, Gavyn Davies of the Financial Times examines the prospects of a Chinese property crash and its impact on the global economy. Davies uses larges amounts of data on China’s property sector, which currently accounts for 16% of the country’s GDP and compares it to the size and scale of the US’ property-induced crash of 2008. Ultimately, the piece argues that a decline in China’s property sector would not lead to the same level of widespread downturn as happened in the US, but that the effect would be large, up to 4% of GDP spread over three years.
FINSUM: This is a solid and informative piece, but it misses the mark in considering the vast knock-on effects of a crash in the property market. The slowdown in building caused would shutter many highly indebted construction companies, and the GDP contraction it would stimulate would then likely lessen the massively indebted Chinese corporate sector’s ability to repay their debts, in turn bringing down the shadow banking market.