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Economy Watch
Economy Watch follows the progress of the world economy and offers you our weekly picks. Be sure to visit for the weekly updates.
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2009 December 17 updates
| Inflation returns to China
Inflation hitting on to China as policymakers are trying to consolidate strong economic recovery. Economic data published on 11 Dec indicated that the rebound remained firmly on track with industrial production and imports both increasing well in advance of forecasts.
One of the main risks to face the economy is a surge in inflation as a result of the massive monetary and fiscal stimulus measures introduced this year.
Consumer prices rose 0.6 per cent last month from a year ago, after falling 0.5 per cent the month before, while prices at the factory gate fell 2.1 per cent last month compared with a 5.8 per cent decline the month before.
The spike of inflation may be due to the rising food, energy prices rather than as a result of the money supply increasing at an annual rate of 30 per cent.
However, the return of even modest inflation will feed into the intense discussion in Beijing about how quickly to ease stimulus measures and whether to abandon a de facto peg against the US dollar and to allow the renminbi to appreciate.
Many economists believe Beijing will not shift currency policy until there are clear signs that Chinese exports are recovering. The November figures were worse than expected. Exports fell 1.2 per cent compared with the year before, compared with a 13.7 per cent drop announced in October. On a sequential basis, exports were up only 0.7 per cent last month over October, in spite of hopes that restocking by US and European clients would lead to a stronger rebound.
Paul Cavey, an economist at Macquarie Research, “We would expect the renminbi to play an even more important role in tackling inflation if commodity prices do again start to rise.” He further added that the rising commodity prices would trigger the appreciation of Renminbi. China used a stronger currency in 2007 and 2008 to absorb that impact of higher prices for imported commodities.
Officials admitted in recent weeks that even if inflation were to pick up, it could be risky to increase interest rates well in advance of any similar action by the US because that could attract a fresh wave of capital inflows to China.
The government also shared their concerns about the potential bubble in house prices which rose 1.2 per cent in November from the previous month, by reintroducing a sales tax on property speculation.
Japanese business confidence remains subdued
Business confidence in Japan is not so optimistic, the overall mood remains negative and according to Japan’s new Democrative.
The overall economy sentiments amongst the Japanese remain negative even though the large Japanese manufacturers.
Sentiment among large Japanese manufacturers has improved for the third quarter in a row, but their overall mood remains negative and they expect capital spending to be down a record 28 per cent in the year to March.
"We can see the numbers are moving in a better direction, but prospects for real conditions are still severe," said Hirofumi Hirano, chief cabinet secretary and spokesman for Japan's new Democratic party-led government.
While the improvement in the Tankan survey's headline index for big manufacturers' assessment of business conditions was greater than forecast by economists, their contracting capex plans highlight worries about the sustainability of Japan's recovery from its sharpest post-war recession.
Such concerns were fuelled last week by Japan's sharp downward revision of its estimate for quarter-on-quarter gross domestic product growth from July to September from a robust-looking 1.2 per cent to a much less impressive 0.3 per cent.
In an effort to shore up the recovery of the world's second largest economy, the DPJ government has announced a Y7,200bn ($81bn) stimulus package that includes handouts for regional governments, jobs subsidies and support for environmentally friendly products.
The Tankan survey, which was carried out before the stimulus plans were finalised, showed strongly negative sentiment among businesses.
The headline diffusion index for big manufacturers, which compares the number of companies that report positive conditions against those who say conditions are negative, rose nine points compared with September's survey. At minus 24, the index was still clearly gloomy – although far better than the record low of minus 58 recorded in March.
The Tankan found sentiment among large non-manufacturers had improved two points to minus 22.
Worries about industrial over-capacity that is a factor in the return of deflation to the Japanese economy will be only slightly eased by survey.
The diffusion index for companies reporting excessive capacity over those unable to meet demand fell only four points to a still substantial 30.
The BoJ, which surveyed 10,116 companies between early November and December, reported a strengthening in profit expectations, although large manufacturers still expected income for the year to March to be down nearly 35 per cent compared with fiscal 2008.
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