Contrarian Thoughts: Depopulation's Benefits

The essence of dramatic tragedy is not unhappiness. It resides in the solemnity of the remorseless working of things - Alfred North Whitehead as quoted by Garrett Hardin in The Tragedy of the Commons

While doing research on an environmentally-related issue, it occurred to me to re-read the famous article concerning the tragedy of the commons by Garrett Hardin. Unbeknownst to many, he was not only concerned with collective environmental abuse but also overpopulation--on which he voiced many politically incorrect opinions. However, questions of demography remain foremost as the world's population has zoomed past 7 billion and the consequences of anthropogenic activity on the environment capture the world's attention.

In many recent posts, I have treated "Detroitification" as shorthand for demise. Fewer and fewer people implies lower and lower economic growth. But, what if we recognize the finitude of economic growth as a consequence of finite resources? It would follow that fewer people may be more desirable. What's more, overpopulating a country, town or what else have you may be a strategy of maximizing one's welfare while reducing that of the broader (world) community--precisely, a tragedy of the commons:

Work calories are used not only for what we call work in common speech; they are also required for all forms of enjoyment, from swimming and automobile racing to playing music and writing poetry. If our goal is to maximize population it is obvious what we must do: We must make the work calories per person approach as close to zero as possible. No gourmet meals, no vacations, no sports, no music, no literature, no art. ... I think that everyone will grant, without argument or proof, that maximizing population does not maximize goods.

Hardin's potential insight is that the more people = more economic growth equation does not hold at a global level given the proverbial limits to growth. Consider, also, the world situation circa 1968 when the article was written:

Has any cultural group solved this practical problem at the present time, even on an intuitive level? One simple fact proves that none has: there is no prosperous population in the world today that has, and has had for some time, a growth rate of zero. Any people that has intuitively identified its optimum point will soon reach it, after which its growth rate becomes and remains zero. 

Of course, a positive growth rate might be taken as evidence that a population is below its optimum. However, by any reasonable standards, the most rapidly growing populations on earth today are (in general) the most miserable. This association (which need not be invariable) casts doubt on the optimistic assumption that the positive growth rate of a population is evidence that it has yet to reach its optimum.

In 2013 we have reached the point where there are any number of "prosperous" populations which have growth rates approaching zero in Western Europe as well as the East Asian tigers--Hong Kong, Singapore, South Korea and Taiwan. And then there's Japan which is already depopulating at a fairly rapid clip but remains the world's third largest economy.

Instead of feeling sorry for them or bemoaning their lack of growth, perhaps the environmentally and morally appropriate response would be to welcome their contribution to sustainability. In effect, they sacrifice national well-being by old metrics alike GDP growth for the sake of not lessening the world's carrying capacity.

Just a thought for you from a reading on Hardin.

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Japan to Privatize Its Forex Reserve Management?

Here's an experiment in foreign exchange reserve management that looks interesting. We've heard of sovereign wealth funds (SWFs) that invest in non-traditional reserve assets, i.e. those other than sovereign debt of major currency-issuing countries or precious metals alike gold. These SWFs may place funds in equities and so forth. However, the innovation insofar as SWFs are concerned is on the portfolio side: they are diversifying placements of reserve assets in search of greater yield. In other words, SWFs are state-owned in their charter.

Hence Japan purporting to allow non-governmental entities to allocate part of its $1.27 trillion stash looks unique insofar as the management side rather than the placement involves the private sector:

Japan is looking to allow private sector funds and trust banks to manage a part of its $1.27-trillion pool of foreign exchange reserves in a drive to manage them better, a government source told Reuters on Sunday. Until now the government has managed the foreign exchange reserves itself, but its ability to do so has been stretched as the reserve roughly doubled over the past decade, thanks to massive yen-selling interventions to weaken Japan's currency.

The government needs to clear legal hurdles on its use of foreign exchange assets if it wants to draft in the services of private financial institutions and will propose amending the law during a parliamentary session that begins on Tuesday. The government is now restricted to lending its foreign securities only to banks, but the new law will also permit brokerages to borrow securities, the source said, with the fees borrowers pay going to replenish government coffers. "

Although we do not think the Japanese government will outsource all of the foreign exchange reserve to the private sector, even just a 10 percent outsourcing will become a $120 billion business," Tohru Sasaki, head of Japan rates and FX research at JP Morgan Tokyo, told clients in a note. 

Interesting if risky stuff. If large losses are sustained though, who's to blame--the Japanese government, the fund manager or both? It's the governance issue that needs sorting out if this experiment in forex reserve management is to be conducted. There's also the qualification for would-be managers that Japan being America's stalwart ally in the Asia-Pacific, assets must be kept in dollar-denominated securities.

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Japan 'Defeating' Deflation? Not Quite, My Friend

There is much debate in Japan as to whether the Bank of Japan's efforts to pull the country out of a deflationary spiral are bearing fruit. True, Japan's consumer prince index is actually showing a positive trend, but this may be largely down to temporary factors and not to any structural change. What happens when the central bank spigots close? The questions facing the developed world are  similar in certain respects. Moreover, Japan's shuttering of nuclear reactors in the wake of the Fukushima incident has caused price rises that may soon be undone as more plants come back online:

Japan’s core consumer price index, excluding volatile fresh food prices, rose 0.8% in August from the same month a year earlier. That prompted private economists to raise their forecasts closer to the central bank’s 0.6% rise on average for the current fiscal year ending March.

People familiar with the central bank’s thinking say it sees the index going as high as 1.0% by the end of this year. But private analysts still see any such a rise — driven largely by higher imported energy costs — as unsustainable.

Strip out the energy component of CPI and the news is much less headline-worthy. You guessed it--Japan remains in deflation territory:

Japan’s inflation accelerated to the fastest pace since 2008 in August on higher energy costs, underscoring pressure on Prime Minister Shinzo Abe to drive wage increases as he seeks to end 15 years of deflation.

Consumer prices excluding fresh food increased 0.8 percent from a year earlier, the statistics bureau said today in Tokyo. The median forecast of 30 economists surveyed by Bloomberg News was for a gain of 0.7 percent. Stripping out energy and perishables, prices fell 0.1 percent. 

This is non-news in the war against deflation. Can this artifice continue, though? While global energy prices are unpredictable, some commentators argue that restarting more nuclear reactors is tied to the success or failure of Abenomics. Pessimistically and perversely, then, it is possible that souring consumer sentiment caused by greater dependence on foreign energy may instead forestall the reactivation of Japanese nuclear plants:

In all likelihood, the success of Abe’s nuclear agenda will rest upon the success of his economic agenda. If the public and his party remain confident in the direction of Abe’s economic policies, he will likely be able to sell nuclear energy as an integral part of his vision.

What can I say? Japanese political economy is weird even by Asian standards and cannot be directly interpreted from Western example.

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East / Southeast Asia's Demographic Bifurcation

There's are always interesting demographic discussions about the "West and the Rest," but there are also interesting demographic variations within regions.Take the Asia-Pacific: While Japan is emblematic of the problems with a shrinking population, it will soon be joined in that situation by a number of East Asian neighbors absent large rises in fertility or large-scale inward migration:

"Japan was largely the only country that was aging and shrinking in terms of its labor force and population in the previous decade. But in the coming decade, several Asian countries – including China, South Korea, Hong Kong [...] will see their labor forces shrink. This will have important implications for GDP [gross domestic product] growth, consumer spending and asset prices, judging from Japan's experience..."

Japan is home to the fastest aging population in the world, with almost a quarter of its population over the age of 65. The country has struggled with sluggish growth stemming from a shrinking workforce, which has put pressure on the government to boost productivity levels.

OTOH, you have the more demographically promising Southeast Asian countries that have not yet reached a similar stage in the demographic transition as their wealthier northern neighbors:

The U.N. sees the working-age population in Indonesia and the Philippines peaking in 2058 and 2085 respectively, later than previously anticipated. At the same time it brought forward forecasts for other Asian countries including China, where the working-age population is expected to peak in 2015, and its total population, currently around 1.3 billion people, is seen decreasing after 2030.

BofAML's Chua says demographics are useful indicators of real GDP growth, noting a strong correlation between changes in working-age population and growth in the real economy over the past decade (2002-2012). 

To be sure, demographics alone do not drive economic growth. However, Japan's example does illustrate the pitfalls to having too few working-age people going forward. Previously marginalized as development laggards, more are taking notice of Indonesia and the Philippines as investment opportunities partly for demographic reasons. 

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Japan's Trade Deficits & Halting Nuclear Power

Deficit-running Japanese are about as unnatural as surplus-running Americans, but we now have to reconsider this conventional wisdom. (Things change, my dear.) Recent years have witnessed an unwelcome turnaround in Japan's trade balance as it has swung from surplus to deficit in a fairly big way. While recent easy money "Abenomics" have lifted the general economic outlook there, there is a good reason why most analysts are less sanguine about the prospects for fixing the trade balance.

A contributing factor to this degradation in the external balance has, of course, been Japan's rising import bill from energy imports in the wake of the Fukushima nuclear power plant incident. With practically all of its nuclear powers shut, the nation's energy needs have been met largely by imports because Japan has few energy resources of its own. Not only do rising energy costs dent the spending power of Japanese consumers then as their electricity bills rise, but they also dent Japan's supposedly "mercantilist," export-oriented orientation:

So far, power companies have applied to restart about a dozen of Japan's 50 reactors. Prime Minister Shinzo Abe wants to see the reactors back on line, as they are a vital part of his plan to turn the economy around. Since the Fukushima disaster, Japan has been forced to import huge amounts of coal, liquid natural gas and other fuels.

Mr Abe's government blames these imports for the huge trade deficits posted by Japan since 2011. The average household electricity bill has risen by 30% since Fukushima, denting the government's attempts to boost consumer spending.

One of the Abe government's campaign promises was to bring these nuclear power plants back online. (His Liberal Democratic Party has long been supported by the energy industry for better or worse.) However, even if all fifty existing reactors were to come back in operation as they likely will in a few years' time, the interesting thing is that it is estimated that Japan would still run an external deficit:

After the 1979-1980 oil shock, Japan bounced back smartly, exporting millions of its cheap, durable and fuel-efficient cars and iconic electronic gadgets such as Sony Corp's Walkman. Today, however, there is no turnaround in sight.

Even though increased fuel imports since the March 2011 Fukushima disaster have been a major drag on trade, restarting all of Japan's nuclear reactors would not bring it back into the black, estimates suggest.

The only one of Japan's 50 reactors in operation was shut for planned maintenance on Sunday, with no firm date for bringing back an energy source that had covered about a third of the country's electricity needs.

The "real" culprit may be Japan offshoring production to nearby countries over the years to cope with rising production costs at home due to yen strength. This trend has only accelerated in recent times, causing a diminution of recorded Japanese export output:

That is because of the "hollowing out" of Japanese manufacturing as firms shift production and procurement overseas. Years of yen strength contributed to that shift, but the currency's retreat failed to reverse the trend as the desire to move closer to faster growing markets, tariffs, lower taxes and labor costs all played a role.

A Cabinet Office survey of manufacturers showed the share of overseas production of Japanese companies rose to 17.7 percent last year from just over 13 percent a decade ago and is seen reaching 21.3 percent in five years.

Japan temporarily shutting down its nuclear reactors that account for a third of its energy needs will likely be remembered as a short-lived, awkward moment in its postwar history. However, its shift to running trade deficits is probably becoming more structurally ingrained. As Don Henley once sang--here with admittedly unlikely regard to huge Japanese trade surpluses--those days are gone forever; it should just let them go.

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So, Why are China, Japan, ROW Dumping Treasuries?

There is a debate going on here in the rest of the world concerning the United States. It isn't really whether American officials are trustworthy, but whether they are more of BS artists or ripoff artists. When it comes to foreign holdings of US Treasuries, it's arguably both: The United States likes to con others with "strong dollar" rhetoric as it runs unfathomable deficits and the dollar falls to some godforsaken level. There is a lie, and a large financial consequence to believing in such nonsense.

Or, is there a limit to global gullibility? Will the rest of the world continue to be held hostage to this "financial balance of terror"? As it turns out, the top two suckers--China and Japan--have actually been selling loads of dollar detritus in recent months. What's more, the rest of the world are following suit, intensifying movement away from greenback garbage:

China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June [there is a two-month lag with this data series], a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.

China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.

Bernanke spooking the markets by suggesting that the Fed will soon stop accumulating nearly unlimited Treasuries to lower borrowing costs is resulting in others' pre-emptive action to avoid near-term losses:

"The sell-off in Treasuries and Bernanke's tapering remarks are related," said Michael Woolfolk, global market strategist at BNY Mellon in New York. "Lightning doesn't strike in the same place twice, but Bernanke repeated his comments in June and that roiled the market."

He said the net Treasury outflow was the highest since at least 1977 when the government started compiling the data. June was the fifth straight month that foreign investors sold long-term U.S. securities, but the specific selling of long-term government bonds was the big turnaround as foreigners had bought $11.3 billion of Treasuries in May.

Are we reaching the outer limits to global gullibility in buying Treasuries? Given the aforementioned time lag in reporting the data, it will be interesting to note from forthcoming reports whether rising interest rates Stateside are driven more by Bernanke signalling the end of "money for nothing" policies or by central banks worldwide dumping Treasuries en masse.

Heaven knows, this world would be a much better place if the latter trend continues. Central bankers of the world, don't be afraid to dump those treasuries and teach America a lesson; in the end, only you will be responsible for your people suffering losses from hanging on to such worthless pieces of paper in their name.  

UPDATE: To be fair, the FT expects some bottom-fishing to buoy capital inflows into America in the next report.

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Depopulation or the Detroitification of Japan

There is a spectre haunting the developed world--the spectre of Detroitification. (Take that, Marx and Engels!) It involves depopulation and industrial hollowing out destroying the tax base of locales barely able to provide basic public services. Aside from the highly questionable logic of Japan incurring more debt to "cure" problems arguably caused by an oversized debt overhang, I have a more fundamental doubt about its economy moving forward. Simply, demographics dictate that an ever-shrinking population places nearly-insurmountable pressure on enfeebling the economy. Too many seniors drawing on too many benefits compared to too few working-age persons--it's a bad situation only set to get worse:

The estimate shows that Japan’s population in 2040 will stand at 107.276 million, a decline of about 20 million from 2010′s 128.057 million. A January 2012 estimate by the same [National Institute of Population and Social Security Research] institute had shown that in 2060, Japan’s population will number 86.737 million, about 30 percent less from the 2010 level.

Japan has been experiencing a natural population decrease since 2007, with annual deaths topping births. In 2011, the total fertility rate — the average number of babies a woman gives birth to during her life — was 1.39. A total fertility rate of 2.07 is required to maintain population levels. Although the public sector has been taking steps to make it easier for women to have more children, it will be extremely difficult to improve the situation.

While industrial stagnation is perhaps less evident in Japan at the moment, the fiscal implications of these hollowed-out societies remain the same. There are already signs of Detroit-esque lapses in the provision of public services emerging:

The progress in the graying of the nation means that the need for social services for residents such as medical and nursing care services will increase. The population decrease means that the nation’s total tax revenues will decline. As a result, grants from the central government to local governments will diminish. Both the central and local governments must find ways to overcome the imbalance between revenues and outlays. It will become all the more important for both the public and private sectors to increase chances for women to fully utilize their abilities in the workforce.

The effects of a population decrease are already being felt. Cases in which road bridges have been closed to traffic because of a lack of funds for maintenance and a drop in the number of users are increasing. Forests exist whose owners are now unknown. The number of vacant houses are increasing. Some municipalities have passed by-laws under which they will demolish vacant houses that have become dangerously dilapidated [my emphasis].

The spectre of Detroitification is hard to beat, and its footprints are unmistakeable.With current leader Shinzo Abe unwilling to consider meaningful migration reform as a solution thus far, it's the Motor City writ large and not Godzilla that's looming ominously in Japan's skyline.

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Money Printing Plus: Japan's Other Growth Strategies

Everyone knows of Japanese PM Shinzo Abe's money-printing strategies for combating Japan's seemingly unconquerable deflation. However, it is but one tactic in a multi-pronged strategy to get the world's third largest economy growing again in a noticeable fashion. Tomorrow Abe unveils a raft of other initiatives for doing so. Reuters has a list of expected steps in the so-called "Third Arrow of Abenomics" compiled from various news sources (don't ask me why it's called that).

Of particular interest to me are those concerning free trade agreements and migration. First, let's begin with FTAs. Belatedly keen on not losing its competitive advantage alongside those FTA-crazy South Koreans, it too is supposedly going to embark on an FTA frenzy:

Hit a target of 70 percent of exports covered by free trade deals by 2018, compared with around 19 percent, by pushing the U.S.-led Trans-Pacific Economic Partnership (TPP) and other trade deals with the European Union, China and South Korea, and aim to create an Asia-Pacific free trade area. 

Insofar as Japan has virtually zero multilateral FTAs at present (only partially implemented Japan-ASEAN FTA aside) but a whole host of bilatereal FTAs, let's say it has a lot of work to do if it truly intends to compete with Korea in this respect. With Japan's strong agricultural lobby complicating matters, expect tense negotiations when these products are discussed. That said, it's interesting how Japan is not playing geopolitics if this were truly the case in being willing to join any sort of FTA negotiation whether it be led by the US (TPP), China or whomever.

Another point of interest is opening up Japan to migration. Its population is shrinking, yet it remains easier for a camel to enter the eye of a needle than to be an economic migrant to Japan. Or is that assertion about to be shattered?

Shorten the duration of stay in Japan required for approval of permanent residency to three years from five years to encourage high-skilled foreigners to keep working in the country.

Let's just say that Japan's come up with all sorts of plans to generate growth since 1990 that have since been shelved or have borne little fruit. 

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The IMF is Unfair (Duh): Japan v Egypt

That the IMF has special and differential treatment for developed countries over developing countries is an unoriginal criticism of the institution. For whatever reason, rich donor countries do not get long sermons about fiscal profligacy, burgeoning deficits, and the need for belt tightening. On the other hand, poor borrower countries are given long sermons about fiscal rectitude, out-of-whack deficits, and the need for austerity. In other words, the poor need to bear the brunt of socially dislocating and harmful policies, while the rich go scot-free.

The recent global financial crisis has been an opportunity for the IMF to prove otherwise. As its recently disgraced and departed former leader suggested, this is supposedly no longer the big, bad IMF that prescribed "structural adjustment" as a "one size fits all" remedy to financial crises globally. Hah! To demonstrate continuing unfairness, let's begin with Japan whose national debt is beyond an unthinkable 200% of GDP. Would they receive a gentle warning from the IMF? Heck no--they are being encouraged to run even larger deficits by having the central bank purchase long-term JGBs:

Christine Lagarde has welcomed the huge monetary stimulus plan unveiled by Japan and says it will help to boost global growth at a time when the outlook is already starting to improve...Christine Lagarde has welcomed the huge monetary stimulus plan unveiled by Japan and says it will help to boost global growth at a time when the outlook is already starting to improve.

Could this "IMF [Hearts] Megadeficits" stance have something to do with Japan constantly filling the international lender's coffers?

In November 2008, in the wake of the Lehman collapse, then prime minister Taro Aso – now finance minister and deputy to prime minister Shinzo Abe – offered the IMF up to $100bn in temporary funds, while calling on other member countries to inject additional permanent capital. And when the IMF asked member states for more capital last year to boost its firepower, Japan was first to commit. Its $60bn pledge was also the largest from any country, helping to lift the total loans available to the IMF above $1tn.

“When the global economy faced its darkest hours, you stood by your fellow global citizens,” Ms Lagarde told a Tokyo forum last July. Japan’s actions, she said, had helped “stave off an even more dire global economic collapse”.

Yes, whatever--on to a national debt that's 300% of GDP (with IMF approval to boot). From Japan as a prime example of a rich nation that gets a free pass, let's turn our attention to Egypt as a repeat customer that gets a bum rap. I am certainly not a fan of the Islamist regime currently in power that has next to no understanding of world politics, international finance and so forth, but the contrast in how it is treated is stark given that the heart of the matter in both cases deals with fiscal irresponsibility. Does the IMF gladly advocate pump priming and other neo-Keynesian measures for Egypt? No. Instead, it's a Washington Consensus-like diet of killing subsidies, austerity and so forth that's held up a $4.8B deal:

Egypt is stalling on the terms of a $4.8 billion International Monetary Fund loan to help it fight a deepening economic crisis, and no deal is likely while an IMF team is in Cairo, diplomats said on Sunday. The IMF mission is set to leave on Tuesday after nearly two weeks of talks, and negotiations may continue on the sidelines of this week's IMF ministerial meetings in Washington, they said...

An IMF programme could help stabilise Egypt's economy in the rocky transition to democracy since the 2011 overthrow of former President Hosni Mubarak, unlocking up to $15 billion in aid and investment to improve a dismal business climate. But diplomats and politicians say Islamist President Mohamed Mursi had yet to endorse required tax increases and subsidy cuts that prompted him to halt implementation of an earlier IMF deal in December, two weeks after it was agreed in principle. "The mission said it is waiting until now for the government to present some of the roadmap related to reforming the economic system," Abdullah Badran of the hardline Islamist Nour party told Reuters after meeting the IMF team...

The news article also has interesting commentary on Egypt being too important to fail in Western eyes resulting in less harsh conditionalities than would otherwise be demanded by the IMF. That said, many Egyptians are clamouring for the ever-elusive conditionality-free loan. At this point, even the IMF is baulking at the suggestion. Just as before, I expect it all to end rather badly. Nevertheless, I am flummoxed by the suggestion that Japan can get away and is even encouraged to run megadeficits while Egypt gets the stick while its people are clearly suffering the effects of economic turmoil.

It's an unfair world where deficits matter for some but not for others according to international financial institutions, but hey, it was like that long before I got here. 

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A Bit Less Lame Than US-EU FTA: Japan in TPP

After the "who cares" of the US-EU FTA, here's something marginally more significant. There is no doubt that Japanese PM Shinzo Abe is seeking American favour in a very big way. The postwar US-Japan relationship has been characterized by lopsided deals to the former's advantage. Think of limiting Japanese exports to the US--consumer electronics, automobiles, you name it--when American producers could not compete. It was probably only a matter of time then that the LDP would lead Japan down this same road in US-led negotiations to enlarge the  Trans-Pacific Partnership (TPP).

We now receive word that PM Abe will make an announcement concerning Japan's TPP plans next week. It appears it's the same old, same old as far as the US goes in fearing Japanese auto exports in the event they are able to be exported tariff-free to the US. And just like then olden days when Japan was willing to strike unfair economic bargains since the US effectively left it with limited means of protecting itself militarily, the latest is that Japan will voluntarily accept the retention of tariffs on automobiles. It's the 80s all over again (I can hear Steve Perry over the radio right about now):

Japan will let the United States continue imposing tariffs on Japanese vehicles for now, a decision expected to help Prime Minister Shinzo Abe announce Japan's participation in talks for the Trans-Pacific Partnership free trade arrangement. The United States currently imposes a 2.5-percent tariff on imported passenger vehicles and a 25-percent tariff on trucks. Although a major premise of the TPP is to eliminate all tariffs in principle, Tokyo and Washington are maneuvering to allow exemptions of certain products that are politically sensitive at home.

Actually, there is a quid pro quo in play of Japan not lowering its towering agricultural supports--which begs the question of why you would even bother to join a free trade deal when it is riddled with escape clauses and opt-outs...

One reason Japan is compromising on the U.S. tariff is because Tokyo wants to maintain tariffs on various agricultural products. But if the U.S. tariffs are kept in place for very long, the merits to Japan of joining the TPP would weaken. For that reason, Japanese government officials want reassurances from Washington that the auto tariffs will eventually be eliminated.

Keep in mind that the economically moribund but politically influential US auto industry still fears Japan after all these years, while Japan's agricultural lobby remains fearsome and continues to be a key constituency for the LDP:

Yet amid the push from the top, resistance is expected from lobby groups in a potential stumbling block to a quick agreement. The “Big Three” U.S. carmakers of Chrysler, Ford and General Motors have reportedly opposed Japan’s entry into the TPP, arguing that the Japanese auto market continues to “lock out” U.S. vehicles.

Ahead of Japan’s summer upper house elections, Abe faces pressures from not only rice and other farmers, but also medical and consumer groups worried about the effects on the nation’s universal health care system as well as food safety. Defending the TPP, Abe told lawmakers on Wednesday that the universal insurance system was “a building block of Japan’s health care system and will never be shaken up....Relaxing individual food safety standards has not been negotiated either,” he added.

Consumer protection advocates have urged the Japanese government not to ease standards on food imports, including U.S. beef, labeling requirements on pesticides and genetically modified foods. Japanese farmers are also reportedly anxious to win exemptions from the TPP’s “zero-tariff” principle. According to agricultural cooperative JA Group, the elimination of tariffs would threaten Japan’s $48 billion in agricultural produce, making nearly all Japanese wheat, sugar and beef uncompetitive and wiping out a quarter of all rice production. The long-cherished national aim of “food security” would also be threatened, with the farm ministry estimating that reliance on imported food would increase to 90 percent from the current 60 percent.

Even if American and Japanese bigwigs do announce that Japan will now participate in TPP negotiations, I hardly think it's a done deal. Not only do they need to sort matters out bilaterally with contentious issues alike automobiles and agriculture, but the overall negotiations are also proceeding rather cautiously.

Ultimately, I think the official Chinese press reads things right: the main purpose as far as Japan is concerned is not trade creation but reinvigorating security ties with the US at a time of heightened security tensions with China over territorial disputes. Those North Koreans are looking pretty crazy too, so the perceived need by Japanese leaders to suck up to Uncle Sam via his pet project is understandable even if it has little to do with trade creation.

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Too Long in Exile: ADB's Kuroda Next BoJ Guv'nor?

It is curious that Western financial new media is finally paying attention to Asian Development Bank President Haruhiko Kuroda. Despite being the head of the most prominent regional lender in our part of the world, he has so far toiled in relative obscurity outside Asia. How obscure is he? His Wikipedia entry consists of two sentences despite being the ADB chief since 2005 [!] Talk about the stereotypical faceless Asian bureaucrat and you may have his photo in there somewhere.

Still, he is now being portrayed as the front-runner in becoming the next Bank of Japan chief since his views are similar to those of PM Shinzo Abe. Besides, he is said to command the support of the opposition DPJ as well, paving the way for his nomination. Kuroda is quite Asian in the sense that he does not hesitate from actively intervening in the markets if the situation calls for it:

As Japan's top financial diplomat from 1999 to 2003, he aggressively intervened in the exchange-rate market to weaken the yen to support the country's export-reliant economy, a sign he will be keen to keep any sharp yen rises in check. He has called for the BOJ to achieve its 2 percent inflation target in two years by pumping money into the economy through unorthodox steps, such as expanding government bond purchases and buying shares. Inflation in Japan has rarely reached 2 percent since the early 1990s.

Ironically, Kuroda is believed by many in the ruling LDP to be ideal for the job precisely because he has spent so much time cottoning up in absentia to the movers and shakers of Asia and beyond as ADB president. Despite gaining next to no attention elsewhere, rest assured that the Manila-based lender commands considerable clout in the Pacific Rim. Quoting PM Abe:

“(We want) someone who can articulate (Japan’s policy) in the inner circle of international finance and win understanding (from foreign countries),” he said. “Someone who can use theory to counter criticism against monetary policy is needed.”

...and here:

Mr. Kuroda’s global experience — as vice minister for international affairs at Japan’s powerful Finance Ministry from 1999 to 2003, and as president of the Manila-based Asian Development Bank starting in 2005 — could also help Tokyo navigate foreign criticism that its monetary policies are intended to weaken the yen to give Japanese exporters a competitive edge.

I ultimately believe that Japan will be aiming to weaken its currency regardless of who takes the job of BoJ governor; it's just that they believe the diplomatically assured Kuroda will be more able than his putative competitors to smooth ruffled feathers. See, for instance, the Koreans complaining about Japan re-engaging in currency war by using unprecedented measures to reflate the Japanese economy.

There is, however, a catch: Japan's grip on the Asian Development Bank has actually increased in recent years despite its fading economic fortunes. Together with the United States, Japan is co-largest shareholder in the institution, but Japanese officials like Kuroda are far more involved in its day-to-day operations. Moreover, China has made limited inroads at the ADB despite surpassing Japan as the region's largest economy. In no small part, Japanese regional influence is strongly conditioned on being able to choose the bigwigs at the ADB. In turn, Kuroda's stewardship of the ADB is believed to be a decisive factor as to why Japan's sway over it remains strong. Pulling him out midway through his second five-year term as ADB president may not bode so well for Japanese influence at the institution:

Abe advisers say Mr. Kuroda's main weakness is his apparent indispensability in his current position—president of the Asian Development Bank, a post he has held since 2005. He is less than two years into his five-year term.

Some Japanese officials worry that if Mr. Kuroda leaves early for the BOJ slot, Japan risks losing the perch it has controlled since the founding of the Manila-based institution in 1966. For Japanese finance officials, the ADB is Japan's equivalent of the World Bank for the U.S. or the International Monetary Fund for Europe—an international financial institution they expect to run, a platform for global influence. Losing the ADB for Japan would be a blow, especially at time of growing insecurity about the country's diminished standing in the region. 

I simply do not think that erosion of Japanese influence at the ADB will happen overnight even if Kuroda is pulled out in a last-ditch effort to reflate Japan's economy. It will remain the institution's top shareholder and Japanese officials will still hold key positions. On the other hand, if Kuroda's successor proves unpopular, you never know if others can muscle in on turf the Japanese have long held to be their own.

2/27 UPDATE: The deed is done. Kuroda has been nominated to succeed Shirikawa.

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Japanese Stimulus: Enough White Elephants Yet?

When it comes to the most pigheadedly wasteful spending to supposedly jump-start an economy, portly and profligate Americans only have one serious rival: the Japanese. Granted, the Japanese have been attempting to escape stagnation for over two decades now instead of America's one. Still, the sheer pointlessness of their entire endeavour is something to behold. In contrast to America's infrastructure which is on par with that of Damascus after the umpteenth rebel mortar assault--the American Society of Civil Engineers gives the US a "D" and estimates $2.2 trillion needs to be spent--Japanese infrastructure is nowhere near as dire.

That hasn't, however, stopped the Japanese government from embarking on massive ("shovel-ready"?) construction projects time and again in the hopes that they will provide the foundations for Japan's recovery. With the LDP back in power, doling out projects to favoured contractors is once again on the agenda, with more train routes, bridges, and highways to nowhere on the drawing board. Throw in various ports and stations used once in a blue moon and you have white elephant projects up the wazoo. As the Reuters article notes, the "challenge" posed by PM Shinzo Abe is spending $100B in 15 months on infrastructure:

"We cannot simply continue to build roads and infrastructure the way we used to at a time when the population is ageing and shrinking," says Takayoshi Igarashi, a public policy professor at Japan's Hosei University who has advised the previous Democrat administration on rebuilding from the 2011 earthquake, tsunami and Fukushima nuclear accident...

Since he took power in December, Abe has earmarked 10 trillion yen ($107 billion) for new infrastructure and upgrades over the next 15 months - half of it funded by government debt. That is equivalent to a quarter of the amount that the Organisation for Economic Cooperation and Development estimates the entire world needs to spend on transport infrastructure each year.

Government spending is a classic remedy for weak growth. But it is one Japan has tried over and over - pouring roughly $2 trillion into concrete and steel since 1990 in a vain effort to resuscitate the economy, now in its fourth recession since 2000. Economists warn that, without reforms to lift Japan's long-term growth potential, more such spending will produce only a temporary jolt that swells a government debt already worth more than double national output...

It's not as if Japan needs yet more infrastructure when there is already much more than necessary to get around?

The world's 61st largest country, Japan has 1.2 million km (745,000 miles) of roads, the world's fifth-largest network. It has 680,000 bridges, almost 10,000 tunnels, 250 bullet trains and 98 airports. Government critics have long derided many as white elephants - unnecessary, costly and environmentally harmful. The airport in Ibaraki, 85 km (53 miles) north of Tokyo, for example, opened in 2010 at a cost of about $225 million as a hub for low-cost carriers. Today, it handles just six flights a day. Construction of the nearly $5 billion Yanba Dam in northwest Japan began in 1967 to help power the needs of a growing population. With Japan's population now shrinking, it remains unfinished 45 years later. 

And there may be hundreds of billions more in spending in store

Yet the money represents only what Abe hopes to spend by April 2014. He has suggested spending similar sums every year for a decade - if he holds onto power that long. With the private sector and local communities expected to match government investment, this would add up to 200 trillion yen ($2.16 trillion) over 10 years - or roughly 40 percent of GDP.

Last, there will be no one to use all this new infrastructure as a shrinking population implies a shrinking workforce. Perhaps there won't even be enough folks to build all these white elephants:

It is not even clear who would use all of the new infrastructure, or even who would build it. Thanks to Japan's low birthrate, the population is declining by more than quarter of a million a year, government statistics show, with its working-age population shrinking at double that pace. According to Health Ministry projections the number of Japanese is expected to fall by nearly a third, to below 90 million, by 2060. That means fewer cars on Japan's roads. Japanese automotive research company Fourin Inc. estimates car sales in Japan will fall from nearly 5.4 million last year to 4.5 million in 2020, and to about 3 million a year by 2040. Japan's construction workforce is also shrinking: today it is a third smaller than in 1997 and building firms are already having trouble finding workers to rebuild areas from the 2011 disaster.

I've suggested that mass immigration [1, 2] is a much more promising solution to reversing Japan's demographic woes and quite possibly its deflationary ones as well, but that's never quite been on the cards. See if all these public works projects make a difference; I honestly cannot see why they will now when they did not before.

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South Korea Declares Int'l Currency War on Japan

Ho hum, another week, another declaration by a non-Western country that it will attempt to staunch the inflow of capital from elsewhere that is driving up the local currency and making imports less competitive. Japan of course started the latest salvo when the LDP regained power and promptly declared that they would use open-ended fiscal and monetary support to get the Japanese economy jump-started after over two decades now of stagnation. (Western nations have long been on this path, having implemented them after the global financial crisis.)

In response, other Asian exporters have been manoeuvring to deal with the ongoing deluge from Nippon. Spooked investors in South Korea have begun pulling out in fear of the authorities taking a more proactive stance in determining the value of the Korean won. I suppose the Korean authorities are pleased with the results of their verbal jawboning thus far of making foreign investors think twice and weakening the currency:

South Korea's threat to impose a broad tax on financial transactions is the first sign of deepening concern in Asia that speculation of competitive currency devaluations is prompting investors to head for the exit. Until then, and because investors had not shown any big signs of concern, Asia's reaction to the tensions centring on the yen had been passive, comprising an asymmetric mix of jawboning and light currency intervention.

The selloff in Seoul markets this week turned into a warning sign. Foreign investors posted their biggest daily stock selloff in 16 months in South Korea and pushing the won, a currency that best serves as a proxy for Asia, to a three-month low. The risk is that the threat of policy action will prompt more market selling, pushing currencies down yet further and raising investor fears of the competitive devaluations that policymakers are trying to avoid.

"Korea is going to be the first domino, and it's that domino effect that the yen's depreciation clearly risks," said Rob Ryan, currency and rates strategist at RBS, referring to the increasing likelihood that Korea announces some form of currency control measure soon. "The real trigger has been the equity market reaction and the outflows from Korea. I think the concerns over intervention are a little overdone just yet, but clearly it is a big risk if the yen continues to weaken..."

The old state-guided development is returning with a vengeance as the government is seeking the cooperation of conglomerates and state-owned firms alike in stemming Korean won strength:

South Korea has understandably been the most vocal of Asian policymakers on the subject of the yen. Heavyweight Korean exporters such as Samsung Electronics Co and Hyundai Motor Co, which compete directly with Japanese electronics and auto companies, have seen their competitiveness eroded as the won increased in value from as low as 15 per yen to near 11.8 over the past six months. Foreigners have sold a net 1.8 trillion won ($1.65 billion) Korean stocks this month. The stock market is down 3 percent so far this year. Foreigners have been buying Taiwanese stocks, but those volumes are far lower than they were in 2012...

The Korean government will tell state-controlled firms to refrain from borrowing abroad and will further tighten rules on banks' currency derivatives trading to ease volatility in foreign exchange markets, Choi said. Seoul was opposed to imposing an outright levy on financial transactions, such as the Tobin tax being debated in Europe. But it would consider similar measures should speculation in the won intensify over time, he said.

There are follow-on effects that may be even direr. China, for one, is South Korea's single largest export market and may not take so kindly if the won is regulated further:

Still, many believe policy risks are rising. Nearly half of Japan's trade is with the Asia-Pacific region and China may not stand pat if Korea imposes currency controls given it is Korea's largest export market. In addition, capital controls have gained some acceptability as a policy response in emerging markets to deal with easy money in the developed world. Even the International Monetary Fund, traditionally a champion of liberalised markets, has conceded that capital controls are sometimes necessary.

I guess the trick is to spook hot money but not real investors who are in it for the longer haul. Where does that divide lie? Hard to tell, but Korea risks negating market sentiment if it goes overboard with these efforts to throw sand into the wheels of international finance and trade. It's not surprising that international currency war has finally hit East Asia--but remember who started it in the first place despite repeated denials.

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The Japan That Can't Export? Its 2012 Trade Deficit

Japan used to epitomize the Asian Exporting Nation, feared around the world for its superior-quality and in-demand products. Those glory days, however, are rapidly receding like the hairline of HRH Prince William the Bald. Most recently, the news was that Japan had a "record" trade deficit in 2013. It actually isn't as dire as the headline sounds since Japan's postwar deficits haven't been remotely American-sized to begin with. Against that scale, a $78B annual trade deficit isn't all that large. But, by Japanese standards, it may be alarming nonetheless as headwinds in generating and sustaining an economic recovery.

Importantly, these are headwinds that won't be going away any time soon as the WSJ describes:

1. Territorial conflicts with China over a bunch of lousy, largely uninhabitable rocks hurting sales of Japanese-branded products in the PRC;
2. Increased imports of energy after shutting down virtually all of its nuclear reactors in the wake of Fukushima;
3. Continued economic malaise in Western consumer markets;
4. A still historically strong yen despite its recent weakening to around 90 yen to the dollar.

To be sure, it is possible that the territorial spat will blow over in a few months. I have also posted about the incumbent LDP being keen on reviving nuclear power plants where possible and building new ones to assuage safety concerns if not. I think the West has seen its better days, but there are other places where Japan may export called...wait for it..."emerging markets". Given the policy of unlimited easing Japan will soon unveil, I think the yen is set to decline as well.

Larger worries, though, concern the niggling fear that Japan's Asian coolness factor has long since been eclipsed by South Korea. Nobody really wants Hitachi and Panasonic TVs anymore; they would rather have Samsungs and LGs. Ditto for the gadget-making prowess of Sony which hasn't had a portable device hit in ages. Last I checked, Western automakers were living in fear of Korean and not Japanese auto imports, too. In soft power terms, the Koreans have improbably taken up the mantle as well via the K-Wave. In other words, all the factors identified above do matter, but ultimately it's Japan's inability to innovate that's causing the most damage to it export prospects.

Heck, maybe they'll even welcome--heaven forbid--migrants injecting fresh new commercial ideas and new consumers into a society that has become moribund in addition to homogeneous.

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"Hurry Up and Die": Japan & the Cost of Eldercare

Former Japanese PM and current Finance Minister Taro Aso has a novel way of dealing with Japan's increasing health care tab that may not resonate so well with their (obviously aging) electorate:

"Heaven forbid if you are forced to live on when you want to die. I would wake up feeling increasingly bad knowing that [treatment] was all being paid for by the government," he said during a meeting of the national council on social security reforms. "The problem won't be solved unless you let them hurry up and die."

Although the phrasing may be very politically incorrect, Japan's tab for caring for the elderly is pronounced and will become only more so given its demographic profile:

To compound the insult, he referred to elderly patients who are no longer able to feed themselves as "tube people". The health and welfare ministry, he added, was "well aware that it costs several tens of millions of yen" a month to treat a single patient in the final stages of life.

Cost aside, caring for the elderly is a major challenge for Japan's stretched social services. According to a report this week, the number of households receiving welfare, which include family members aged 65 or over, stood at more than 678,000, or about 40% of the total. The country is also tackling a rise in the number of people who die alone, most of whom are elderly. In 2010, 4.6 million elderly people lived alone, and the number who died at home soared 61% between 2003 and 2010, from 1,364 to 2,194, according to the bureau of social welfare and public health in Tokyo.

Inarticulacy aside, I think Aso is on to a number of worthwhile points of debate here: First, what he really is addressing that The Guardian and the rest fail to latch on to is the question of prolonging a person's life when they can no longer continue to function in a meaningful way as "tube people." Especially with so many Japanese elders living alone, who makes the decision to (sorry--this may be my Taro Aso moment for the day) pull the plug? Or, can family members veto the decisions of public physicians to do so? Second, the Asian version of the "greedy seniors" argument is more contentious insofar as we are still obligated to care for them instead of, say, following the rather abhorrent American-style habit of putting Mom and Dad out to pasture in some old folks' home. They raised you--and you put them in an "assisted care" facility in return. Such gratitude. That is, do strained national and household finances erode such values? Third, and this is often overlooked, Japan's fiscal woes are inextricably tied to the longevity of seniors. While advances in health care are well and good, there are fiscal implications for people living longer who no longer contribute economically on the public purse.

There are no easy answers, but fumbling for them is probably better than ignoring these questions altogether like certain North Americans who specialize in hiding their heads in the sand.

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Odd Arne Westad on Frosty China-Japan Relations

LSE IDEAS is such a hive of activity nowadays I don't even manage to keep up with what the boss is up to. (Of course he isn't "odd"; it's a Norwegian name!) A few weeks ago I featured his well-received book about China's history of reaching out to the rest of the world since 1750. Fluent in Mandarin, he now has a take on Sino-Japanese relations in the New York Times that is quite critical of Chinese officialdom. (It even reached the "most-read" list a few days ago.) I mainly think this quarrel is a commercial disaster; he goes deeper into the historical tensions that remain unresolved. Given that we've been hosting Chinese Foreign Ministry officials via Chevening scholarship programmes for a few years now, I am still surprised how forthright he is while I would have been...more circumspect about doing so. I suppose academic integrity still counts for something in the highly commercialized world of higher education, and perhaps you don't build a reputation mincing words. There's a lesson in there somewhere.

And yes, Asians should all just get along.

PS: IPE@UNC will probably gloat that he completed his PhD in history at the storied UNC-Chapel Hill.

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Nuke to Thrill: Rekindling Japan's Fission Passion

The taste of love is sweet 
When hearts like ours meet 
I fell for you like a child 
Oh, but the fire went wild...

[The chart above is from Nuclear Tourist.] The return to the status quo ante of Liberal Democratic Party (LDP) leadership in Japan unsurprisingly means the comeback of any number of policies the nation has become accustomed to: healthy agricultural subsidies to key rural constituencies; budgetary and monetary largesse; and, for today's topic, a return to nuclear power. While the incidences at Fukushima power plant illustrated the hazards of operating nuclear plants in the earthquake-prone Pacific Ring of Fire to the rest of the world, bear in mind that there were no direct casualties as a result despite various projections of future fatalities due to radiation exposure. Still, the previous Democratic Party of Japan (DPJ) leadership bowed to public pressure in closing down any number of reactors in the wake of Fukushima. Alike several industrialized economies, Japan had taken to nuclear power in the aftermath of the 1973 and 1979 oil crises, and it took something drastic to shake its belief.

Speaking of a return to old habits that die hard, however, Japanese movers and shakers have experienced discomfort over the implications of doing away with fission. After a string of monthly trade deficits in the wake of the devastating Tohoku earthquake, mercantilist sentiment naturally awoke. What's more, the economic implications of a deficit-running Japan already overburdened with massive debt were difficult to contemplate. It was only natural that the traditionalists would return to what "worked" before once the LDP gained electoral victory. Here is commentary immediately after they won:

Japan's plans to phase out nuclear power and boost reliance on renewable energy are likely to be reversed with the victory of the Liberal Democratic Party (LDP) in parliamentary elections. In voting on Sunday, LDP captured control of the legislature's lower, more powerful house from the Democratic Party of Japan. The Democratic Party, in office since 2009, had set a goal of phasing out nuclear power during the 2030s as part of a new energy policy developed in response to the March 2011 Fukushima Daiichi Nuclear Power Plant disaster. All but two of Japan's 50 nuclear reactors are now idled because of public worries about seismic resistance.

More recently, we too note that the LDP is set to pull off the ol' bait and switch of promising to curb its enthusiasm for nukes. You will not be surprised to note that the LDP is also quite close to the nuclear industry...

In its statement outlining its election pledges, the LDP conceded that its pro-nuclear energy policy had been flawed and apologised for causing the Fukushima nuclear accident. The LDP, which had talked in the past about raising Japan’s dependence on nuclear energy from nearly 30 per cent to as much as 50 per cent, pledged during the elections “to establish a social and economic structure that does not need to depend on nuclear power...”

But “since the Abe administration was formed, their rhetoric on nuclear power has changed quite rapidly”, says Koichi Nakano, professor of political science at Sophia University in Tokyo. “It now looks like the LDP feels it is their duty to promote nuclear energy,” Mr Nakano says...

Given the LDP’s close ties to the nuclear industry and its history of promoting nuclear power, the Abe administration cannot afford to have the public realise that Japan can get along just fine without nuclear power, Mr Nakano says. “I think that is what they are most afraid of,” he adds.

Opinion polls indicate that a majority of the public have a negative opinion of nuclear power. Smart money says the LDP will not champion nuclear power so overtly, but that it will nonetheless roll back the DPJ's ambitions to wean the nation off fission. On the menu, then, are the construction of newer and purportedly safer designs. Not only do they assuage public discomfort to an extent, but they also generate new infrastructure spending that obviously will benefit traditional nuclear industry allies:

Shinzo Abe, who took over as prime minister last month, has given a clear indication that the government is looking to build new nuclear power plants...“The new nuclear power plants we will build will be completely different from the Fukushima Daiichi nuclear power plant which caused the accident, and those that were built 40 years ago,” Mr Abe said in a television appearance this week.

“We are likely to build new nuclear power plants on winning the public’s understanding,” he said. Mr Abe’s comments came after Toshimitsu Motegi, his economy, trade and industry minister, said he would re-evaluate the previous administration’s ban on building new nuclear reactors.

Don't be surprised either if they begin reactivating nuclear plants if they can get away with causing a public uproar. Time, after all, is on the LDP's side: public opposition tends to wane after the triggering event--Fukushima--recedes further and further into the past.

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The Yen Also Falls: To Negative Nominal Rates?

Everything is less than zero - Elvis Costello

I am constantly befuddled by foreign exchange markets since they tend to display even more "irrational" behaviour than stock markets. Witness Japan and its currency. Beginning 1999 or so, Japan has conducted aggressive monetary easing via its zero-interest rate policy (ZIRP) that entails [duh] near-zero nominal interest rates. However, this and quantitative easing (QE) have done little to pull Japan out of its funk since the bubble burst in 1990. I of course think there are lessons to be learned here for Westerners who do the same Stupid Monetary Tricks, but others would say that their situations are different.

No matter; after being the almighty yen for the past several years, we get news that the yen is (slightly) weakening due to the (actually quite conservative and traditionally dominant) Liberal Democratic Party beating the (once upstart but now quite entrenched and equally staid) Democratic Party of Japan in parliamentary elections. News of an LDP victory has sent the yen tumbling--or at least what passes for it in this day and age of mild rather than wild forex swings in Japan:

The yen slumped to its lowest in over a year-and-a-half against the U.S. dollar on Monday as part of a broad skid after Japan's conservative Liberal Democratic Party, which is committed to aggressive monetary easing, won a landslide victory. The LDP surged back to power in Sunday's election, giving ex-Prime Minister Shinzo Abe another chance to take the helm. The LDP and its ally the New Komeito party secured the two thirds majority needed to overrule parliament's upper house, meaning the new government has a greater chance of pushing though its policies.

The LDP being a traditional practitioner of patronage politics, their priorities lie in American-style "shovel ready" projects. It's somewhat ironic; they taught the Yanks all this ZIRP and QE tomfoolery which they are continuing with anyway, and in turn they are imbibing construction-as-stimulus:

The Bank of Japan meets later this week and most analysts expect the central bank will ease policy further. It will most likely increase its asset-buying and lending programme, currently at 91 trillion yen, by another 5-10 trillion yen, sources have said. Abe, who quit as premier in 2007 citing ill health, has called for "unlimited" monetary easing and big spending on public works to rescue the economy from its fourth recession since 2000.

I have always been a connoisseur of sorts of Japanese economic policy. Accustomed to being meek and mild worker ants in the postwar period, they still display their banzai and kamikaze streaks in a few areas alike macroeconomics. How did they manage to run up a public debt that is 200% of GDP which is set to rise even more sharply with the LDP that's responsible for a lot of it? Honestly, I think that the fiscal levers are well and truly overdone. What's there left? Consider once more the "zero-bound" problem:

In spring 1999, ZIRP was introduced but it was constrained by the so-called zero bound problem. Therefore, worsening deflation meant the real interest rate would rise, aggravating recession and hence deflation.   

What the heck else can Japan do? Having "pioneered" the modern implementation of ZIRP, maybe they can try NIRP--negative interest rate policy. That's right; they should target rates at which they punish you for keeping money in a bank. Certainly even such a palliative won't work--those thin tatami mats they roll away during the day won't hold as many squillion yen as king-sized beds those portly Yanks have--but it may be worth a try as implied by yen weakening as of late. At the very least there will be amusing stories of folks hoarding cash.

Desperate times call for desperate measures. Bring on the NIRP! It's the ultimate weapon--unthinkable, even--in international currency war (and more specifically Japan's two-decade-long battle with deflation).

Screw M2, if you know what I mean.

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US v China in FTAs: TPP, Meet the PRC's 'RCEP'

So the FTA battle in rejoined: In the run-up to the ASEAN summit this weekend, here's a feature about (surprise!) another FTA arrangement that should soon be negotiated in the Asia-Pacific. It is no big secret that the United States and China do not see eye to eye about who should take the leadership role in Asia-Pacific economic integration and what form it should take. That both would prefer being the leader in regional integration is obvious, but they too would configure a regional FTA differently. The US would design something favourable to its interests highlighting provisions on--inter alia--intellectual property, competition law, government procurement, labour and the environment. Meanwhile, China would prefer to emphasize all the abovementioned less and concentrate on the more straightforward matter of increasing trade volume.

So, while the US Trade Representative keeps talking up the Trans-Pacific Partnership (TPP) enlargement negotiations in the hopes that more countries would join in, China has now reacted lest it be frozen out of a pan-regional preferential trading arrangement. From the South China Morning Post, meet the Regional Comprehensive Economic Partnership or RCEP:

China will later this month enter talks to create an Asian free-trade bloc covering 28 per cent of world GDP, a reaction to U.S. progress in forming a Trans-Pacific Partnership that excludes China, South Korean Trade Minister Taeho Bark said on Monday.

The RCEP, or Regional Comprehensive Economic Partnership, will be comprised of the 10-nation ASEAN club plus six others: China, India, Japan, South Korea, Australia and New Zealand. Its launch is to be formally announced at the ASEAN summit in Phnom Penh later this month, with a goal of reaching a deal to lower trade barriers across the region by the end of 2015.

Notably, American leadership leaves it in no doubt who the target of TPP is (AKA those PRC trade cheats in so many words):

“We’re organising trade relations with countries other than China so that China starts feeling more pressure about meeting basic international standards,” Obama said in a presidential debate with Governor Mitt Romney two weeks ago.

Backed into a corner, China believes it has no choice but to revive the ASEAN+6. For geopolitical reasons, China would include Australia, New Zealand and India even if its preferred configuration pre-American meddling would be ASEAN+3 (the +3 being China, Japan and South Korea):

Bark said RCEP had grown out of a plan to launch trilateral trade talks between China, Japan and South Korea. Some ASEAN countries, worried about the trilateral initiative, pushed for a wider deal. “China’s position on this economic integration in East Asia was pushed by TPP,” Bark said in a lecture organised by the Centre for Trade and Economic Integration in Geneva.

“In the past, China didn’t want to have ASEAN plus six, they only wanted plus three. Japan preferred ASEAN plus six. China preferred anything without the United States,” he said. “I don’t know how much they hope to get but they want to do it because of the TPP.”

What is the incentive to join China's proposed FTA instead of America's expanded one? Well, aside from being less comprehensive, China is likely to offer attractive carve-outs and exemptions in sensitive industries alike agriculture:

But many developing country members might want to water down RCEP by asking for special treatment. South Korea will demand an exemption to protect its rice farmers, while Japan is also likely to want carve-outs for agriculture. If the signatories’ squeamishness at opening their markets does not devalue RCEP, they might be forced to lower their sights in any case to meet the three-year schedule. If so, RCEP could end up having little influence on regional trade.

The trilateral talks are still expected to go ahead, although the planned launch, originally set for the Phnom Penh summit, is likely to be postponed to later in the year due to a territorial dispute between China and Japan, Bark said.

 Go figure. Based on the principle of lowest common denominator, I think RCEP stands a greater chance of coming true than TPP. That said, China's goal of getting RCEP done by 2015 is certainly ambitious even if it's a less comprehensive deal than TPP no matter what the Chinese call it. Besides, it at least makes more geographic sense than the whole-hearted TPP. In a way, TPP is a fitting advocacy for the US at the current time: a centre-less FTA championed by a discombobulated nation.

PS: After making two posts now featuring their articles, I almost forgot to mention that Hong Kong's premier English-language daily the South China Morning Post is now ungated. You can only preview a number of articles in theory, but still. So, by all means, visit it for fine news features like the one excerpted above.

UPDATE 1: A clear advantage of RCEP is that all ASEAN member countries are on board already (alongside China, obviously). From the Chair's Statement from the 2011 meeting when Indonesia was the host, p. 13:

45. Recognizing the benefits of sound and sustainable economic relations with  partner countries, we reinforced  our commitment  to  maintain the centrality and proactive role of ASEAN in relation to external parties. We  welcome the ASEAN Framework for Regional Comprehensive Economic Partnership that establishes an ASEAN-led process by setting out  principles under which ASEAN will broaden and deepen its engagement with FTA/CEP partners and subsequently with other external economic partners towards a regional comprehensive economic partnership agreement. This agreement includes  trade  in  goods, trade in services, and  investment as well as other areas related to trade, investment and economic cooperation. We envisage that this partnership agreement will provide a framework under which ASEAN and its external partners can address trade and investment issues that may emerge in the future.

UPDATE 2 (Nov. 21): Lest you think I overstate the competition to sign up Southeast Asian nations to trade deals, the US has now inked a "U.S.-ASEAN Expanded Economic Engagement (E3) Initiative" that aims to smooth the way for non-TPP participants in ASEAN to join the Trans-Pacific Partnership. Or, that's how it should work out in theory according to the White House:

Furthermore, by working together on these E3 initiatives, many of which correspond to specific issues addressed in trade agreements, the United States and ASEAN will lay the groundwork for ASEAN countries to prepare to join high-standard trade agreements, such as the Trans-Pacific Partnership (TPP) agreement that the United States is currently negotiating with ten countries in Asia and the Western Hemisphere.  

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Sony in China: $375M Price Tag of Japan Hatred

This is just a brief follow-up on a post I made a few weeks ago on the territorial disputes in our part of the world spilling over into commerce. For instance, insofar as the Chinese leadership could use a convenient scapegoat right now for the PRC's slowing economy, what use is there attempting to soften public ire aimed at Japanese firms? Amidst the factory shutdowns, consumer boycotts and thrashed Japanese-brand products, the plight of one Japanese firm is illustrative of how things are getting pretty bad for its compatriots operating in China:

The company cut its overall full-year sales forecast by 200 billion yen on Thursday. Japan's Sony Corp said Thursday that anti-Japan sentiment in China and weakness in the world's second-largest economy is likely to dent the company's sales by 30 billion yen ($375.3 million) in the year ending next March 31.

It is much easier to destroy than to build trade ties that have taken literally decades and decades to establish, and I think we are being reminded of this almost daily now.

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