05.04.08

Japan’s Economy — Balancing Traditional Export Oriented Economy and Consumerism

Posted in Economic Analysis, Oceania Cruise at 11:16 pm by Administrator

On the Oceania Cruise, we stopped in Hiroshima, Kobe and Okinawa. Kobe offered insights into Japan’s economy. The area has always been a major sea-port and the new airport juts out into the Bay. We took the latest, fastest and most energy-efficient version of the bullet train to Kyoto. It is another symbol of the technical prowess of Japanese engineering. Compared to the German, French or Spanish fast trains, the Japanese one is quieter; the connections between cars are hardly noticeable; the overall feel is smoother. While the latest version of the bullet train goes 5% faster, it uses 35% less energy due to aerodynamic features.

The major change that I noted since my last visits to Japan is the increase in upscale spending. Kobe has always been noted as a sophisticated city and the department stores in the city center carried all of the world noted luxury brands. You could see that orinary citizens dress well and wear brand-name accessories.

Japan emerged from the doldrums of the 1990’s by making some tough economic reforms. The government streamlined both regulation and the bureaucracy. The banking sector wrote off many bad debts — including real estate loans that had been on the books for years. (I would encourage our economic policy makers in the US to look at that example. The current trend is to postpone the day or reckoning in the US.) All of the changes and reforms coincided with the global upswing from 2004-2007 and Japan prospered. Most importantly the ratio of exports to GDP rose significantly during the period. Japan had returned to its traditional export-led economic model, except that this time it was without the heavy-handed “guidance” from the Ministries in Tokyo.

As I noted before, Japan is spending its money on consumption, moving it a bit closer to the US model. The Japanese are now enjoying the fruits of their hard work. In the pure economic sense, saving too much (Japan over the past fifty years) is a drag on the economy as well as saving too little (the US since the 1980’s). Allowing the markets to find balance is everything in economics

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Japan’s Economy — Balancing Traditional Export Oriented Economy and Consumerism

Posted in Economic Analysis, Oceania Cruise at 11:16 pm by Administrator

On the Oceania Cruise, we stopped in Hiroshima, Kobe and Okinawa. Kobe offered insights into Japan’s economy. The area has always been a major sea-port and the new airport juts out into the Bay. We took the latest, fastest and most energy-efficient version of the bullet train to Kyoto. It is another symbol of the technical prowess of Japanese engineering. Compared to the German, French or Spanish fast trains, the Japanese one is quieter; the connections between cars are hardly noticeable; the overall feel is smoother. While the latest version of the bullet train goes 5% faster, it uses 35% less energy due to aerodynamic features.

The major change that I noted since my last visits to Japan is the increase in upscale spending. Kobe has always been noted as a sophisticated city and the department stores in the city center carried all of the world noted luxury brands. You could see that orinary citizens dress well and wear brand-name accessories.

Japan emerged from the doldrums of the 1990’s by making some tough economic reforms. The government streamlined both regulation and the bureaucracy. The banking sector wrote off many bad debts — including real estate loans that had been on the books for years. (I would encourage our economic policy makers in the US to look at that example. The current trend is to postpone the day or reckoning in the US.) All of the changes and reforms coincided with the global upswing from 2004-2007 and Japan prospered. Most importantly the ratio of exports to GDP rose significantly during the period. Japan had returned to its traditional export-led economic model, except that this time it was without the heavy-handed “guidance” from the Ministries in Tokyo.

As I noted before, Japan is spending its money on consumption, moving it a bit closer to the US model. The Japanese are now enjoying the fruits of their hard work. In the pure economic sense, saving too much (Japan over the past fifty years) is a drag on the economy as well as saving too little (the US since the 1980’s). Allowing the markets to find balance is everything in economics

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04.29.08

The Contradictions of Modern China

Posted in Economic Analysis, Oceania Cruise, China at 4:28 am by Administrator

On the surface, China remains a Marxist-Leninist state. Yet the economic system has lost most of its ideological content. Here are a few scenes:

At the Temple of the Jade Buddha, monks chant while the courtyard is filled with ordinary people — old and young — burning incense sticks that waft their prayers above.

The Maserati dealer shows off a beautiful yellow sports coupe and competes with the Ferrari dealer next door. Meanwhile, outside the street vendors, those peasants from the countryside without work visas for the City, make a few Yuan shining shoes or selling trinkets. Meanwhile down the road, the Shanghai Aesthetic Surgery Center does a booming business.

The City boasts incredible vistas with daring buildings. Yet if you look up towards the sky, the view is obscured with hundreds of wires. Wireless communications have supplanted the old telephone lines but what to do with the legacy of the communist rule?

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Shanghai - Bursting at the Seams

Posted in Economic Analysis, Oceania Cruise, China at 3:25 am by Administrator

Sailing into Shanghai’s harbor was an amazing sight. By the entrance from the ocean, the banks of the Yangtze River were littered with the relics of the heavy industry investments of the Central Planning years under Mao and early years of Deng Xiao Peng. As we grew closer to the City, newer construction started to appear. When we rounded the final corner, the massive and daring buildings of new Shanghai appeared.

Shanghai is busy and bustling. As you look up and down busy Nanking Road, people are everywhere, shopping and carrying out business. Along the way, buildings from the Mao era and from before the revolution are being gutted and restored. New highrises are going up by the dozens.

Beside the new Shanghai, there are symptoms of other social problems. The Chinese authorities attempt to slow the rural to urban migration by requiring work visas before the peasants can look for work in the City. As a result, there is a vigorous informal economy. Along the waterfront by the Bund and Nanking Road are hundreds of street vendors selling all manner of goods. We got a number of “Mao” watches with the face of the Chairman and a waving hand — taken from the wind-up Mickey Mouse watches we had as kids.

As with all the cities on our Asia journey, traffic is overwhelming. New freeways are going up but there are already too many vehicles. One can smell the exhaust everywhere. While the new cars must meet strict standards, every effort is made to keep older vehicles running, particularly for delivery vehicles.

Shanghai is the symbol of new China - rapid growth, highly populated and facing major environmental challenges.

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03.26.08

Day 1 Oceania Cruise — Beijing & Tianjin

Posted in Economic Analysis, Oceania Cruise, Trade Policy at 12:28 pm by Administrator

It is certainly busy times for China. Flights across the Pacific remain full, despite the run-up in oil prices. Those on board the flights include businessmen and more importantly China is a burgeoning tourist destination (in fact a bargain compared to Europe in these days of the plummeting dollar).

From the airport to the port at Tianjin revealed the explosion in infrastructure spending. There were literally hundreds of apartment buildings or new factories under construction. The construction at the Tianjin airport zone continues, supplementing the dozens of existing structures.

The new apartment boom continues apace with 20 and 40 story structures rapidly going up. In the mean time, the shoddily constructed structures of the Mao era, particularly in Tianjin, are being abandoned and torn down.

The highway from Beijing to the port was chockablock with trucks carrying containers to the port for export to the US and the rest of Asia. There were almost as many trucks coming from the port. China has increasingly become an assembly location for consumer goods being designed in Korea and Japan. Both countries already have major automotive assembly operations in the country and the streets have brand names from US, Germany, Japan and Korea. (While I was Consul General in Hamburg, I had a tour at the VW factory in Wolfsburg and then VW CEO Piech underscored the growing importance of the Chinese market to their global operations.)

As we went down the highway, I was thinking about the volume of new construction and what might happen if there is a slowdown. These apartments are being built on the assumption that the economy will continue growing at a 10% growth path. There are two possible scenario for the slowdown – exports to the US fall as the US economy cools or China pulls the reins in on the economy after the Olympics. One only needs to remember the decade of the 90’s after the Japanese boom collapsed. So, how will China’s new found banking system deal with an eventual slowdown?

Sphere: Related Content

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01.26.08

Wild Week in the Markets Underscores Interconnectedness of World Economy

Posted in Economic Analysis, Taxes & Tariffs, Exchange Rates at 12:31 am by Administrator

What was interesting about the tumult of the last week in global stock markets is that the concerns began in Asia about worries over the direction of the US economy. That led to Asian investors pulling out of US stocks and European investors followed suit. The US markets were closed on Monday but it was clear to the Fed and US Treasury Department officials that with the drop around the world, the US markets would face a tsunami of sell orders at opening bell. The Fed reacted quickly by cutting some rates by 3/4 of a point and the President and Congressional leaders advanced their timetable on a stimulus package. Was it enough? We’ll have to see but the markets are still clearly worried at week’s end. My personal opinion is that there are short term liquidity issues that the markets are reacting to and long term growth issues as the US consumer has cut back on spending due to changes in the mortgage market. The equity line of credit piggy bank, which financed most of the growth in consumer spending since 2002, has been broken. It’s going to take a while for the consumer to pay down debts to start consuming again.

But let’s think through the international business implications of the policy changes in Washington this past week. The cut in interest rates made short term financial investments in the US less attractive versus the Euro or Yen zones. That will keep the dollar weak, now at $1.46/Euro. That will be good for US exporters and for foreign tourism coming to the US. That will also make it more difficult for European countries to expand their economies via the traditional export markets. I would expect the ECB to also cut rates, even with the fears about inflation.

The economic stimulus package will also affect the other major trading partner of the US, namely China. With the Yuan tied to the dollar, the interest rate cut will have little effect. However with a larger percentage of US income being spent on imported goods (estimated to be 21% today versus 19% in 2001), the stimulus package will increase demand for goods from China and part of the stimulus package will leak out of the economy.

Bottom line — Weak dollar, boost for US exports to Euro-zone and boost for Chinese exports to US.

What is your opinion - post a comment!

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01.09.08

How much has the export driven strategy led to the boom in China.

Posted in Economic Analysis, Exchange Rates at 5:34 am by Administrator

I found the article in the January 3 Economist entitled “An Old Chinese Myth” to be quite fascinating. It takes a contrarian view that increases in domestic demand, not the export surplus, have led to the economic boom in China.

Begin Quote: “MOST people suppose that China’s economic success depends on exporting cheap goods to the rich world. Headline figures show that China’s exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China’s economy would be hit much harder by an American downturn than it was during the previous recession in 2001. …If exports are measured correctly, however, they account for a surprisingly modest share of China’s economic growth…

“Jonathan Anderson, an economist at UBS, a bank, has tried to estimate exports in value-added terms by stripping out imported components, and then converting the remaining domestic content into value-added terms by subtracting inputs purchased from other domestic sectors.

“Once these adjustments are made, Mr Anderson reckons that the “true” export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets.  Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.”

I have a slightly different take on the process based on my experience in countries like Chile and Argentina which opened their markets to international trade in the 1980’s. An exchange-rate policy that favors exports at the beginning of the process is certainly an important first step. However, in my opinion, the key policy change is that by orienting the country to international trade, an economy can rapidly close the technology gap with the developed world. In doing so, productivity increases and domestic sectors that feed the export industry can also increase production. In a few years, countries that were laggards in technology because of self-imposed isolation can catch up to the most modern production techniques.

One of the issues that critics of globalization seize on is that income gaps widen during this process of modernization. This results from the above processes. The sectors that are open to international trade advance quickly, only limited by the pool of skilled workers, while traditional sectors lag. This is not the fault of globalization but rather a reflection of sectors where the economy has not kept up to date because of low skill levels. The answer is not to slow down globalization but rather to increase investments in education and infrastructure.

China has boomed not from low-wage exports or a “rigged ” exchange rate but rather by moving up the value chain. That in turn has allowed a good portion of the traded-sectors to grow rapidly. The challenge in China, as other economies have experienced, is to bring the non-traded sectors of the economy up to the same levels of productivity.

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01.08.08

Japan’s Consumer Still Reluctant to Spend

Posted in Strategies, Economic Analysis, Marketing at 4:13 am by Administrator

Mark Fuller and John Beck posit in their book “Japan’s Business Renaissance” that Japan’s economy turned a corner the early part of this decade thanks to business restructuring and increased willingness of consumers to spend. Certainly the prime example of restructuring is the automove industry with innovative leaders like Toyota (now number two worldwide) and Honda. The Japanese automakers have done well in creating new products and being at the forefront of clean technologies like hybrids and fuel efficient cars. The innovation has not paid off in stimulating greater purchases by Japanese consumers. Today the AP carried the following story:

TOKYO (AP) — Japan’s domestic auto sales fell to a 35-year low last year as the nation faced high gasoline prices, limited income growth and shrinking demand, an industry group said Monday.

Sales of new cars, trucks and buses declined 7.6 percent to 3.434 million vehicles in 2007, the Japan Automobile Dealers’ Association said in a statement. The figures do not include sales of minicars and minitrucks.

The result, which marked the fourth straight annual decline, was the lowest since 1972, when sales totaled 3.406 million vehicles.

The data showed that the world’s third-biggest auto market is slow to respond to efforts by some Japanese car makers to spark local demand by boosting their offerings of new models. Japan’s largest automaker, Toyota Motor Corp has introduced nine models since last May but estimates a 6 percent drop in its domestic sales in 2007.

The nation’s new vehicles sales in December alone fell 7.1 percent from a year ago to 236,142 vehicles, down for the first time in three months, the association said. And the outlook for the domestic market remains gloomy.

Another industry group, Japan Automobile Manufacturers Association, has put its domestic sales forecast for this year at 3.427 million vehicles - excluding minivehicles - down 0.2 percent from sales for 2007.