What Global Saving Glut?
Jul 05, 2005
Stephen Roach (New York)
Another new theory has been concocted to rationalize unsustainable excesses. The notion of a “global saving glut” has been proposed -- and quickly accepted -- as a new and important excuse for mounting global imbalances. It is also thought to explain why interest rates are so low -- resolving the great conundrum of our time by stressing the mismatch between excess capital and limited investment opportunities. Finally, this theory implies that global imbalances are more benign than malign -- drawing into question the urgency for any rebalancing. I don’t buy the global saving glut hypothesis, and here’s why.
At the heart of this debate is America’s massive current account deficit. Both history and theory tell us that such outsize external imbalances are not sustainable. Yet, so far, the time-honored current-account adjustment has yet to play out. There have been many attempts in recent years to come up with new theories to explain why: The so-called Bretton Woods II hypothesis is one such strain of thinking -- essentially arguing that a mercantilist Asia must now be seen as part of an expanded dollar bloc that is more than willing to provide the external funding for an income- and saving-short US consumer (see M. Dooley, D. Folkerts-Landau, and P. Garber, “An Essay on the Revived Bretton Woods System,” September 2003). More recently, former Fed Governor Ben Bernanke has pushed the debate even further, famously suggesting that a global saving glut is a key factor behind America’s gaping current account deficit (see his 10 March 2005 speech, “The Global Saving Glut and the US Current Account Deficit”). In Bernanke’s view, the US is effectively doing the world a favor by absorbing a surfeit of saving that is sloshing around increasingly integrated global capital markets. The saving-glut hypothesis has quickly become the rage, endorsed by policymakers, a broad consensus of investors, and the popular media -- the latest press endorsement being the July 11 cover story of Business Week. Experience tells us that new theories such as these almost always crop up during periods of financial market excess. Look no further than the New Paradigm thinking of five years ago. In this same vein, it pays to heed the everlasting wisdom of Graham and Dodd, who some 70 years ago looked back on the excesses of the Roaring 1920s and wrote, “…[T]hat new theories have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair, are all in strict accord with the age-old tradition.” Conjecture about a global savings glut would make Graham and Dodd cringe. In my view, not only is the notion of excess global saving hard to support with empirical evidence, it is also hard to support from a theoretical point of view. IMF statistics provide our best gauge of global saving. In 2004, the IMF’s global flow-of-funds framework put the world saving rate at 24.9% of global GDP. While that marks the second consecutive yearly increase in this measure, it is only 1.9 percentage points above the 23% norm that prevailed from 1983 to 2000. Yes, the global saving rate has edged up from its longer-term average, but this hardly qualifies as a glut. Moreover, this fixation on saving ignores the other side of the macro ledger -- an equally significant increase in global investment. In 2004, the IMF estimates that world investment rose to 24.6% of world GDP -- also a second consecutive annual increase and only 0.3-percentage point below the world saving rate. So where’s the glut? Macro theory, as well as our double-entry macro accounting system, stresses that saving always equals investment. That identity remains very much intact today -- hardly supportive of the notion of an over-abundance, or a glut, of global saving that would both resolve the interest rate conundrum and explain the absence of a US current account adjustment. Alas, the devil is in the detail -- or, in this case, in the shifting composition of global saving and investment. Two main forces have been at work in reshaping this mix -- namely, a record plunge in the US saving rate matched by an equally large increase in the saving rate of the developing world, especially Asia. On the IMF’s basis, the US gross saving rate fell to 13.6% of GDP in 2004. (Note: Gross saving rates include depreciation charges -- unlike the net saving rates that I have long underscored, which exclude such charge-offs). That represents a 3.3 percentage point plunge from the 16.9% average that prevailed over the 1983 to 2000 period. By contrast, the IMF puts the saving rate in the developing world at 31.5% of its GDP in 2004 -- up a whopping 6.5 percentage points from its 1983 to 2000 norm of 25%. Reflecting the sharp increase in Chinese saving, developing Asia has led the way on the saving front; its overall saving rate is estimated to have surged to 38.2% in 2004 -- up dramatically from the 28.8% norm of the 1983 to 2000 interval. The mirror image of this pattern shows up in the shifting mix of the global disparities between saving and investment. In 2004, US gross investment exceeded gross saving by 6.0 percentage points of GDP, whereas in Developing Asia, saving exceeded investment by 2.7%, led by China. Surplus saving was also evident last year in Japan (3.7% of its GDP), Germany (3.6%), and, to a lesser extent, Latin America (1.2%). The balance between any nation’s gross saving and investment is basically the functional equivalent of its current account position. Saving deficits translate into current account deficits, whereas nations with surplus saving positions run current-account surpluses. All this simply restates the rather obvious point that I have noted ad nauseum over the past several years -- that the world is now beset by record disparities between those nations with current-account deficits (mainly the United Sates) and those with current-account surpluses (mainly Asia). The problem is not the overall state of global saving or investment, but the tensions that have opened up between deficit and surplus nations. The imperatives for a rebalancing of this disparity remain urgent, in my view. There may be a deeper and potentially more sinister meaning behind the saga of the global saving glut. In my view, it is being used as a foil to deflect attention from one of the world’s most serious imbalances -- the excess consumption of America’s asset-dependent economy. In his treatise on the saving glut, Ben Bernanke goes on at length to dismiss the connection between America’s saving shortfall and its current account deficit. He stresses, in particular, the seemingly incongruous relationship between America’s fiscal balance and its external shortfall -- noting that the US current account deficit widened in the late 1990s as the federal budget moved into a rare position of surplus. What Bernanke conveniently leaves out of this discourse is the plunge in the personal saving rate over this same period from 4% to 1% on the back of a powerful wealth effect brought about by the equity bubble. In a similar vein, he all but dismisses the even more worrisome substitution of property-based wealth effects for income-based saving in recent years. In fact, he actually reverses the causality of these asset effects -- arguing that they should be treated as “endogenous” by-products of the global saving glut and the associated search for return, or yield. In other words, according to this line of reasoning, America’s asset bubbles are innocent victims of global circumstances rather than visible signs of domestic markets and US consumers that have gone to excess. That the leading apostle of this new theory -- Ben Bernanke -- was, until recently, a governor of the Federal Reserve is all the more curious. In my view, no one has a bigger stake in dismissing the perils of the Asset Economy than its architect, the Fed. This brings up an alternative explanation to the savings-glut thesis: It hinges on the role of the US central bank. By condoning the equity bubble of the late 1990s, a case can be made that the Fed set in motion a post-bubble defense strategy of extraordinary monetary accommodation that all but insured a steady stream of “echo bubbles” -- from bonds and credit to emerging-market debt and property. Given the shortfall of labor income generation evident in this jobless and wageless recovery, US consumers have turned to asset-driven wealth effects as both a supplement to saving and as the principal means to fund the greatest consumption binge in modern history. By anchoring interest rates at the short end of the yield curve at close to zero in real terms, this same excess monetary accommodation not only supports overvaluation in asset markets but also enables homeowners to go deeply into debt in order to extract purchasing power from assets in order to fund the US consumption binge. By focusing on the saving glut, Bernanke conveniently offers a revisionist history and theory that all but exonerates the Greenspan Fed from any culpability in spawning the world’s unprecedented imbalances. Such a mindset ignores the mounting pitfalls of yet another post-bubble shakeout -- this one dominated by the downside of overvalued property markets and the concomitant unwinding of a potentially lethal debt cycle. All this is not to deny one very important aspect of the global saving glut story -- the surplus of saving that exists throughout Asia and parts of Europe. In my view, this is traceable to a seemingly chronic shortfall of domestic private consumption -- from Japan and China to Korea and Germany. While the reasons behind this trend are as diverse as the economies themselves, the common thread is a lack of job and income security brought about by ongoing restructuring (Japan), reforms (China), or the threat of both on still rigid economies (Germany). But that raises the possibility of an even greater challenge for the United States: As restructuring and reforms run their course in nations with current account surpluses, their excess saving should eventually be absorbed and translated into renewed emphasis on consumption. That would then make it all the more difficult for America to fund its massive current account deficit at today’s asset prices and foreign exchange value of the dollar. Implicit in the saga of the global saving glut is yet another effort at scapegoating -- in effect, pinning the blame on the world’s savers while exonerating American consumers and the US central bank from fostering mounting global imbalances. Unfortunately, by failing to face up to its own excesses, the United States does itself and the rest of the world a huge disservice. I’ve said it from the start: Global rebalancing is an urgent and shared responsibility. The sooner the world seeks a collective resolution of its problems, the less likely a disruptive endgame.
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Taking Stock
Jul 05, 2005
Richard Berner (New York)
It reads like a script from Byron Wien’s 10 Surprises: At midyear, oil prices reached $60/bbl, 10-year Treasury yields fell to 4%, the dollar rallied 4-7% on a trade-weighted basis, equity prices were flat, inflation was low but creeping higher, and in my view the economy was resuming growth at trend or faster. Against that seemingly improbable backdrop, it’s time to evaluate our calls, decode what went right and wrong, and decide whether to make changes. At the top of my list for diagnosis is the interest rate call, as long-term yields continue to defy our projected increases. I readily acknowledge that there are legitimate bull and bear arguments, but as I see it, the forces that could push US yields higher are still in play. Here’s why. First, why have yields declined? There are several possible reasons, all of which have been widely discussed: Renewed confidence that inflation will stay low, fears of weak growth, a reduced “term premium,” a global savings glut, and incipient pension demand for long-duration assets. In my opinion, three of these are important: Inflation concerns have ebbed, the Fed’s measured tightening pace has restrained term premiums and volatility, and the demand for duration seems to be growing. But I think upside inflation risks still dominate. In addition, I think the change in the US balance between saving and investment — apart from any excess of savings outside the US — still points to higher real yields here. And finally, that incipient demand for duration is likely to be met with new supply, so its influence on yields will fade. Let’s start with inflation. There’s no mistaking why the inflation premium in long-term yields has declined since March, by 40-50 bp as measured by 5- or 10-year break-even inflation in the TIPS market. Core inflation has receded by similar magnitudes as measured over three-month spans either by the Consumer Price Index or the personal consumption price index (market-based), from 3.3% and 2.6%, respectively, to 2.2% and 2.1%. Both surveyed and TIPS-market-based measures of longer-term inflation expectations have receded from their recent peaks in March; the latter measured by 5-year, 5-year forward break-even inflation has declined by 40 bp to 2.3%. And with slower global growth, cyclically-sensitive price measures have also decelerated sharply over the past three months, with the ISM price diffusion index plunging by 22.5 points to 50.5% in June and core intermediate producer prices decelerating to 0.8% in the three months ended in May. In my view, however, the case for upside inflation risks is still intact. I think statistical quirks in housing quotes have recently pulled core inflation, especially measured by the CPI, below its trend. Despite the dollar’s recent strength, prices for both imported non-auto consumer goods and low-tech capital goods are still accelerating; both rose to 10-year highs in the year ended in May. Moreover, despite slower global growth, slack in the US economy is dwindling. Low-tech industrial capacity excluding motor vehicles is actually lower today than it was five years ago. As a result, moderate growth in production has lifted such operating rates 550 basis points in the past two years back to their long-term average of 79% — and climbing. Energy quotes are rising again. With crude quotes hitting new highs, I am obviously concerned about the impact on US and global growth, but there is also scope for renewed pressure on energy-using materials. Finally, the labor cost picture is gradually deteriorating as productivity growth slows and labor markets tighten, potentially adding to future pressure on core inflation (for details see “Inflation Model Uncertainty” and “Has US Inflation Peaked?” Global Economic Forum, June 3 and June 21, 2005, respectively). There’s more. Real, risk-free yields beyond the 5-year maturity at 1½-2% are lower today than in 2002 when the US recovery was still very much in doubt. It’s fashionable today to argue that although US economic performance may not alone warrant such low real yields, a glut of global savings — partly the product of weak demand abroad — is holding yields here below what they otherwise would be. In other words, some argue, the gravitational pull of lower global yields will continue to depress their US counterparts. Proponents of that view take the dollar’s strength since the beginning of the year as evidence of a portfolio shift in that direction. I have a tiny bit of sympathy for this argument, both because global capital markets are becoming more integrated and because Asian authorities and OPEC producers are passively recycling net export receipts into those markets. But I think it puts too much emphasis on global developments with three key assumptions. It assumes that US and overseas debt are extremely close substitutes for each other. It assumes that US-overseas cyclical and structural economic and financial differences matter little for US yields. And it assumes that global capital flows evidenced by a stronger dollar will influence US yields more than the domestic allocation of saving and investment. In my view, all three assumptions are suspect. There are still good reasons for investors to differentiate between US and overseas sovereign debt based on differences in economic policies and political risks. In addition, I think that yield differentials should reflect cyclical and structural productivity, growth and inflation differences. In that respect, the saving glut argument in my view confuses a portfolio shift into US assets with one triggered by monetary policy and interest rate differentials. A portfolio shift into the US would strengthen the dollar and narrow US-overseas yield spreads. In contrast, I think US-overseas growth and inflation differentials are promoting divergent paths for US and overseas monetary policies, which favors both wider US-overseas yield spreads and a stronger dollar. Finally, I believe that rising corporate external financing needs — in turn the product of slower growth in corporate cash flow and a resumption of double-digit gains in corporate capital spending — will soon put upward pressure on real yields. The nonfinancial corporate “financing gap” has gone from slightly negative to nearly 2% of nonfinancial corporate GDP over the past year, and a further substantial increase is coming, likely to 3% or more, bringing with it new corporate issuance. New corporate supply is also eventually likely to mute the impact on long-term yields of duration demand from pension plan sponsors and others with asset-liability duration mismatches. That hasn’t happened yet, and may not happen quickly. But it’s coming as CFOs with such gaps realize that the new debt won’t change their capital structure or cost of capital, because investors and rating agencies already increasingly regard unfunded pension obligations as debt, so the publicly-issued debt will simply defease that liability (see “Implications of Rising Pension Contributions,” Global Economic Forum, June 13, 2005, and the report by my UK colleagues David Miles and Melanie Baker, “Real Yields, Pensions, and Shifts in Demand for Bonds,” July 4, 2005). For market participants, I understand completely how painful it has been to buck the trend towards lower yields by sticking with the implications of such macro analysis. But now I believe another inflection point for markets is at hand. I expect that long-term yields will eventually reflect the gradual rise in core inflation to 2¼% this year and 2½% next year. And I think that real yields will finally rise, and diverge from those abroad, reflecting US-overseas growth, productivity and return differentials. There are, to be sure, risks in both directions. I cannot rule out that slower growth in China and further declines in commodity quotes would push US yields lower, as perceptions about global growth and inflation subside somewhat further. But I also believe that today’s yields contribute to financial stimulus and thus upside risks to US growth and inflation. As a result, with market participants convinced that yields won’t rise meaningfully and suspicious that yields could fall further, I think the upside risks to yields are far more significant than are those pointing to declines.
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It's Still About Oil
Jul 05, 2005
Andy Xie (Hong Kong)
Summary and Investment Conclusion I visited European investors last week. Oil surfaced as the most important factor on investors’ minds. The strong interest in China’s macro situation was partly about the oil outlook. I conveyed the message that overcapacity had surfaced in China, fixed investment would slow next year, and economic data would demonstrate the decelerating trend in the next six months. The majority of investors believed that the Chinese government had the power to keep the economy strong and would do so until the 2008 Olympics. Oil is a typical bubble with many new investors mixing with speculative investors. Because both oil supply and demand are not very elastic, speculative demand could effectively push up oil prices when excess capacity is small. Rising prices could create sufficient profits for speculators to compensate for the cost of slowing oil circulation. The bubble will burst when demand slows sufficiently to create enough excess capacity to overwhelm speculative demand. Asia Pacific accounts for 29% of global oil consumption and is slowing fast, partly due to high oil prices. The demand for oil is softening in Asia, and the days of the oil bubble are numbered, in my view. The Bullish Bias in Europe I visited 10 cities in Europe to see investors last week. With the exception of Dutch investors, most European investors were bullish or turning bullish about Asia, growth, and oil. The basic premise was that China and India would continue to grow rapidly due to their competitive advantages. Their demand would push up commodity prices. Technical factors partly drive the bullish sentiment. After meteoric rises in oil prices, the sector has become very large in most indices that investors follow. The most valuable companies in the US, Europe, and Asia are all oil companies, similar to the TMT sector in 2000. Thus, the momentum in this sector could make a big difference in investment performance. Unless the trend reverses convincingly, it is difficult for investors to pull out of oil. The outperformance of oil in a low-return environment has prompted some traditional investors (such as pension funds) into the oil market by buying long-term futures contracts. The idea is that, while China and India may be cyclical in the short term, their high growth rates in the long term should support higher future oil prices. This is essentially an idea to front-run China and India — before they get rich, own what they will want. Speculative investors have played a more important role in driving up prices. As volatilities in financial markets have shrunk, the oil market has stood out as a place with a lot of volatility. Speculative capital has gone disproportionately into the oil market. As oil demand and supply are relatively inelastic, speculative demand could overwhelm the excess capacity in the industry and make the prices go up quickly. The profits from the price appreciation could more than offset the cost of slowing down oil circulation — a result of speculative demand. The China Factor China is at the center of the bullish sentiment on oil and other commodities. The massive increase in Chinese demand for commodities in the past three years has not disappointed. European investors were quite late in the commodity game. On this trip, I discovered that the Swiss were just warming up to commodities. When so many commodities were making historical highs, it was hard to imagine that it was the right time to warm up to the sector. Like investors elsewhere, European investors viewed China’s growth momentum as a secular phenomenon. There was enormous faith in the ability of China’s government to keep the economy strong as it wishes. It was widely believed that the Chinese government would be able to keep the economy strong until the 2008 Olympics. I gave the message that overcapacity had become serious in China and its investment cycles would turn down soon as a result. China’s potential growth rate is 2.3 times that of the global economy. But it has been growing much higher since 2002 due to overheating. Overheating has grossly exaggerated China’s commodity demand. When the Chinese economy reverts to the mean, which, I believe, is already under way, the demand for commodities should be much weaker. This distinction between cyclical growth strength and secular growth potential is a view not widely shared in Europe. Most investors interpreted China’s recent growth momentum as mostly secular. Thus, if China slows down over the next 12 months, as I expect, it could be a surprise to European investors. The Push Factor Europe’s own bleak prospects are a major factor in the enthusiasm of European investors towards commodities, China and Asia, I think. While visiting 10 cities in one week could not allow an in-depth understanding of European issues, it gave me a snapshot. Europe looked poorer to me than one year ago. Most Europeans were quite pessimistic about Europe’s future. Job security was the issue on everyone’s mind. Concerns about immigration are widespread. Many Europeans appear to want to hang on to their entitlements rather than to accept pro-market reforms. Indeed, market (forget about capitalism) has become almost a dirty word in some quarters. It struck me that Europe was living off its inheritance. The discussions I had and other observations left me with a sense that not enough thought is being given to the future, and it occurred to me for the first time that Europe could become a poorer place in the 21st century, similar what happened to Latin America in the 20th century. In such circumstances, Europe would not be positive for either stocks or bonds. The returns on the former would be constrained by anti-market policies and the latter by poor government finances. European investors should look aggressively for investment opportunities outside of Europe, in my view. This push factor may explain the enthusiasm in Europe for investment opportunities in China-related themes. It could also lead investors into a bubble. The enthusiasm of European investors for American technology stocks in 1999 and 2000 did not end well. The current enthusiasm for commodities may have a similar ending. The Oil Bubble Won’t Last A bubble persists because it usually creates profits or paper wealth in the short term to boost demand. The resulting strong economy could keep the bubble going. Property bubbles are the best example: they can boost an economy through income, wealth and profit channels at the same time. That is why property bubbles appear most frequently and last longer than other bubbles. The oil bubble, however, pulls down the economy. Its demand feedback is so negative that such a bubble cannot last very long. So far, the global property bubble has offset the negative effects of high oil prices on demand. However, with the exception of the US, property markets have stopped rising or have begun declining. Thus, the negative effect of high oil prices is becoming more palpable now. Asia Pacific accounts for 29% of global oil consumption and appears to be slowing. China’s overheating has generated sufficient demand to offset the negative effect of high oil prices for the region so far. However, China has begun to slow. Its import demand is cooling. Without the China offset, current oil prices could push a number of Asian economies into recession soon. The oil demand from Asia Pacific may decline from hereon. Demand weakness could open excess capacity sufficiently to overwhelm speculative demand. Thus, speculators should be concerned about the Asian economic outlook, in my view. The China slowdown scenario is not accepted by the market yet. When the data from China establish a downward trend, the oil market could unwind.
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The Silence of Lambs
Jul 05, 2005
Serhan Cevik (London)
Macroeconomic normalisation presents an opportunity to deal with structural bottlenecks. The record-breaking privatisation of Turkish Telecom confirms our long-held view that the normalisation of the country’s macroeconomic landscape is having a favourable effect on asset valuations. Of course, Turkey is not devoid of structural weaknesses, but the atmosphere allows the development of an aggressive reform agenda addressing economic and institutional bottlenecks and paving the way for productivity gains in the agriculture sector. Given the importance of rural votes in election cycles, the sustainability of prudent policies requires the rejuvenation of rural regions and the ensuing improvement of income distribution (see Agriculture — The Ultimate Test for Structural Reform, June 2, 2000). Agriculture may not be important for output growth, but it is crucial for employment. The share of agriculture declined from 50% of GDP in the 1930s to 11.2% last year. However, this is not just an evolutionary shift towards a post-industrial economy that we would be more than happy to see. Rather, the farming sector, employing 35% of the workforce, has become less efficient, compared to European and other developing countries. In our view, institutional factors (such as the inheritance law) and short-sighted policies have resulted in a fragmented farm structure that is now a major burden. For example, Turkey’s total factor productivity growth surged from 0.5% in the 1990s to 5% in the past three years, but this notable performance conceals inefficiencies in agriculture. The productivity of small farms, accounting for 70% of cultivable land, stands at 24.8% of that of industrial sectors. Turkey’s total livestock production has been on a steady downward trend. The deterioration is not limited to structurally distorted areas, like grain production, but has affected all sub-sectors. For instance, livestock numbers declined by 49.8% between 1980 and 2003. Even though the prolonged unrest in rural areas (in the east and southeast) reduced production, institutional problems and policy mistakes have been the main culprit, in our view. Notwithstanding a substantial increase in subsidies in the 1990s, the farm sector accounted for a mere 2.8% of private fixed investment spending, compared to 44.8% undertaken by manufacturing firms that employ less than 18% of the workforce. Unfortunately, the failure to develop modern farm enterprises and increase value-added has kept the entire economy below its true potential. Turkeyhas the land and human capital to become a leading centre for organic farming. Turkey has a competitive advantage in labour-intensive crops such as fruit, vegetables and flowers, but the great majority of farmers are accustomed to growing subsidised products. However, there are already encouraging developments taking place, even without any ‘encouragement’ from the government. The number of organic farmers, for example, increased from 1,947 in 1996 to 13,044 in 2003. With product variety improving from 26 crops in 1996 to 179 in 2003, the country’s organic food exports reached US$50 million per annum. This is still a miniscule figure, but highlights a great potential, especially given that the export-to-production ratio is about 95% and the global organic food market is growing at an annual rate of 25%. Alleviating rural poverty is the key to improving income distribution. The rural poverty rate increased from 34.5% in 2002 to 37.1% in 2003. This is significantly higher than the poverty incidence in urban areas, and reflects lower productivity and informality. Given the composition of human capital in rural regions, it would be unrealistic to expect today’s farmers to become factory workers, bank tellers or gardeners in the country’s growing tourism industry. In our view, the authorities must develop creative initiatives, including new subsidy schemes, that would ease the transition from a patronage-based model to more rational practices designed to increase productivity-enhancing technological capabilities and encourage greater scale and higher value-added in the agriculture sector.
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Trade Momentum Rebounded from April Lows
Jul 05, 2005
Deyi Tan (Singapore) and Daniel Lian (Singapore)
Trade momentum rebounded from April lows Export growth rebounded from the 17-month-low of 9.8% in April to 10.9% YoY in May. This brought exports for the first two months of 2Q05 10.3% higher than the same period a year ago. However, exports contracted 2% MoM, suggesting that the apparent May rebound was likely underpinned by comparatively lower base effects. Meanwhile, imports defied the usual down cycle pattern, expanding at a faster pace than exports for the first time in 5 months at 14.1% YoY or 2.9% MoM. Consequently, the trade surplus narrowed to RM6.5bn, compared to RM8.5bn in April. Continued divergence between manufactured products and energy exports Exports of electrical & electronic products (+8.2% YoY), chemicals & chemical products (+3.7% YoY) and machinery, appliances & parts (+12.4% YoY) continued to register relatively subdued growth, while crude petroleum (+41% YoY) and refined petroleum products (+26.9% YoY) continued to surge. Meanwhile, a countrywide breakdown shows that exports to the US (+16.9% YoY), Hong Kong (+10.3% YoY) and India (+31.7% YoY) remained strong, while those to China (-1.7% YoY), Japan (+4.2% YoY) and the EU (+4.9% YoY) lagged behind. Imports strengthened across the board in May The uptick in imports was on the back of stronger momentum across all three categories of end-use. The greatest expansion came from capital goods imports, which rose 26.4% YoY (vs. +15.4% YoY in April). Meanwhile, intermediate goods, which made up 71.1% of total imports, expanded by 12.5% YoY (vs. +2.5% YoY in April) and consumption goods registered a reversal from April’s contraction of 2.4% YoY with 10.5% YoY growth in May.
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Postal Reform
Jul 05, 2005
Robert Alan Feldman (Tokyo)
What’s New The Postal Reform bill passed the Lower House. It will now be sent to the Upper House for consideration. Conclusion: Passage of Postal Reform has now become highly likely, despite the narrowness of the margin in the Lower House. Market Implications Economic benefits from postal privatization will be very large. The biggest benefit comes from funds management. A huge pool of funds will be managed under market principles, improving discipline on the use of capital. Efficiency of postal operations will also likely rise, and could trigger major business opportunities for many industries, as the postal network is used more efficiently. Risks If the Upper House fails to pass the postal reform bill, PM Koizumi will likely dissolve the Diet, and the LDP will likely lose the subsequent general election by a large margin. Stable government is unlikely to return soon. Arithmetic and Political Logic Now that the Postal Privatization bill is safely through the Lower House of the Diet, attention will turn to whether the bill can pass the Upper House. The politics of this Upper House are somewhat different, but I think the answer is the same: the likelihood of passage is very high. This conclusion is the result of a combination of arithmetic and political logic. The arithmetic begins with analysis of the Lower House vote today. Precise figures are not available on the party composition of the “dissenters” in the LDP, but it is safe to assume that all came from the LDP. I have attempted to estimate how many LDP members voted no, and how many abstained. (Totals of yes, no, and abstention are published, but the party breakdowns are not. I assume that all opposition members voted no, and that all abstentions came from the LDP.) What would happen if the number of no votes and the number of abstentions from the LDP in the coming Upper House vote were in the same proportions of the LDP seats? On this assumption about voting patterns, there would be only 114 yes votes, and 120 no votes, with 8 abstentions. With 104 no votes locked in from the opposition already, the total number of no votes would be 120, and the bill would fail. This is precisely the outcome that is not likely to happen, in my view. What would passage in the Upper House require, relative to this pattern? There would have to be either (1) a shift of 4 votes from no to yes, or (2) a shift of 7 votes from abstention to yes, or (3) some combination of these two. Three Reasons that Upper House Passage Is Likely Is such a different pattern of votes likely in the Upper House? I think the answer is yes. First, Upper House seats are safer than Lower House seats, and thus the pressure on candidates to depend on postal system employees for votes is somewhat lower. Supporting this point, the next election for the Upper House is in July 2007, time enough for the postal debate wounds to heal. Second, there are 51 Lower House LDP “dissenters” (the 34 no-voters and 17 abstainers) who are under threat of being disowned by the LDP in the next general election. They face a much greater threat if the bill does not pass the Upper House, on the following logic. PM Koizumi may be able to forgive the 51 dissenters as long as the bill passes the Upper House. If it fails to pass the Upper House, he will be forced to dissolve the Lower House, and ask the people for a judgment on the LDP. The LDP can hardly give party endorsements to the 51 dissenters, and thus they face a greater likelihood of defeat. Therefore, ironically, the 51 dissenters have a strong interest in seeing the bill pass the Upper House. They will doubtless make their position known to their fellow party members. Curiously, the dissenters will actually have a good position if the bill passes the Upper House. They can retain their seats, but still claim to their disappointed constituents that they did everything possible, and blame the result on Koizumi. Third, the LDP leadership in the Upper House is in danger of losing control of the chamber entirely, if there is a Lower House dissolution. A general election would almost certainly result in a major defeat for the LDP. In this case, there would be no incentive for the Komeito to maintain its coalition with the LDP. The Komeito would most likely form a coalition with the Democratic Party of Japan — and leave the LDP in the lurch. Thus, for the LDP leadership in the Upper House, a failure to pass the Postal Reform bill is risking political suicide. The Talented Hawk Hides His Claws Finally, it is prudent to interpret the media coverage of the voting result with care. The media have a distinct bias toward sensationalism, and will likely make much ado about the closeness of the Lower House vote. Some have already said that the vote shows Koizumi’s weakness. In fact, I think exactly the opposite is the case. Indeed, the anti-reformers had been saying for weeks that they had more than enough votes to defeat the bill, but they failed to do so. Also, it is politically questionable for Koizumi to trumpet success at this point, since such trumpeting would likely anger the anti-reformers in the Upper House. His goal is to pass the bill. Not gloating is part of the strategy. Thus, while the margin of passage of the Postal reform bill in the Lower House was narrow, the prospects for passage in the Upper House are very good, in my view. Thus, another milestone on the road to reform has been passed. For my earlier analyses of the economics and the politics of Postal Reform, please see the following papers: (1) “Postal Privatization: Political Drama, Economic Revolution,” October 8, 2004. (2) “Postal Reform Failure and the Triple Meltdown,” February 17, 2005, (3) “Crunch Time for Postal Reform,” March 28, 2005).
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