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Turkey
A Perfect Mess May 03, 2007 By Serhan Cevik | London The military’s foray into politics has introduced an unexpected risk. Turning points usually become apparent in retrospect, but it was clear that the 2001 crisis in The latest political saga hurts institutional convergence towards Social polarization increases the risk of ending up with a fragmented parliament. Secularism is not under threat in Turkey, as the number of people opposing a regime based on religious principles stands at 76% of the society and 68% even among those who identify themselves as ‘Islamist’ (see The Litmus Test for Liberal Democracy, April 9, 2007). Nevertheless, fear-driven politics remain a major source of social polarization, especially after recent developments and with the prevailing distrust within the society. The best way to move out of the impasse and to shorten the period of uncertainty, without creating further tension, is letting the voters decide on the future trajectory of politics. Of course, while bringing the election date forward is the right move at this stage, it would not necessarily deal with the underlying fragilities. This is why I think that political dynamics now imply a higher degree of uncertainty. No one was expecting to see the AKP winning as many seats as it has today, but recent developments may have also altered the voting behavior in surprising ways. The Turkish economy is strong, but a higher degree of uncertainty could become a drag. I remained an unwavering ‘optimist’ in the past five years, but I am now having second thoughts for the first time. Although I still believe that the Turkish economy stands on stronger footings and do not expect an outright military coup, the risk of ending up with a fragmented parliament is now higher, and this could become a drag. However, my main worry is about the possible erosion of confidence if
Japan
Modest Slowdown Alert (Follow-up) May 03, 2007 By Takehiro Sato | Tokyo Concerns for future growth, despite strong growth in the past Based on data available as of April 27, we estimate that the economy will show real annualized growth of 3% in January-March, outpacing Some uncertainty around consumer spending in summer Concerns have emerged first of all on the consumer spending front. According to a bunch of industry data and the Household Survey, the boost to March consumption from consumers buying up spring merchandise early was short-lived and the April-June launch-pad is likely to be lowered. In April, it seems some department store sales figures are showing an ongoing decline in sales, driven by sluggish clothing sales. Disposable income is likely to decrease from June, due to an effective increase in resident tax, and above all a tax increase looks set to dampen spending levels in July-September. Another factor to keep in mind is that once the Upper House election of July 22 is over, regardless of the election outcome, consumption tax issues that have already been signed off on are likely to come to the fore again as top government priorities, along with the issue of revising Production over the summer could show increasing signs of a temporary correction Industrial production in March was a negative surprise, falling considerably short of expectations. Excluding automobiles, production by processing and assembly industries either fell or was much lower than METI forecasts. In terms of the gap between actual production and the estimated production index, IT-related activity was particularly weak. In electronic component and device industries, the inventory ratio continued to increase steadily, presenting the risk of a correction. In terms of the inventory and shipment ratio for individual types of electronic components, there was an improvement for LCD panels; meanwhile, semiconductor ratios are still low overall, but are edging up steadily and in some cases are higher than their levels in 2004, when the economy entered a soft patch. As if to underline these trends, DRAM and other semiconductor prices have been weak to date. Production cuts in January-March are expected to be followed by a production increase in April-May, as part of the introduction of new mobile phone models. However, as production has been lackluster in comparison to the estimated index, particularly in IT-related areas, we still see the risk of production falling short of forecasts. Expected production cuts in April, particularly for IT-related products, are linked to the slowdown in the Incidentally, we assume that in January-March the Prices — another economic indicator — are in negative territory Price movements, which are another indicator of economic health, have not been overly positive, reflecting economic trends and the YoY decrease in gasoline prices. In March, Policy and market implications As we have outlined, we think there is a risk of a slight slowdown in summer. Nonetheless, in its outlook report issued on April 27, the BoJ generally maintained its bullish growth scenario and forward-leaning stance on monetary policy. However, when we look at the report in more detail, we sense some level of hesitation by the BoJ across the board, possibly due to changes in some areas of demand components, as we describe above. For example, it has taken a half-step back in terms of the wording it has used regarding its future monetary policy management. In the report’s conclusion, the BoJ says it will adjust the level of interest rates gradually in accordance with improvements in the economic and price situation. This compares with its previous outlook report in October, when it said will adjust the level of interest rates gradually in light of developments in economic activity and prices. In other words, we interpret its latest wording to mean that it will adjust interest rates in accordance with improvements in the economy and prices, but if there are no improvements it will leave rates unchanged (i.e., we think it has shifted from a forward-looking to a backward-looking stance). Thus, we think the market is unlikely to bring forward its expectations of a third rate rise on the back of the BoJ outlook report, given the slight change in the BoJ’s wording, the increasing uncertainty around the global economy, and the decrease in prices. While it seems quite likely that prices will remain in negative territory in the near term, we think the market is still unlikely to respond to the BoJ’s rate hike campaign. We expect fairly bullish GDP data on May 17, but we do not think this will be enough of a catalyst to bring forward rate hike expectations, as the market has already factored in the strong growth of the quarter. We would prefer not to be entirely pessimistic for the following reasons. First, in regard to consumer spending, the weather can affect the timing of spending, but we do not see this factor as important in terms of the overall spending trend. More important in our view is the outlook for employment and personal income. Regarding employment, the recent drop in the job offers to applicants ratio is somewhat of a concern, but this is partly the result of the authorities taking a tougher stance on monitoring job offer content, rather than a reflection of the true economic situation. In real terms, we expect the labor market to remain tight, partly due to structural factors such as the increase in employees reaching retirement age. Regarding wages, there is little upside from a macroeconomic viewpoint due to ongoing restructuring by small to medium-sized companies and the public sector, as well as demographic changes. Nonetheless, the increase in employment is steadily pushing up total employees’ income, in terms of ‘wages x employment’. Second, regarding a rise in the consumption tax, we think that the government is likely to present this to the public in its most palatable form, which is as a tax aimed at achieving greater social security. In other words, we think that the opposition parties and the public are prepared to pay more tax to build a social security base that can cope with changes ahead. If the government commits to using additional consumption tax revenue to meet the minimum needs of its ageing population, including their healthcare needs, a rise in the consumption tax could have a positive impact on spending through the non-Keynesian effect of boosting future expectations (increasing permanent income). However, this assumes adequate public confidence in fiscal and social security policy. In any case, although it is easy to come up with reasons for being pessimistic, pessimism could change to optimism, depending on how things play out. The scenario we are backing is that growth slows slightly in summer, but that the economy resumes steady growth thereafter amid ultra-low inflation.
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