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					Japan / Emerging Asia:



          John Walker

   Oxford Economic Forecasting
         November 2003

     Tel: (44) 1865 202828
    Email: jwalker@oef.co.uk
Japan / Emerging Asia   2   Oxford Economic Forecasting
            Good…but not that good
    Seasonally adjusted quarter-on-quarter % changes
                             2002                2003
                     Q1    Q2     Q3   Q4    Q1     Q2                 Q3
   Real GDP          0.1   0.7    1.2  0.4   0.5    0.9                0.6
   Business invest. -1.1 -0.1     1.8  3.6   2.5    4.7                2.8
   Current profits   5.0   3.8    6.9  2.6 -1.8     5.0
   Wage income      -1.0 -0.6     0.2 -0.5 -0.1     0.6              –1.8
   Tertiary sector -0.6    0.5    0.1 -0.4   0.5    0.8              –0.2

   Nominal GDP          0.4   -0.6   0.7   -0.5   -0.1      0.3       0.0
   Industrial output    0.8    3.0   1.8    0.4    0.3     -0.7       1.3
   Real exports         5.4    5.6   1.4    1.9   -1.0      0.3       1.5
   Car registrations    1.2    4.1   3.6    0.7    1.8     -7.2       3.6




Japan / Emerging Asia            3                Oxford Economic Forecasting
                   A mixed performance
 Main industrial sectors (% of total)        % change in output between
                                         2003Q3 & 2002Q3   2003Q3 & 2000avg
 Iron & steel (4.4%)                          +2.0                +3.0
 Fabricated metals (5.7%)                     -2.7               -16.2
 General machinery (12.7%)                    +4.5               -12.9
 Electrical machinery (5.7%)                  +4.0                -7.6
 Info. & comm electronics equip (4.8%)        +2.7               -17.5
 Electronic parts & devices (11.4%)           +13.1               +6.2
 Transport equipment (12.4%)                  -2.6                +6.5
 Ceramics (4.3%)                              -3.3               -14.8
 Chemicals (11.7%)                            -1.2                +0.2
 Plastic products (4.4%)                       0.0                -6.4
 Textiles (3.4%)                              -8.1               -25.7
 Food & tobacco (7.8%)                        -0.8                -3.3
 Other manufacturing (4.4%)                   -1.9               -13.0
 Total                                        +1.2                -5.2

Japan / Emerging Asia                    4                 Oxford Economic Forecasting
     But some things in common…
   • Improving profitability and rising investment…



  Number of Tankan sectors expecting positive growth in fiscal year 2003

  Industry (no. of sectors)        Sales          Profits         Investment

  Manufacturing (17)                 8              15                 11

  Non-manufacturing (10)             5              8                   6




Japan / Emerging Asia                 5                     Oxford Economic Forecasting
Japan / Emerging Asia   7   Oxford Economic Forecasting
Japan / Emerging Asia   8   Oxford Economic Forecasting
Modest turnaround in labour market
    • The greater confidence of firms has led to a modest
      turnaround in the labour market – the unemployment rate
      has fallen this year while the ratio of job offers to
      applicants has picked up. But most of this improvement
      has centred on the service sector – particularly for part-
      time workers, while jobs in manufacturing and
      construction have continued to fall – if not as rapidly as
      in 2002.

    • Companies’ control over expenses have been a key factor
      behind the improvement in profitability over the last year.
      This emphasis is unlikely to go away – keeping downward
      pressure on wages and restraining growth in household
      income and consumption.




 Japan / Emerging Asia            9               Oxford Economic Forecasting
Does the yen breakout change this?
    •   Since the last OEF meeting the yen has broken out, moving
        below 110 for the first time since 2000, spurred on by the G-7
        meeting.

    •   How much has this move threatened the relatively reasonable
        outlook outlined previously? The OEF macro model suggests
        that GDP growth would have been 0.4% higher in 2004 and 0.2%
        higher in 2005 if the yen had stayed at 118.

    •   But on a positive note the domestic economy appears to have a
        greater degree of resilience than we had expected – confidence
        remains at three-year highs. And while exporters had not
        anticipated a stronger yen at the time of the September Tankan
        they held cautious views over export prospects. But exports
        have performed reasonably despite falling sales to the US as
        those to China have boomed.




 Japan / Emerging Asia                 10               Oxford Economic Forecasting
Japan / Emerging Asia   11   Oxford Economic Forecasting
Does the yen breakout change this?
    • However, there remains the danger that the yen will
      appreciate further. In the first three quarters of this year
      the Japanese authorities bought over $123bn of dollars to
      weaken the yen. And reserves increased by another
      $21bn in October despite what was said at the G-7
      meeting.

    • But while this would clearly be damaging to export
      prospects it should not cause Japan to sink back into
      recession. After all the growth of US import volumes is
      expected to be much higher in 2004 than in 2003. A
      greater danger would be unexpected US economic
      weakness or a sudden deceleration in the Chinese
      economy.



 Japan / Emerging Asia            12              Oxford Economic Forecasting
Japan / Emerging Asia   13   Oxford Economic Forecasting
                  China growth rates
                        1995 1998     2002    2003
     GDP                10.5    7.8    8.0    8.5-9
     TFE*               7.6     6.5   12.5    17-19
     Ind VA             14      8.9    13     16-17
     Imports $          14     -1.3    21     40-41
     Exports $          23      0.5    22     32-33
     Electricity        8.9     2.5    13     14-15
     Oil demand                 8.5   -1.8    5.9   9-11

   * TFE = Domestic demand + exports


Japan / Emerging Asia          14            Oxford Economic Forecasting
Imports rising faster than exports
   • Exports are now about 33% of GDP – up
     from 24% in 2000, 20% in 1995 and 15%
     in 1990

   • But imports have risen much faster than
     exports since 2000

   • Imports also about 32% of GDP, up from
     21% in 2000, 18% in 1995 and 13% in
     1990


Japan / Emerging Asia   15        Oxford Economic Forecasting
                        A cautionary tale…
   • MEXICO enters OECD and NAFTA (1994):
     exports and imports rise 20% pa - 1995 balance
     of payments crisis, massive devaluation

   • KOREA enters OECD 1996: exports and imports
     rising 15-20% pa – 1997 balance of payments
     crisis and massive devaluation

   • China enters WTO – exports and imports rising
     20% + pa

   • Shouldn’t we be grateful if China avoids a
     balance of payments crisis?

Japan / Emerging Asia           16       Oxford Economic Forecasting
     China: Capital and trade accounts US$bn
     60                                                                           60
     50                     Total FDI inflows                                     50
     40                                                                           40
     30                                                                           30
     20                                               Total trade                 20
     10                                                balance                    10
       0                                                                          0
     -10                                            Total FDI                     -10
     -20                                            outlfows                      -20
     -30                                                                          -30
     -40                                                                          -40
                          All other capital flows
     -50                (estimate based on B of P                                 -50
     -60                         identity)                                        -60
     -70                                                      -70
        1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
     Source: OEF


Japan / Emerging Asia                    17                     Oxford Economic Forecasting
                        NE Asia: Exports (US$)
    % year                                                            % year
    50                                                                    50

     40                                                                     40

     30                                              China                  30

     20                                                                     20

     10                                                                     10

      0                                                                     0

    -10                                                                     -10

    -20                                                                     -20

    -30                                                                     -30
                          Korea             Taiwan
    -40                                                                     -40
      Jan-98    Jan-99    Jan-00   Jan-01      Jan-02        Jan-03
        Source: Datastream

Japan / Emerging Asia              18                   Oxford Economic Forecasting
Pressure to revalue Yuan mounts
   • Robust Asian growth prospects, large current
     account balances and rising reserves have
     pressured some regional currencies to revalue
     by 10-15% over the last year

   • The anomaly is China, which clings to a fixed
     US$ peg of 8.3 Yuan/US$

   • The more the 2004 outlook is improving, the
     more pressure China faces to revalue

   • So what might China do? This depends on the
     economic outlook and risks.

Japan / Emerging Asia      19           Oxford Economic Forecasting
Japan / Emerging Asia   20   Oxford Economic Forecasting
Japan / Emerging Asia   21   Oxford Economic Forecasting
           External balances (2003e)
                        Reserves Months C/A as %
                         $bn     cover  $bn GDP

     CHINA               350        10    25      1.7
     JAPAN*              550        19   125        3
     TAIWAN              180        17    25        9
     S KOREA             135         9     6        1
     THAILAND             40         6     8      5.5

   * Japan’s foreign assets=$3tr, net $1tr

Japan / Emerging Asia          22         Oxford Economic Forecasting
     China: balance or imbalance?

   • China’s reserves levels not really so high:
     10 months cover versus about 20 in Japan
     and Taiwan (and HK)
   • Capital account risks unknown: saw illegal
     outflows of $50-60bn in 1997-2000, now
     inflows are $20-30bn
   • Trade and current account surpluses not
     that high either and imports are still rising
   • And China has a deficit with rest of Asia –
     unlike Japan. Plus a rising oil deficit.
Japan / Emerging Asia    23          Oxford Economic Forecasting
                   Trade balances 2002

                        ASIA         EU       US

     CHINA*             -67         +10   +90

     US                 -215        -82     n/a

     JAPAN              +33         +17   +61

   * based on China data


Japan / Emerging Asia          24         Oxford Economic Forecasting
           Yuan options: fix or float?

   • Lobbyists asking for 40%
     revaluation – from 8.3 to 6
     Yuan/US$
   • Free float – unlikely
   • Small adjustment possible
   • Wider bands of +/- 10%?
   • Puts Yuan in 7.5-9 range


Japan / Emerging Asia   25         Oxford Economic Forecasting
      Yuan float: settles around 7.7
          Interest rates stay at 5%
   Effects in        2004 2005 2006 2007
   on
   GDP: % loss      -0.5 -1.2 +0.2 +0.6

   OR with
   fiscal action maintaining GDP growth:
   Budget increase 0.7 1.3 -1.2 -0.8
   as % of GDP
   (deficit increase versus base)

Japan / Emerging Asia   26        Oxford Economic Forecasting
       US-China trade: no quick fix
   • Encouraging China to import more in
     general does not help the US much – even
     if China doubles imports, the benefit to the
     US would only be about US$30bn pro rata
   • Discouraging US imports from China may
     be difficult even with a large revaluation of
     the Yuan – price elasticities are small
   • A 10% appreciation of the Yuan may
     hardly change the US-China balance
   • Bilateral deals set to raise US import
     share? Eg aircraft purchases

Japan / Emerging Asia    27          Oxford Economic Forecasting
              Impact of a weaker US$
    Change in:                2004 2005 2006
     $ against Asia only
     US current a/c            10     35    50
     $ versus all major currencies**
     US current a/c            20     75   120
     Assuming world demand stable
     US current a/c            70    150   200
     Assuming price to market + world demand stable*
     US current a/c           230    320   390
   * Best case scenario
   ** 20% on Euro + £, Can$, Yen, Yuan
       other Asia: average 15% revaluation



Japan / Emerging Asia           28             Oxford Economic Forecasting
              Impact of a weaker US$
     Change in:                 2004   2005   2006

     US current a/c               20    75      120
     ASIA current a/c            -25   -40      -35
     EUROZONE a/c               - 10   -30       -40
     UK                         - 15   -30       -40
     CANADA                       -5   -20       -40

     SUM of above             -35    -45     -35*
   * includes some gains for Latin America and other
      emergers

Japan / Emerging Asia      29             Oxford Economic Forecasting
   Growth impact of a weaker US$
                        % loss in GDP growth

     Japan                   0.5 to 1%
     China and Singapore        1-2%
     worst case:
     Taiwan and Korea             3-4%

     versus
     US GAIN                +0.5 to 1%

     US + about 1m jobs, China+Japan lose 2.5m


Japan / Emerging Asia        30          Oxford Economic Forecasting
Japan / Emerging Asia   31   Oxford Economic Forecasting
Japan / Emerging Asia   32   Oxford Economic Forecasting
Japan / Emerging Asia   34   Oxford Economic Forecasting
Japan / Emerging Asia   35   Oxford Economic Forecasting
              GDP Forecasts for Asia
                        2002          2003         2004
     %pa growth
     China              8.0          8.5--9      7.5-to-8.5
     Hong Kong          2.3          2.5--3         4--6

     Japan               0.2          2--3       1.5-to-2.5
     Korea               6.3          2--3         5--6
     Taiwan              3.6         2.5--3        5--6

     Malaysia            4.1           4--5        5--8
     Thailand            5.2          6--6.5       6--7
     Philippines        4.4           3--4         4--5
     Singapore           2.3           0--1        5--8
     India              4.7         5.5-to-6.5     6--7


Japan / Emerging Asia          36                   Oxford Economic Forecasting
    Summarising the risks for Asia
   • Non-economic: regional terrorism, repeat of
     SARS…

   • Country and sector specific issues: eg
     Singapore and Korea still weak versus Thailand
     and China

   • General risk: currencies

   • What will China do?

   • Impact of a weaker US$ on Asia – could leave
     2005 quite a lot weaker….


Japan / Emerging Asia      37           Oxford Economic Forecasting

				
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