Thread: Asian News

apan And China: Two Trade Deficit Culprits

Carl Delfeld, Chartwell Advisor, 02.16.06, 11:00 AM ET





COLORADO SPRINGS, COLO. - According to the Commerce Department, the trade deficit with China was $201 billion in 2005, or 28% of America’s total deficit of $726 billion. Our 2005 trade deficit in petroleum products was an even larger $210 billion, but the China number will certainly get the most political attention and this eye-popping figure is sure to get the China trade hawks riled up. But if you look behind the numbers, the trade imbalance with Japan is likely larger than China.

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Here's why. China customs data indicate that about 60% of China’s exports come from foreign companies manufacturing and assembling in China. Even if we knock this number down to 50%, this is still equal to $100 billion worth of China’s exports last year. According to research from my think tank, ChartwellAmerica, the vast majority of these so-called Chinese exports are controlled by Taiwanese, South Korean, American and Japanese firms.

For example, about 75% of manufacturing output by Taiwanese companies takes place in China. Samsung has 23 factories in China and closed down its last notebook plant in South Korea last year. Japan’s Panasonic has 70,000 employees working in China.

This is why I have been recommending clients have allocations to the Taiwan, South Korea and Japan iShares in order to capture this growth in their global portfolios.

A major reason for Japan’s economic recovery can be attributed to its booming exports to China, of which a major slice goes on to America. China has now replaced America as Japan’s largest trading partner.

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If we conservatively assume that 25% of $100 billion of foreign-controlled Chinese exports are from Japanese companies in China and add that to Japan’s 2005 trade surplus with America of $82.7 billion, this brings the number to $107.7 billion. That's higher than China’s number stripped of its foreign company exports.

The Japan imbalance is often explained by its weak economy and consumer demand, but it is amazing that the deficit has stubbornly persisted and that American firms have still been unable to penetrate the second largest economy in the world. Because of the huge imbalance in wages between China and the U.S., a bilateral trade imbalance seems logical. But why one with Japan where wage levels are roughly comparable to those in the U.S.?

Japan’s weak yen policy is certainly a key issue. Japanese manufacturers are loath to see the yen get stronger as it will put pressure on their pricing advantage.


Even if you are skeptical of the trade data, it is hard to argue that more American exports, particularly of manufactured goods, will not raise American growth rates, lessen our dependence on foreign capital (China’s and Japan’s central banks financed 40% of our 2005 deficit) as well as raise wages. Let’s work relentlessly to open new markets and not be shy about using our leverage as the largest consumer market in the world. Rather than bilateral trade pacts with smaller countries that will have only a small impact on our economy, let’s tackle China and Japan head on.

Meanwhile, back on the home front, the enactment of a flat tax has to be the top priority. It will work wonders to spur economic growth, innovation, higher levels of savings and investment, less dependence on foreign capital and, yes, higher levels of exports.

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor. He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor. Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor.

Ichiro, my apologies for not getting back to you about how I might perceive the future in terms of these markets. I post the article below to provide some backdrop for my comments.

I'm from the school of thought which suggests that there are two economies in our country that do not regress or correlate very much, if, at all. The PHYSICAL economy and the FINANCIAL economy represent these economies. I think the article below is very indicative of what is really transpiring in the "Real" economy. Productivity in this country has been going down for a very long time despite all the myths and jobs are continuing to be exported as a solution for cutting costs and being "competitive". This does not represent positive economic growth as suggested by the parrots on bubblevision. I believe you are wanting me to comment on the FINANCIAL economy which is represented by currency and derivatives of currency as reflected in our debt and equity markets and markets throughout the world that have become very dependent on each other.

I think we're entering a period of extreme volatility in all markets reflecting the fact that globalization is coming to an end where countries begin to focus inward more then abroad. As this process begins to gain more momentum, you will begin to see all markets abroad and here become very roiled to the point where it will be difficult to look at a chart and try to guess the direction. Real value players will be acquiring commodities while the rest will be chasing dreams of the not to distant past and will be very disappointed as this process corrects itself back to an economic model built on savings and real capital investment as opposed to debt and financial investment. Two very different economic models.

I've been in commodities for the past six years and see no reason to change my investment philosophy going forward. For the DOW to reflect real value to date compared to commodities over the last five plus years the DOW would have to be trading in the low to mid 20,000+ range so it has a ways to go and if it should approach these levels I'm betting commodities will more then surpass it in terms of overall return. Here's an interesting correlation or prediction that I will make, if the DOW should approach these levels, unemployment in this country will be at about 12% to 15% reflecting a tale of two very different economies. Good luck with your investment choices.



Forget Iran, Americans Should be Hysterical About This


http://counterpunch.com/roberts02112006.html

By PAUL CRAIG ROBERTS

Last week the Bureau of Labor Statistics re-benchmarked the payroll jobs data back to 2000. Thanks to Charles McMillion of MBG Information Services, I have the adjusted data from January 2001 through January 2006. If you are worried about terrorists, you don’t know what worry is.

Job growth over the last five years is the weakest on record. The US economy came up more than 7 million jobs short of keeping up with population growth. That’s one good reason for controlling immigration. An economy that cannot keep up with population growth should not be boosting population with heavy rates of legal and illegal immigration.

Over the past five years the US economy experienced a net job loss in goods producing activities. The entire job growth was in service-providing activities--primarily credit intermediation, health care and social assistance, waiters, waitresses and bartenders, and state and local government.

US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.

The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is “the envy of the world.” Communications equipment lost 43% of its workforce. Semiconductors and electronic components lost 37% of its workforce. The workforce in computers and electronic products declined 30%. Electrical equipment and appliances lost 25% of its employees. The workforce in motor vehicles and parts declined 12%. Furniture and related products lost 17% of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43%. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15%. Even manufacturers of beverages and tobacco products experienced a 7% shrinkage in jobs.

The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized “new economy” never appeared. The information sector lost 17% of its jobs, with the telecommunications work force declining by 25%. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4%. Computer systems design and related lost 9% of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago.

In five years the US economy only created 70,000 jobs in architecture and engineering, many of which are clerical. Little wonder engineering enrollments are shrinking. There are no jobs for graduates. The talk about engineering shortages is absolute ignorance. There are several hundred thousand American engineers who are unemployed and have been for years. No student wants a degree that is nothing but a ticket to a soup line. Many engineers have written to me that they cannot even get Wal-Mart jobs because their education makes them over-qualified.

AP
Japan Stocks Rebound After 2 Days' Losses

Monday February 20, 10:11 pm ET

Japanese Stocks Rebound After Two Days of Losses on Rekindled Foreign Interest

TOKYO (AP) -- Japanese stocks rebounded Tuesday on rekindled demand among foreign investors and on news that real estate companies are planning to hike office rents, another sign the economy is emerging from deflation.


The Nikkei 225 index jumped 281.05 points, or 1.82 percent, to 15,718.98 points on the Tokyo Stock Exchange at the close of morning trade Tuesday. The index shed 275.52 points, or 1.75 percent, to 15,437.93 the previous day.

Pre-market buying via foreign brokerages before the market opened Tuesday outweighed selling for the first time in 10 sessions, helping to boost investor sentiment after two straight sessions of losses.

A report in Japan's leading business newspaper the Nihon Keizai that the government is likely to upgrade its economic assessment and that real estate firms are planning office building rent hikes is also rekindling hopes that the economy may be coming out of deflation.

The news helped lift banks and real estate stocks. Winners included real estate developer Mitsui Fudosan Co., up 5.25 percent to 2,305 yen (US$19.45), and Sumitomo Mitsui Financial Group Inc., up 2.45 percent to 1.25 million yen (US$10,550).

The broader TOPIX, which includes all issues on the exchange's first section, was up 26.71 points, or 1.70 percent, to 1,598.82 midday Tuesday. Gainers outnumbered losers 1,267 to 353. On Monday, the TOPIX lost 33.22 points, or 2.10 percent, to 1,572.11.

In currencies, the U.S. dollar was trading at 118.53 yen on the Tokyo foreign exchange market at 11 a.m. (0200 GMT) Tuesday, up 0.34 yen from late Monday in London.

The euro fell to US$1.1929 from US$1.1945 late Monday in London.

The yield on the 10-year Japanese government bond rose to 1.5400 percent, up from Monday's close of 1.5150. Its price fell 0.25 to 100.51.

TOKYO, Feb 21 (Reuters) - The dollar hugged well-worn ranges on Tuesday as the market awaited direction from the minutes of the Federal Reserve's latest policy meeting and from U.S. consumer price data.

For clues about the central bank's thinking, the market will scrutinise minutes of the Jan. 31 Federal Open Market Committee meeting, due at 1900 GMT.

"The question is how far the Fed will go with its rate hikes," said a trader at a Japanese bank. "In that sense, consumer price data will be really important."

A strong reading for the U.S. consumer price index in January -- due on Wednesday -- could cement expectations for more rate rises, dealers said.

As of 0100 GMT, the dollar was trading at 118.45 yen <JPY=>, up from around 118.25 yen in late European trade on Monday, but within its 117-119 yen range of the past month.

U.S. financial markets were closed on Monday for a national holiday.

The euro was little changed at $1.1935 <EUR=> and 141.25 yen <EURJPY=R>.

Expectations that the Fed will raise rates at least twice by the middle of the year helped to push the U.S. currency to a six-week high against the euro last week.

Although the latest Fed meeting was chaired by former Chairman Alan Greenspan rather than the current chief, Ben Bernanke, the market is very interested in the views expressed at the gathering, traders said.

Originally Posted by roguewave

Forget Iran, Americans Should be Hysterical About This
http://counterpunch.com/roberts02112006.html

I figured out where all the new jobs are! They're here in San Antonio! Homes are going up like wildfire! Tens of thousands! The jobs are CONSTRUCTION! We're building track houses... for the people who build track houses... for the people building track houses! Did I mention Highway Construction? We're building track houses for the people who build roads and highways, for the people building track houses; to get to the new track houses! It's... PERPETUAL KINETIC growth.

On a serious note... the article was a good read too; and I agree.

Originally Posted by Fivetears

I figured out where all the new jobs are! They're here in San Antonio! Homes are going up like wildfire! Tens of thousands! The jobs are CONSTRUCTION! We're building track houses... for the people who build track houses... for the people building track houses! Did I mention Highway Construction? We're building track houses for the people who build roads and highways, for the people building track houses; to get to the new track houses! It's... PERPETUAL KINETIC growth.

On a serious note... the article was a good read too; and I agree.

Don't forget about the track houses for the construction workers building the new Toyota Plant to supply the trucks to commute the track house workers to build the track houses for the track house builders moving in.

Originally Posted by Gilligan

Don't forget about the track houses for the construction workers building the new Toyota Plant to supply the trucks to commute the track house workers to build the track houses for the track house builders moving in.

You Nailed It! Pardon the pun.
Toyota in NASCAR; Toyota in San Antonio.
Next... Toyota in the Presidential Motorcade in Crawford.

Yen Gains as BOJ's Fukui Gives Positive Signals on Policy Shift

Feb. 23 (Bloomberg) -- The yen rose the most in two weeks after Bank of Japan Governor Toshihiko Fukui said a seven-year bout of deflation has almost ended and the central bank will ``gradually'' raise interest rates from zero percent.

The central bank will ``immediately'' reduce the amount of cash pumped into the financial system, a precursor to raising rates, when it is convinced of sustained inflation, Fukui told lawmakers today in Tokyo. The yen climbed against all of the 16 most-traded currencies that Bloomberg tracks.

``Fukui's comments are positive on a shift in policy, and we may even get rate hikes later this year,'' said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London. ``That is positive for the yen.''

The BOJ, which has kept key rates near zero since 2001, is preparing to end its deflation-fighting policy after fourth quarter growth in the world's second-largest economy outpaced that of the U.S. and the dozen nations that share the euro. The Federal Reserve's key rate is 4.5 percent and the European Central Bank's benchmark borrowing cost is 2.25 percent.

The yen strengthened to 139.92 per euro at 8:30 a.m. in London from 141.23 late in New York. It traded at 117.57 against the dollar versus 118.54.

`Moment of Truth'

``The yen got its boost because Fukui's comments signaled the moment of truth is approaching,'' said Kenichiro Ikezawa, who helps oversee the equivalent of about $1 billion at Daiwa SB Investments Ltd., a unit of Japan's second-largest brokerage. ``An end to the super-easy policy in April could be a done deal, and the bank may raise rates in the last six months of 2006.''

The central bank holds its next policy meeting on March 7-8. The yen may strengthen as much as 116.70 against the dollar today, Ikezawa said.

``Core consumer prices achieving stable gains are close at hand,'' Fukui told a parliamentary committee in Tokyo. The prices, which exclude fresh food and rose 0.1 percent in November and December, will show ``relatively clear gains'' in January, he said.

Three-month euro-yen futures indicate traders are betting the central bank will raise interest rates a quarter-percentage point in the last quarter of this year.

Contracts for December 2006 delivery yielded 0.505 percent, up from 0.415 percent three weeks ago.

The futures settle to a three-month Tokyo interbank lending rate that averaged about 0.51 percent when the BOJ kept its target for lending at 0.25 percent from Aug. 11, 2000, to Feb. 27, 2001, according to data compiled by Bloomberg.

Consumer Prices

Core consumer prices rose 0.1 percent from a year before both in November and December, the first back-to-back gains since April 1998. The government will release January's price index on March 3.

Higher interest rates in Japan may bolster the yen as local investors bring cash home to benefit from higher returns. The yen fell 13 percent versus the dollar last year as Japanese investors bought 16.6 trillion yen ($140.5 billion) of assets abroad.

The economy expanded at an annual 5.5 percent pace in the fourth quarter, up from a revised 1.4 percent in the third, a government report on Feb. 17 showed. The U.S. economy, the world's largest, grew at a 1.1 percent annual rate last quarter. The euro region expanded 0.3 percent in the fourth quarter from the third.

The yen also gained after the dollar failed to break through 119 versus the Japanese currency this week, after touching a high of 118.99. The currency last traded at 119 on Feb. 7.

'Sell the Dollar'

``People are looking for any reason to sell the dollar and buy the yen at a moment,'' said Michiyoshi Kato, vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``The upside of the dollar looks heavy after it failed to break through to 119 in the past couple of days.''

Japanese government bonds also fell after Fukui said the central bank will gradually raise rates to a ``neutral level.''

The yield on the benchmark 1.6 percent bond due December 2015 rose 3 basis points, or 0.03 percentage point, to 1.545 percent, according to Japan Bond Trading Co. Yields move inversely to price.

Investors reversed so-called ``yen carry trades,'' a strategy of borrowing in yen at low Japanese interest rates to invest in higher-yielding assets such as New Zealand bonds, said Keizo Tanaka, senior currency dealer in Tokyo at Resona Bank Ltd. Those trades had helped to depress the value of the Japanese currency.

`Reversal of Bets'

``The yen is benefiting from a reversal of bets on yen-carry trades on concern the New Zealand dollar will fall,'' Resona's Tanaka said. ``The unwinding of that trade also is going on amid speculation the central bank is getting closer to raising rates.''

Traders may buy the euro in anticipation a measure of German business confidence today will hold near a five-year high, bolstering speculation the ECB will keep raising interest rates after an expected increase on March 2.

The euro traded at $1.1908, from $1.1914 yesterday.

The Ifo confidence index, based on a monthly survey of 7,000 executives in Europe's largest economy, was probably 101.5 in February from 102 in January, a level last reached in May 2000, according to a survey of 20 economists by Bloomberg News. The survey reading has averaged 94 in the past five years.

French executives' confidence rose in February to the highest in more than a year and Italian consumers grew more optimistic, suggesting Europe's growth is quickening, reports showed yesterday.

``Should the Ifo figures have a strong showing, it may help push up the euro,'' said Kikuko Takeda, a currency manager at Bank of Tokyo-Mitsubishi UFJ, a unit of the world's largest lender by assets. ``Given ECB officials' recent comments, a rate increase next week is on the horizon.''

To contact the reporter on this story:
Kabir Chibber in London at kchibber@bloomberg.net;
Chris Young in Sydney at cyoung12@bloomberg.net.

Last Updated: February 23, 2006 03:42 EST

Very, very important info.... In summary it states: As the BOJ starts to increase the interest rate in the near future (starting in March 06), it would start with speculators suddently closing positions that are becoming more expensive: dumping Treasuries, gold, Shanghai real estate or whatever else they used yen borrowings to bet on. This already happened back in 1998 on what carry-traders can do. But, i dont think it will happen till the interest rate is raised beyond 3% by BOJ.


Japan's Boom May Explode Yen-Carry Trade: William Pesek Jr.

Feb. 22 (Bloomberg) -- Surprisingly strong growth in Japan is raising many eyebrows, not least those at the central bank anxious to scrap its zero-interest policy.

There can be little doubt 5.5 percent growth between October and December pushed the Bank of Japan further in that direction. Oddly, there are few if any signs global markets are bracing for higher debt yields in Japan.

Why? Japanese rates have been negligible for so long that investors take them for granted. This, after all, is the economy that's cried wolf too many times. The reason investors from New York to Singapore aren't ecstatic about Japan's recovery is the sense we've been here before -- many times.

Yet Japan's latest growth figures should make believers of some of the biggest skeptics. Not only did exports boost the economy in the fourth quarter, so did personal spending -- a sign optimism is spreading to households around the nation.

Rest assured the BOJ is noticing and will soon begin pulling liquidity out of Asia's biggest economy. Once that process begins, there's no telling how aggressive the BOJ will be and what effect it will have on bond yields.

Where Liquidity Begins

There are two reasons Japan's rate outlook is a huge story for global markets. One, yields in the biggest government debt market will head steadily higher for the first time in more than a decade. Two, it may mean the end of the so-called yen-carry trade.

``All liquidity starts in Japan, the world's largest creditor country,'' said Jesper Koll, chief economist for Japan at Merrill Lynch & Co. ``When rates go up here, rates go up everywhere.''

What makes the carry trade so worrisome is that nobody really knows how big it is. For example, the BOJ has no credible intelligence on how many hedge funds, investors and companies have borrowed cheaply in ultra-low-interest-rate yen and re-invested the funds in higher-yielding assets elsewhere.

Nor are the Bank for International Settlements, Federal Reserve Bank of New York or the International Monetary Fund likely to know how much leverage this most popular of trades has enabled banks to build up. Ditto for regulators overseeing the dealings of portfolio mangers around the globe.

Carry-Trade Craze

During the past decade, the yen-carry trade has become a staple for many punters. A popular form of the strategy exploits the gap between U.S. and Japanese yields. Anyone borrowing for next to nothing in yen and parking the funds in U.S. Treasuries received a twofold payoff: the 3-plus percentage-point yield difference and the dollar's rise versus the yen. The latter dynamic boosts profits by the time they're converted back to yen.

Yet as the BOJ raises rates and more investors buy into Japan's revival, the yen is sure to rise, much to the chagrin of carry-trade aficionados. Realization the trade is moving against investors may send shockwaves through global markets.

It would start slowly with speculators suddenly closing positions that are becoming more expensive: dumping Treasuries, gold, Shanghai real estate, shares in Google Inc. or whatever else they used yen borrowings to bet on. The chain reaction would accelerate once the mainstream media jumped on the story.

If all this sounds far-fetched, think back to late 1998, which offers an example of the damage a panic among carry-traders can do.

Remember 1998

In October of that year, Russia's debt default and the implosion of Long-Term Capital Management LP shoulder-checked global markets. The disorienting period culminated in the yen, which had been weakening for years, surging 20 percent in less than two months.

Suddenly, just about anyone who'd borrowed cheaply in yen rushed for the exits. It prompted frantic conference calls among officials in Washington, Tokyo and Frankfurt. Just how big was the yen-carry trade? How much leverage was involved? What could policy makers do, if anything, to regain control?

Since then, the wild days of 1998 have been largely forgotten. And as Japan slid back into recession and deflation, the yen-carry trade was back in favor. Trouble is, just as then, officials have little data to go on to understand the enormity of the risks all this poses.

Clearly, the global financial system is in better shape than it was in 1998. For the first time in a decade, economies in the U.S., Europe and Japan are growing in synch. There's the added benefit of strong growth in China and most of the rest of East Asia. India is also growing rapidly.

A boom in the number of hedge funds globally hasn't destabilized the international financial system as critics expected -- at least not yet. The world economy's resilience in the face of rising terrorist threats and record oil prices also provides some measure of comfort.

Even so, it's not clear investors are taking the risk of rising Japanese bond yields seriously enough. Once the process begins, world markets may be surprised by how quickly Japanese rates shoot higher, taking the yen -- and all those who borrowed in it -- along for the ride.


To contact the writer of this column:
William Pesek Jr. in Tokyo at wpesek@bloomberg.net

Last Updated: February 21, 2006 20:22 EST

Why the Bank of Japan Should Just Shut Up: William Pesek Jr.

Feb. 13 (Bloomberg) -- Transparency, Alan Greenspan liked to say while heading the U.S. Federal Reserve, is a cornerstone of successful central banking.

Efforts to demystify the Fed in the 1990s encouraged central banks around the globe to institute their own versions of monetary glasnost. Yet can the process go too far? Can central banks be too, well, talkative? Yes, and the Bank of Japan is a case in point.

The BOJ is itching to end its policy of holding interest rates near zero. And who can blame it? No central bank should ever become such an obvious pawn of politicians that it eliminates short-term borrowing costs. Japan's is now in a unique bind, one it understandably wants to get out of.

And so, BOJ officials can't seem to stop talking about their desire to take yen out of the system. There's just one problem: Japan is still experiencing deflationary pressures. What the BOJ really should do is just shut up.

Governor Toshihiko Fukui and his BOJ colleagues think they're doing the prudent thing, telegraphing plans to tighten credit. Yet until the consumer price index and other inflation measures turn positive and stay there for six months or even longer, BOJ staffers should keep their heads down and their mouths closed.

Too Much Talk

The BOJ doesn't have a monopoly on the too-much-talk front. Take Greenspan, who, off the payroll for barely a week, began arming hedge fund managers with insights into the Fed's thinking on rates. It would be better if he kept mum for a couple of months out of respect for his successor. Ever the capitalist, Greenspan is choosing fat speaking fees, according to press reports.

Few monetary decisions will be as important this year as ones made in Tokyo. After 15 years of walking in place, Japan probably grew at an annual rate of almost 5 percent in the final three months of 2005. Steady growth and rising-price trends in key sectors like property are fueling concern at the BOJ that inflation will suddenly accelerate out of control.

Prematurely declaring an end to Japan's seven-year-plus bout with falling prices may prolong it. For one thing, it will undermine investors' efforts to assess inflation expectations. For another, it will damage the economy's revival.

Clear Hints

Last week, Fukui said consumer prices, excluding fresh food items, ``are going to show clear gains in January and afterwards. Our judgment of core consumer prices will become increasingly important from our next policy meeting,'' which is on March 8-9.

That's about as clear as language gets in the central banking world of winks, nods and secret handshakes: The BOJ plans to begin pumping fewer yen into the economy sooner rather than later.

Fukui was toasted as the world's best central banker by the Economist magazine in 2004 and by AsiaMoney last year. You would think he'd know monetary policy is as much about influencing perceptions as the money supply. It's a mistake to worry too much about a problem Japan doesn't have (inflation) and not enough about one it does (falling prices) -- and to relay that impression to markets.

Inflation expectations must be based on data and anecdotal evidence, not on what the central bank says. If Fukui's confidence that inflation is on the way proves wrong, a central bank that already has little credibility will have even less.

BOJ Risks

Core consumer prices rose 0.1 percent in both November and December from a year earlier. Yet this recovery hasn't even come close to proving it can sustain price increases through Asia's biggest economy. And even with high oil prices, deflationary pressures unleashed by China and India may slow the process.

The bigger risk is that the BOJ moves too soon, before inflation firmly takes hold. Is the BOJ about to make a mistake similar to one in August 2000, when it raised rates prematurely? It reversed course 10 months later, returning rates to zero. Another mistake like that may boost bond yields and undermine the economy.

This is one of the very few cases in modern history where politicians are right to jawbone a central bank, as Prime Minister Junichiro Koizumi has been doing. He wants the BOJ to wait until deflation is clearly in the rearview mirror before altering its policies. And Koizumi is right.

For a more objective take on things, consider recent comments by Asian Development Bank President Haruhiko Kuroda. A respected economist, Kuroda's past as chief currency official at Japan's Ministry of Finance gives him considerable authority on the issue.

Walk the Walk

``The main objective is price stability,'' Kuroda said in Tokyo last week. ``That hasn't been attained. Deflation is not yet over.''

Kuroda has no ax to grind; he's merely concerned that a mistake may not only crimp Japanese growth, but Asia's. ``I think the recovery is good for Asia,'' he said. ``The Japanese economy was a growth engine for many years, and it may become one again.''

To get there, Japanese policy makers need to walk the walk of smart, forward-looking central banking. At the moment, they're only talking the talk -- and doing so a bit too much for comfort.


To contact the writer of this column:
William Pesek Jr. in Tokyo at wpesek@bloomberg.net

Emerging market currencies slide on contagion fear

Wednesday February 22, 7:11 am ET

By Steve Johnson


Emerging market and high-yielding currencies fell sharply in European morning trade on Wednesday as Tuesday's sharp slide in the Icelandic krona unnerved investors.

The krona suffered its biggest one-day fall against the US dollar for most five years on Tuesday, tumbling 4.6 per cent, as Fitch lowered the outlook on Iceland's country rating from "stable" to "negative", citing an "unsustainable" current account deficit and soaring net external indebtedness.


The krona continued to slide on Wednesday, falling a further 3.4 per cent to a 15-month low of IKr68.26 to the dollar.

And the sell-off appeared to spook carry trade investors who have piled into a range of generally high-yielding emerging market currencies in the hunt for superior returns.

"Markets appear to be reacting to heightened risk by selling off emerging market currencies in the wake of the Icelandic krona's move yesterday," said Tim Fox at Dresdner Kleinwort Wasserstein."

The South African rand fell 1.3 per cent to R6.105 against the dollar, the Turkish lira 1.3 per cent to TL1.3325 to the dollar, the Indonesian rupiah 1 per cent to Rp9,350 to the dollar, the Polish zloty 0.5 per cent to 3.8094 zlotys against the euro and the Slovak koruna 0.3 per cent to SK37.418 to the euro.

The Brazilian real, backed by interest rates of 17.25 per cent, also fell 1.9 per cent to R$2.165 to the dollar, although at least there was fundamental news here, with Brazil reporting a current account deficit of $452m in January, compared to a surplus of $802m in the same month last year. Despite this, Goldman Sachs saw the deterioration as likely to be temporary.

Elizabeth Gruie, emerging markets currency strategist at BNP Paribas, argued that the wider sell-off was being driven by declining global liquidity, as major trading blocs raise interest rates, but she believed the move was likely to be contained.

"Emerging market currencies universally suffered, reflecting fears of global tightening following the hawkish [ECB president Jean-Claude] Trichet into the Federal Open Market Committee minutes and oil nervousness, but the correction is so far muted and the sell off is likely be contained," she said.

The New Zealand dollar, the highest yielding developed world currency, also continued its recent slide, falling a further 0.7 per cent to a fresh 17-month low of $0.6576 against the greenback. Not for the first time, the sell-off was blamed on Japanese retail investors, who have hitherto been big buyers of kiwi-denominated uridashi bonds.

"New Zealand dollar sentiment has deteriorated markedly in recent days with the economic data continuing to point to the possibility that the New Zealand economy is falling into recession, which will force some aggressive monetary easing by the Reserve Bank later this year," said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ.

"One key driver of New Zealand dollar appreciation was Japanese investor demand seeking higher yields. With high yields now in doubt this demand is ebbing away."

In contrast, the behaviour of the major currencies was more predictable. The US dollar was little moved by Tuesday's release of the FOMC minutes, which surprised no one by saying that "some further policy firming might be needed to keep inflation pressures contained".

However the dollar firmed 0.3c to $1.1881 against the euro and 0.6c to $1.7393 against sterling ahead of US inflation data due later on Wednesday. The greenback was little changed at Y118.75 against the yen, with the latter seen gaining some strength from the repatriation of funds by Japanese retail investors.

Sterling was little changed at £0.6830 to the euro as minutes revealed the Bank of England voted 8-1 to leave rates on hold earlier this month, as most observers had expected.