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A view of the skyline and buildings at Shinjuku district during sunset in Tokyo, Japan June 20, 2021.
Will Japan raise interest rates … to zero?
Japan’s central bank will debate a landmark interest rate rise next week that could bring interest rates to a staggering 0% after nearly a decade of negative rates.
As the saying goes, there are four types of economies: developed, underdeveloped, Argentina, and Japan. While most countries have been working hard to cool inflation, Japan has struggled with the opposite problem, deflation, since the 1990s. Lower prices at the grocery store are nice, but consumers pay for it on the other end: Businesses see revenues fall, struggle to pay their debts, and lower wages or downsize to break even (mostly the former in Japan). The economy stagnates and ordinary families suffer.
Tokyo started running 0% interest rates in 1999 and negative interest rates in 2016 – in other words, encouraging companies to borrow money and keep cash flowing through the economy. It’s helped drive recent inflation, currently around 2.2%, above the target of 2%.
But is it the right kind of inflation? The Bank of Japan wants to make sure price increases are being driven by consumers spending more, and not costs on the producers’ side, before they hike rates. There are some promising signs, including Japanese trade unions securing the largest pay increase in 30 years from Japan’s largest corporations.
“All eyes are on the annual wage negotiations that will wrap up this week,” says Eurasia Group’s Japan analyst David Boling. “The Bank of Japan wants to see strong wage growth before it scotches the negative interest rate policy.”
We’re watching how cautiously central bankers choose to tack — if the climb to zero looks too steep next week, they can always wait until their April meeting.
The headquarters of the People's Bank of China is pictured behind an iron chain in Beijing.
Will China’s property woes get political?
As China’s financial troubles mount, analysts forecast stormy skies for its economy — and potentially, its politics.
Much of the turmoil centers on the country’s real estate sector, which has traditionally driven up to 25% of its economic growth. Last Friday, property development giant China Evergrande Group filed for bankruptcy in the US after two years of restructuring. The same day, Hong Kong’s Hang Seng Index announced that it would be dropping Country Garden Holdings, the country’s largest property developer, from its listing as of Sept. 4. Earlier this month, Country Garden missed a deadline to pay $22.5 million in loan interest and is described as “teetering on the edge of default.”
There have been several attempts to right the nation’s economic ship in recent days. China’s securities regulator announced a series of reforms to boost investment in its capital markets. Its Ministry of Public Security announced a relaxation of internal migration rules to combat urban labor shortages. And the People’s Bank of China attempted to shore up the renminbi by injecting Rmb757 billion ($104bn) of short-term liquidity into China’s banking system and cutting medium-term financing rates.
Household consumption — so low that there are fears of deflation — makes up only about 38% of GDP in China, compared with around 68% in the US, so increased consumer spending is an obvious choice for spurring economic growth. On Monday, the bank modestly cut one-year and five-year loan prime rates to make it easier for businesses and households to borrow money and boost consumer spending.
Why this matters: Apart from risks to both China’s and the world’s economy, there is concern that worsening economic prospects could incite the Chinese government to ramp up repression at home and aggression aboard. Former Special Assistant to the US Secretary of Defense Hal Brands warned that "China may act more aggressively in the near term — as its military capabilities mature — to lock in gains while it still has the chance." And President Joe Biden opined earlier this month that China’s economic woes present a “ticking time bomb” which could lead its leadership to “do bad things.”
Topping that list? Military action against Taiwan. China’s latest show of force in the region saw 42 warplanes and eight vessels dispatched to the South China Sea after Taiwanese Vice President William Lai stopped over in the United States en route to Paraguay.
Such a demonstration may be as much for domestic as external consumption to assert Xi Jinping’s authority and quell the grumbling of Chinese citizens, some of whom are angrily asserting their rights as their property investments tank. A whopping 90% of China’s households are homeowners, and most household debt is in the form of mortgages. That debt hit 63.5% of GDP in the second quarter of 2023, so if the country has its own Lehman Brothers moment, it could make the 2008-09 financial crisis look quaint by comparison.A worker works at a workshop of a textile company in Binzhou city, East China's Shandong province.
China flirts with deflation. Why is that a bad thing?
Times are tough in the world’s second largest economy. After several years of on-and-off-again pandemic lockdowns, China’s economic rebound remains limp. Even the notoriously tight-lipped politburo of the Chinese Communist Party recently nodded to the economy’s “tortuous progress.”
While much of the rest of the world contends with inflationary pressures, many economists say China is tussling with the inverse phenomenon: deflation.
What’s deflation, and what are the implications at home and abroad?
China’s economy, worth a whopping $18 trillion, is a dynamic one, and so multiple factors are contributing to its current anemia.
Beijing’s flirtation with deflation is linked, in large part, to the plunging cost of goods and services due to weak demand at home. Simply put: Chinese consumers are spending less, which is putting downward pressure on prices. A steep dip in imports last month – 12.4% year-on-year – signals that demand remains sluggish six months after President Xi Jinping ditched the growth-stifling zero-COVID policy.
But aren’t low prices a good thing?
Not quite. Falling prices do not necessarily mean that Chinese consumers are buying more stuff at a cheaper price. In fact, many economists say that deflation often sparks deep anxiety about the state of the economy, causing consumers to cut back on spending in order to stash more away in a rainy day fund.
Said another way: Perception of the strength of the economy is almost as important as economic growth itself. As a narrative takes hold – at home and abroad – that China could be entering deflation territory, many Chinese are concerned with taking on new debt, causing a downturn in investments.
What’s more, deflation can eat into companies’ bottom lines, leading to belt-tightening and job losses. The latter is a particularly big concern as youth unemployment in China continues to reach new records. In fact, in a sign of how bad things have gotten for young Chinese entering the workforce, one university president recently advised graduating Chinese students not to be picky about which jobs they accept. The world is my oyster? Not so much in Xi’s China.
Why is this happening now?
Global lockdowns and work-from-home policies were great news for China, dubbed the world's factory. But as American and European consumer trends have rapidly evolved (out with the expensive ergonomic chair, in with the trip to Burning Man!) Beijing has been left with a bloated manufacturing sector and too much inventory. The hope was that domestic demand for stuff would make up the difference, but that hasn’t been the case due to a number of factors.
One key issue impacting consumer behavior is the tumult of the real estate sector. For the most part, housing sales have been depressed since the early days of the pandemic. As we recently wrote, the collapse of real estate giant Evergrande in late 2021 freaked out both developers and buyers, so now the former can't get loans to finance projects, and many have been forced to default on their debt, leaving projects incomplete.
What’s more, the oversupply of houses in many cities as a result of demographic shifts (the Chinese are not making enough babies!) has also put downward pressure on home prices.
The world is watching. Dwindling demand in China, the world’s largest importer of food and fuel, is bad news for the many countries that rely on China to buy what they’re selling.
For example, commodity-exporting countries, like steel giants Australia and Brazil, are particularly sensitive to China’s infrastructure slump, while tech-exporting countries – like Taiwan and South Korea – are feeling the burn of China’s retail and manufacturing contraction. (China’s goods imports dropped 6.7% year-on-year in the first five months of this year.)
What’s the government doing about it?
The People’s Bank of China cut interest rates back in June in a bid to stimulate growth and has also released small stimulus packages to help boost spending and consumer confidence – though not nearly enough to move the needle. In the meantime, true to form, the CCP is tapping into its culture of fear, warning economists that they better stay mum about negative economic trends.- Ian Explains: Why China’s era of high growth is over - GZERO Media ›
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