‘Japanification’ sets in as stimulus loses ‘oomph’

  • Business
  • Saturday, 14 Dec 2019

THIS a follow-up on my previous column on Nov 30 reviewing the world in 2019 and assessing its outlook for 2020.

Despite facing significant risks, activities in Asean5 remain stable, with real income rising steadily amid relatively low unemployment and low inflation as shown by the table.

It’s clear Asean is currently underperforming, especially Thailand in the face of robust growth in the Philippines and Vietnam. Indonesia’s high potential will be realised soon enough. Malaysia remains the outlier. Holding them back is politics as usual, with a lack of resolve to transform. Structural reforms have slowed since the 2010s. Ability to effectively deliver reforms matters. No doubt, further escalation of trade tensions and associated rises in political uncertainties will lead to weaker growth.

As of now, prospects are for more of the same in 2020. Priority remains taking firm action to boost potential output growth, improve inclusiveness, and strengthen resilience. Unfortunately, not much is happening in Malaysia – it’s slipping behind its neighbours, especially the Philippines and Vietnam. Unfortunately, badly needed structural reforms – from significantly cutting-down the use of unskilled imported labour to climbing-up the value-added ladder in state-of-the art electronics manufacturing; from diversifying into “estate” agricultural food production to digitalisation and 5G to raise productivity; and from resolving high youth unemployment to creating better paying jobs to absorb unacceptably high graduate unemployment; are not happening fast enough. Unfortunately, education reform – so vital to succeed in raising competitiveness and to excel in the use of science and technology, and in innovation, has yet to seriously start. Such reforms are a necessary and sufficient condition for Malaysia to boost productivity-driven competitiveness, in the face of a gradually falling and ageing population. Unfortunately, unmitigated climate change weakens prospects – need to focus on efforts to foster the supply of low-carbon energy, and the development and adoption of green technologies.

China and trade war

China’s economy grew 6% in 3Q19 (against 6.2% in 2Q19, 6.4% in 1Q19 and 6.6% in 2018), as business activity continues to stabilise. Growth across the board cooled despite some recovery in industrial production and retail sales in the face of weaker fixed investment in agriculture, manufacturing and industry. Growth in 4Q19 should be on target. China’s GDP, which rose by 6.2% in the first three quarters, is shifting from the phase of rapid growth to high quality development.

For China, while its growth decelerates, living standards continue to rise as its middle-class expands. After months of trade war, Chinese consumers have become more cautious. Still, with policy support, retail sales growth has been sustained despite a household debt to disposal income ratio of 140% in 2018. Nevertheless, its GDP growth rate is still 3x faster than in AEs (advanced economies).

China’s rebalancing towards consumption & innovation remains on track – its contribution has since climbed to 60.5% of GDP. The quality of life in China has improved tremendously over time – life expectancy has more than doubled: 35 years in 1949 to 77 in 2018. By 2018, poverty in China had fallen to 1.7% and will be completely eradicated by 2020.

Trump’s trade war has been fuelling anxiety. But its fallout may not be as severe as many have feared. After all, bilateral US-China trade totalled about US$700 billion – less than 1% of global GDP. Indeed, the impact of US protectionism and geopolitical frictions has been surprisingly modest. Tariffs already in place and in the pipeline will reduce US’s GDP by just over 0.2% in 2020, compared with a world in which the trade war had never started. More harmful are indirect effects: weaker business confidence, productivity and risk-appetite in financial markets.

These bring the damage to almost 0.6% of US’s GDP in 2020. The damage to China will be almost 2% of its GDP. These are small percentages – but of vast economies. IMF estimates that an unresolved trade war could cost US roughly US$125bil of forgone output in 2020 alone. The cost to China could exceed US$300bil. Big numbers indeed.

“Trade wars are good, and easy to win” Trump tweeted in March 2018. But for all of Trump’s bravado, data paint an ever bleaker picture of US manufacturing (the purchasing managers’ index has been below the 50-point mark separating contraction from expansion, since August 2008); while China shows a smaller fall in manufacturing activity and far greater resilience over the long term. So, US is losing out more from the escalation of the trade war. Further, US manufacturing sentiment has virtually collapsed, spectacularly so in 4Q19.

Meanwhile, their Chinese counterparts are staying cool, as they were since early 2019. Recent data appeared to support latest research findings that US importers & farmers had, indeed, paid a heavy price for the trade war. As I see it, US and China now need to build a new strategic partnership, and work together in good faith to structure a new relationship. Previous focus on resolving bilateral trade imbalances doesn’t solve anything for US companies or workers. What goes around comes around.

For Malaysia, the impact remains rather modest: total exports to the United States totalled US$22.5bil in 2018, or less than 1% of US total imports. There has been some trade diversion of US imports (from China) towards Malaysia, especially of manufactures, but not significant. Time will tell.


I well recall Japan’s descent into deflation following the financial bubble bust in 1990. Former Fed chairman Ben Bernanke later rebuked Japan for not acting boldly enough and missing out on real reforms. A decade on, secular stagnation is once again on the cards on both sides of the Atlantic – inflation is below target with low bond yields (negative interest rates in euro-zone) in the face of slackening (or no) growth – a phenomenon now come to be known as “Japanification”.

Indeed, policymakers today find themselves in the Japan-like situation of very low inflation and low interest rates, leaving them with little elbow room to really stimulate in bad times. Why so? Many blame rapidly ageing demographics. This is contentious. After all, 24 nations today experience falling and ageing population, yet only Japan (so far) is suffering deflation. Europe isn’t far behind.

As I see it, the real issue is failure to seriously undertake economic reforms to take-up new growth opportunities. Sure, demographics (more so an ageing population) matters. Still, all’s not lost. Suitably aggressive monetary and fiscal policies can make a difference. But make no mistake. Politics can make it difficult for Europe to escape Japanification once it takes root.

Savings, US dollar, ringgit

World’s savings glut in part finance the persistent US payments deficit. Asia’s stockpile of savings is enormous. East Asia alone saves up to one-third of its GDP (same as the combined rate Europe and US saves). These savings have depressed long-term interest rates. They are also a drag on a world suffering from weak demand.

Still US dollar has remained strong since 2014 – benefited from a strong US economy, sustained by strong consumer spending. In contrast, the eurozone responded by saving more. In combination, capital from Asia and Europe flowed into the United States, and drove up the price of US dollar assets. But things are changing, tilting the scales against US dollar.

After a longish expansion, growth in US and the world is slackening today – beginning to lack vigour; indeed, looking tired. Global and US manufacturing is bottoming; jobs-rich service industries are also slowing down. Investors are planning to move capital out of expensive US dollar assets to EMEs (emerging market economies) where assets are cheaper, but with potential to grow. This shift will bring about a particular boon in EMEs, where a fall in US dollar makes it easier for them to service US dollar debts and ease credit conditions; and where true value really is (equities are cheaper, bond yields higher).

Also, EMEs’ currencies have scope to make up for lost ground. Indeed, many have started to rally against US dollar. At this time, any breakdown in US-China trade talks will work against US dollar. As with other political risks involving Hong Kong protests, UK Brexit and even, the US elections. “Noises” against US dollar are getting louder.

Odds are for US dollar to weaken in the course of 2020. What about the ringgit? As things stand today, the ringgit will remain weak, which on balance is not good for Malaysia. Ringgit can appreciate only with determined, purposeful structural economic reforms. I don’t see this in the horizon – not even in the medium-term. Unless we seriously commit and implement a well thought-out plan to fundamentally reform the economy – what more we can efficiently produce and how to do so competitively – including an exchange rate policy to strengthen and then, stabilise the ringgit, I am afraid Malaysia will be left behind. Our neighbours will move forward regardless.

New frontier

The world has changed. And, will continue to change. One thing is certain. So insatiable is the global appetite to save that about a-third of global investment-grade debt (worth US$17 trillion) today carry negative-yields!

That is, lenders must pay (get back less than what they first invested) to hold them to maturity. Nations and people adapt. In early 2012, the Fed thought US interest rates would settle at over 4%. Nearly eight years on, they are just 1.75%-2% and are the highest in G7. A decade ago, most thought that central banks would eventually unwind quantitative easing (QE). Now, the policy seems permanent. The combined balance-sheets of central banks in US, eurozone, United Kingdom and Japan today stand at over 35% of their total GDP.

European Central Bank (ECB), desperate to boost inflation, is restarting QE. For a while, the Fed managed to shrink its balance-sheet. But since September, its assets have started to grow again. What’s worrisome is that as central banks run out of ways to stimulate the economy when it flags, more of the heavy lifting will fall to tax cuts than public spending. Because interest rates are so low (or negative), high public debt has become more sustainable, particularly if borrowing is used to finance long-term investments that boost growth (such as infrastructure).

Even so, the politics about fiscal policy has been confused and sometimes damaging. Germany still failed to improve its decaying roads and bridges. Britain cut budget spending in early 2010s at a time when its economy was weak – lack of investment is one reason for chronically low productivity growth. US is running a much bigger-than-average deficit, but to fund tax cuts for firms and the wealthy, rather than on road repairs or green power-grids. Then, there is the “modern monetary theory” that is gaining popularity on America’s left: that there are no costs to expanding government spending while inflation is low. Concomitantly, central banks are starting to encroach on fiscal policy, traditionally the territory of governments. Bank of Japan’s massive bond holdings prop up a public debt of nearly 240% of GDP.

In eurozone, QE and low rates provide budgetary relief to indebted southern countries. As I see it, there is danger in the “fusion” of monetary and fiscal policy. Just as politicians are tempted to meddle with central banks, so the technocrats will take decisions that are the rightful domain of politicians. Sure, in downturns, either the government or central bank will need to administer a prompt, powerful but limited fiscal stimulus. One way is to beef up the government’s automatic fiscal stabilisers (such as unemployment insurance).

Another, is to give the central bank a fiscal tool (that does not try to redistribute money), and hence does not invite frenzy at the printing press – by, say, transferring out cash when the economy slumps (helicopter money). Each path brings risks. Since the old arrangement no longer works well, institutions that steer the economy have to be remade for today’s new frontier.

What then are we to do

What comes next? As global markets come to grips with heightened political risks, credit and currency risks, and the likelihood of left-wing governments, it is becoming clear that shifts & shocks are coming on fast & furious. It is likely that, in good time, a synchronised global downturn (even recession) will come to pass. By next year, it is not unreasonable to expect new lows in bond yields; a deepening in yield curve inversion, higher prices for safe assets (yen and Swiss franc), and even a quiet bull in gold.

Needless to say, more tough talk from Trump (as impeachment enquiry hots-up) will intensify to the detriment of confidence, even of consumer spending. Today, central banks – shudder at the risky behaviour that low (or negative) interest rates are encouraging: potentially unsafe investment because of ultra-cheap money; are now anxious that they can’t readily tighten policy, when really needed; and, now worry that such risk taking is reminiscent of the preceding crisis a decade ago. Still, for many, the near-term risks remain geopolitical. Not so much about the economic outlook.

Uncertainty surrounding the political landscape isn’t helping markets; nor a longer-term deterioration in US-China relations. What’s most worrisome is that the idea of US “decoupling” digitally from the rest of the world is fast becoming mainstream. Under consideration are: (i) import ban on any new technology deemed a “national security threat” linked to a “foreign adversary”, and (ii) a permanent tariff on China.

For Malaysia, the only way forward is to significantly raise productivity, given its low fertility rate is unable to replace its also ageing population. There is no other way.

Be that as it may, as I see it, investors and businessmen have little choice but to remain focused on what they know they can control – investing long-term, driving value creation, & deriving benefits working co-operatively with great partners.

All they can hope for is: that the summer of discomfort will not turn into a winter of discontent.

Prof Tan Sri Lin See-Yan of Sunway University is the author of Trying Troubled Times Amid Trauma & Tumult, 2017–2019 (Pearson, 2019). Feedback is most welcome. The views expressed are the writer’s own.

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outlook , 2020 , Lin See-Yan , What are we to do


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