America – East West Markets

Economic Growth: Japan and America

Japan could be slipping back into a recession. Thankfully, this is unlikely to have a negative effect on America’s economy but internationally, concern is expected to increase. The reason America is less likely to be impacted is two-fold: a mere 4.1 percent of American exports go to Japan and the falling value of the yen vis-à-vis the dollar which results in cheaper Japanese imports in America. Experts predict at most, a decline of around a tenth of a percentage point.

The regions that could be negatively affected however is Europe and China; areas that are already dealing with the challenges of slow economic growth.

Japan’s disappointing performance may be connected to the escalation in its sales tax. This was somewhat substantial – an increase of 5 to 8 percent. While it did help in reducing the overwhelmingly large budget deficit, it simultaneously had the negative impact of making consumer spending less appealing. Clearly, the economy just wasn’t up to this kind of move.

Shinzo Abe, Japan’s Prime Minister last year put money into the fiscal system, lowering interest rates through bond purchases last year. At that time, the region encountered a peak, following a stagnation of over two decades. But now, growth in the economy has weakened to around 1.5 percent.

Perhaps Abe needs to do a bit of what he did a year ago to get the region back on track.

Best Countries for Business

Japan Versus UK

In a recent report by Bloomberg, Japan was ranked higher than the UK vis-à-vis the regions that are best to do business with. In this report it escalated four places, stealing the third spot, with only America and Hong Kong ahead of it. For measuring purposes, the review utilized six criteria. Two of these were: the extent of economic integration; preparedness of the local consumer base.

Perhaps another reason for Japan’s escalation in this review has something to do with its 14 percent drop in the yen against the dollar over the last year. This has increased its competitiveness in the export market.

However, Japan’s trade deficit for last year was extremely high with a substantial decrease in exports to China and Europe. Its exports have been plummeting for the last seven months with a drop in shipments of almost 6 percent in December 2012. Some analysts believe the deficit may have reached its nadir, given the expectation of an improvement in exports over the next few months. Once that happens – along with the general upswing in the world economy – there is a strong likelihood that the country’s trade deficit will shrink alongside it. This does not mean it will go into surplus in 2013 but at least it will be going in the right direction. One also has to take into consideration the escalation in the price of oil import. As well, given that Europe is still trying to deal with its debt, the region is less interested in Japanese exports.

US Economy Has to Get off the Cliff

If America fails to deal with its economic issues, the fiscal cliff will turn into a fiscal abyss. According to China’s Xinhua news agency, America’s politicians need to take a more active role in sorting out its $16 trillion debt. Clearly they are afraid of becoming unpopular by reducing spending and increasing taxes. Instead, they are seemingly ignoring the issue and just getting into more debt. It is for this reason that the abyss is feared.

America’s economic issues are obviously going to impact other countries. One of them is China since around two-thirds of its holdings are invested in American dollar assets. America is also a major export for China. And it’s not just China. There was an increase in stock markets around the world last week. This was due to what the world perceived America did to thwart the rise in taxes and cuts in spending that could have been the straw that broke the economy’s back. But since America has been so near the edge of the financial cliff, it does not bode well for ensuring it will be able to climb out of an abyss.

As a reflection of Chinese administrative thinking, Xinhua also put out a demand to America to “live up to its global economic responsibilities” and pointed out that the reason it was in such a “mess” was because of its badly-functioning political system.

Made in America

Economics and Politics

Historically, it’s been China where manufacturers have felt most comfortable. It’s traditionally been a huge financial saving. But this could be changing. Already many are moving their business out of China and back home as noted in a previous post.

And now, as part of his campaign, Barack Obama is claiming that since manufacturers are coming home, this is clear evidence that the country’s economy is back on track. He is using this argument to point out that Mitt Romney was one of the early proponents of encouraging US corporations to outsource blue-collar jobs to low-wage economies overseas.

At the same time, Obama – along with other proponents of doing business in America – is claiming that taking business abroad is becoming more expensive. In addition, workers in America are becoming increasingly more efficient, and it’s thus making more sense for businesses to come back to the States.

So it seems that the household phrase Made in China could very soon be replaced by Made in America.

Fortune Global 500: Asia and America

In a Fortune Global 500 list on the world’s largest companies based on revenue, in an unprecedented move, China came in higher than Japan. Despite this achievement, American firms still took the most positions on the list. Indeed, a staggering 132 companies from the United States were featured, with China as number 2 on the list, featuring 73 companies and Japan with 68.

Europe’s Impact

While Europe lost 11 companies in 2011 on the list, China gained 12. Nonetheless, as Fortune pointed out, even though there is a financial crisis in Europe, and Japan has encountered many disasters, the big international companies have continued to escalate in both profit and revenues.

Despite its lead position, America shouldn’t be sitting back on its laurels. The superpower should be aware of the fact that it was the only country to lose so many companies on the list over the last 10 years, having lost 65 headquartered companies throughout that timeframe. In addition, companies in China were showing post-crisis success in 2009, with a move to gas and alternative energy and away from oil. After a hard 2011 vis-à-vis investments, so far 2012 is going well, in America especially, but also noteworthy throughout the world.

East-West Currencies

Clearly connected to all this news is the fact that trading companies are not as enthusiastic about converting the American dollar to the Chinese Yuan. Indeed it is the US dollar that companies want to accumulate since it is strengthening. What happened was, that at the time the Yuan was increasing, rather than buy the US dollar and sell the Yuan to pay for imports, companies would borrow US dollars from banks so as to pay for imports, which shorted the US dollar, which was good since it was anyway the US dollar was weakening. Today the opposite is the case; traders are hanging on to US dollars for longer which impacts China’s monetary condition since its inflows force central bank intervention. China thus finds itself in a strange place, with its domestic economy requiring easier monetary condition but flows leading it in the opposite direction.

Global Economic Leader: China or US?

Perceptions Versus Reality

Even though more people see China as the global economic leader, the truth is, America is still way ahead of this eastern superpower. A survey carried out by the Pew Research Center this year found that a mere 36 percent of (over 26,000) respondents (spanning 21 countries) regarded America as the leading economic power – a drop from 45 percent in 2008. Why? Probably because many people still see America’s economy as being in turmoil, due to the western recession that impacted it the most. However, even with all of that, it is still ahead of China. In addition, the fact that Europe’s economy isn’t giving anyone anything to smile about, is not helping matters either.

Indeed, regarding figures for China’s economy just a couple of months ago, the situation doesn’t look good. However, it’s not all doom and gloom since according to Dow Jones Newswires and Reuters, industrial production increased 9.6 percent in May (compared to figures from May 2011). In addition, between January and May, fixed asset investment in urban areas increased by a little over 20 percent. Vis-à-vis inflation, wholesale and consumer price gains eased much more than expected.

China’s Economic Windfall

It should be noted that China has experienced significant outbound investments. In the first quarter of 2012, the level of acceleration reached $21.4 billion (following a standstill in 2011), boasting assets in the resource sector and South America being the most popular commodity pool operator. As well, data from the Ministry of Commerce shows China attracted nearly twice as much inward investment as the $60.1 billion it sent outbound in 2011.

Approximately 50 percent of China’s attempted foreign forays ended in failure last year. In addition, there was a sharp increased enjoyed in the country’s imports and exports in May. So, the question begs, with all this good news and the economic forecast in America not looking all that hot (especially vis-à-vis the country’s “faltering” job market), why is the perception that China is doing better than its western counterpart, not the reality? Indeed, as JPMorgan Chase economist, Michael Feroli, noted, America’s most recent economic data has been “decisively disappointing.”

The truth is, even with the optimistic economic data coming out of China, caution is still being recommended. In response to a poor economic performance for China in May, policymakers China’s slashed interest rates for the first time in over three years.

Ultimately, while both China and America are currently facing their various economic challenges, the perceptions are that China is doing better, but the reality is the opposite.

China, Japan and US Markets

It looks like China’s growth figures are going to be higher than anticipated. This is due to the expectation of Japan’s leading share index opening higher too. But the anticipated figures are very much dependent on the stability of the yen and on some raised worries that tensions could increase due to the launch of North Korea’s ballistic rocket. According to one strategist at Monex Inc., it looks like Japanese stocks will “chase the upside following the U.S. markets.” Immediately thereafter, America’s stocks netted a second day of solid gains.

Japanese Market

There are currently two principal issues with which the Japanese market needs to contend. First, fears of North Korea and second, the weakened dollar. These problems need to be sorted out if Japan has any hope that the west will take it seriously vis-à-vis investment-making and business development. The weak yen isn’t exactly helping the situation either; indeed, it’s definitely negatively impacting various Japanese ETFs.

Clearly though, unfortunately, the tsunami the country experienced last year is still being dealt with as well. Indeed, it’s not doing much for Japan’s economy, even today. So now the question being asked is if ETF investors will have a solid chance of making gains in Japanese equities. At least for this year though – as compared to figures in 2011 – Japanese equities are rebounding and the expansion of the Bank of Japan’s figure to $1.37 trillion has facilitated economic stabilization.

Conclusion

So ultimately it’s somewhat unrealistic to make sweeping statements about the Japanese economy and the benefits or disadvantages of making investments there today. It could just be a case of potential investors in general feeling better about taking risks and bringing their money to the east, simply because America’s economy is experiencing less flux and the Eurozone isn’t such a scary financial haunt anymore either. Or, it could be that there are good reasons for western investors to take their monies back to Japan – it really depends in great part on who one asks, and, at where the yen/dollar sits at that particular time.

Asia’s Economic Success: In Spite of Europe’s Mess

In recent years, although other eastern markets have failed to thrive in debt-ridden European environments, Asia has not been one of them. The region has not encountered nearly as much strife as its neighbors and in fact on the contrary, has enjoyed impressive financial growth. For western businessmen therefore, Asia fares pretty high on the list of possible potential addresses due to less red tape; stable investment opportunities and higher interest rates, especially in countries like Indonesia.

Indeed, Indonesia’s GDP increased by almost 6.50 percent last year which is the highest since the Asian crisis began (and way better than neighboring China and India) and it does not need to depend on global trade flows for success either. Its population is large and growing and its youth has minimal debt and thus greater spending capacity and it offers a huge variety of commodities, being self-sufficient in oil and gas.

Oil Issues

So that’s great for Indonesia. But is this the case throughout the region? Do all eastern markets have so much to offer potential western investors? Perhaps not. Looking at oil prices that are increasing at uncontrollable rapid speeds, Asia’s growth could be shot in the food, making it a rather unattractive place for western businessmen to lay their hats.

In addition, since Asia does not stand alone, both the western world and indeed the global community at large, needs to understand that it will be impacted as well. Should its growth be stumped, this will have a domino effect on Europe and won’t do any favors for America’s recession recovery either. As Tweeter FirstpostMarketsLive noted, “Asia is largest consumer of oil having surpassed North America in 2007 to account for more than 31% of world demand.”

Asia’s economic conglomerates are concerned. Nomura, a multinational conglomerate offering financial services has been taking a stand on the potentially problematic matter. The company’s chief economic advisor, David Resler noted, even though there isn’t as great a threat to a resumption of the financial crisis, this oil price mega increase at the beginning of the year has replaced that threat in as great a severity.

So ultimately there is a lot of optimism out there for potential western investors into Asia. But should the oil price increase crisis not be solved, it could be downhill for not only the entire region, but potentially the whole world. Asia needs to sort this out, and fast.

Manufacturing Away, Not Home

China – Not US – More Efficiently Producing iPhones

Although there has been talk about Chinese jobs returning to the United States of America due to the fact that sending them there is no longer proving to be such a money-saver, when it comes to the manufacture of iPhones, it seems this is not the case.

While still working on the iPhone, Apple CEO Steve Jobs was incredibly demanding and it seemed his desires could only be met in China, not America. He wanted a perfect glass screen to be developed in as little time as six weeks. The Chinese didn’t let Jobs down. Within 96 hours, its facility employing 8,000 workers putting in 12 hour-days had produced over 10,000 iPhones. No American plant would be able to achieve that.

So, unlike other manufacturing plants, it seems that Apple will not be moving its operations to America any time soon. If it did, figures show that it could take up to nine months to find the close to 9,000 industrial engineers to produce the iPhone in America. In China it would take just 15 days. The figures thus speak for themselves.

Chinese Manufacturing Jobs to Return to US?

At one time, the United States of America seemed to be sending all its manufacturing jobs east. But now it looks like these positions might be boomeranging back to the west. Why? Because it is no longer all that inexpensive to outsource such positions to China, so there does not seem to be as much point. According to experts from the Boston Consulting Group (Douglas Hohner, Harold Sirkin and Michael Zinser) industries such as furniture and auto will be returning to America as it no longer pays to have them in China.

At one point it was the case that labor was cheaper there – less than $1 per hour – but this has changed along with the significant expansion in China’s economy.