PP 7767/09/2011(028730)

Economic Highlights
Global
•MARKET DATELINE

14 October 2010

1 The US May Adopt An Inflation Target That Could

Lead To Asset Price Inflation In Emerging Economies
2 Euroland’s Industrial Production Picked Up M-o-m In
August
3 China’s Exports And Money Supply Slowed Down In
September
4 Japan’s Core Machinery Orders Picked Up M-o-m In
August

Tracking The World Economy...

The US May Adopt An Inflation Target That Could Lead To Asset Price Inflation In Emerging Economies

Jus a few months ago, the US Federal Reserve policymakers were focused on how to exit from their extremely easy-
monetary policy. The thinking has changed and now they are positioning themselves to do more given that the US
economy is slowing down and unemployment rate remains at a high level. Based on the Fed Chairman’s, Ben Bernanke,
earlier writing about Japan and various policy responses proposed to help Japan to shake off the deflation, Japan’s
experience may help to shape the Fed’s responses to the US slow recovery.

No doubt there are differences between Japan and the US economy. Japan has an aging population, less profitable banks
that did not get quick capital injection or attention from regulators after the property bubble burst, low job market
turnover and many industries are shielded from international competition. In addition, Japan is a big exporter, has a
high savings rate to fund its deficits and it has experienced many years of deflation but not in the case of the US in
the modern era. However, there are similarities between the two countries where both went through stock and real estate
busts that severely damaged their financial system. Japan in the early 1990s and the US in 2007-2008. Both saw
unemployment rise and developed much slack in the economies. Both ran up large budget deficits and pushed interest
rates to zero. Both have important globally traded currencies that did not dramatically weaken after their bubbles burst.

Back in 1999, Japan’s consumer prices had started falling and the Bank of Japan had already pushed short-term interest
rates to near-zero. Policymakers in Japan were stumped over what else the central bank should do, if anything. Mr
Bernanke then argued that the Japanese could cheapen the yen by selling it in the currency markets; or buy long-term
debt from the Ministry of Finance to finance tax cuts, something he said was akin to just dropping money from a
helicopter. Mr Bernanke was particularly troubled by Japan’s emerging deflation. Mr Bernanke argued that the Bank of
Japan had to aggressively manage public’s expectations, because convincing households and businesses that deflation
would not persist would help to spur economic activity. He felt that Japan needed to make a commitment to get inflation
higher and keep policy accommodative until it increased. In a May 2003 speech, Mr Bernanke suggested that Japan
should adopt something called a “price-level target”. With inflation target, the central bank could aim for, say, 1% inflation
every year. This approach would relieve the pressure Japanese debtors felt from high real interest rates and also help
break deflationary expectations.

Now, apart from buying more government bonds, the idea of an inflation target came up at the Fed’s last meeting. If
the US were to implement the same policy going forward, emerging economies will likely feel the pinch of rising
inflationary pressure, particularly asset price inflation, due to inflow of foreign capital searching for higher returns
elsewhere.
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 14 October 2010

The Euroland Economy

Industrial Production Picked Up M-o-m In August

◆ Euroland’s industrial production picked up to +1.0% mom in August, from +0.1% in July and -0.1% in June.
This was the second straight month of picking up, suggesting that industrial activities remained resilient in the
Euroland. The stronger growth was due to a pick-up in the production of capital goods and a rebound in the
production of durable-consumer goods as well as intermediate inputs during the month, after slipping into a contraction
in the previous month. These were, however, offset partially by declines in the production of non-durable consumer
goods and energy during the month. In terms of country, the pick-up in production was driven by a stronger growth
in Germany, Italy and Spain’s industrial production. Yoy, industrial production grew at a faster pace of 7.9% in
August, compared with +7.2% in July but off the peak of +9.7% recorded in May, suggesting that industrial activities
are losing momentum.

Asian Economies

China’s Exports And Money Supply Slowed Down In September

◆ China’s exports slowed down to 25.1% yoy in September, from 34.4% in August and the peak of +48.5% in
May. This was the fourth consecutive month of slowing down and the slowest pace of increase in six months,
suggesting that China’s exports are weakening in line with a slowdown in global demand. The slowdown was on
account of slower increases in exports to European Union (EU) and the US, the two largest export markets for China,
which eased to 27.4% and 27.5% yoy respectively in September, from the corresponding rates of +35.4% and
+42.1% in August. The slowdown in exports to EU was mainly due to slower exports to UK, Germany and
Netherlands. Similarly, exports to Hong Kong, Japan, South Korea, Taiwan, India, Asean, South Africa and Brazil
slackened during the month. In the same vein, China’s imports slowed down to 24.1% yoy in September, from
+35.2% in August and a high of +66.0% in March. This suggests that domestic demand is softening as well. As
a result, China’s trade surplus narrowed to US$16.9bn in September, from a surplus of US$20.0bn in August. As
a whole, the slowdown in export suggests that the Chinese economy will likely grow at a more moderate pace in
the 3Q, after easing to +10.3% in the 2Q.

◆ China’s money supply, M2, moderated to 19.0% yoy in September, after a rebound to +19.2% in August and
compared with +17.6% in July, suggesting that the underlying economic activities remained resilient in the country.
New lending, on the other hand, inched up to RMB595.6bn in September, from RMB545.2bn in August. Indeed, new
lending has been hovering at around RMB500-600bn in the last four consecutive months, suggesting that it has
stabilised somewhat after the tightening measures introduced by the Government to control the rapid credit expansion.

Japan’s Core Machinery Orders Picked Up M-o-m In August

◆ Japan’s core machinery orders, excluding volatile orders for ships and orders placed by electric power companies,
grew at a faster pace of 10.1% mom in August, compared with +8.8% in July and +1.6% in June. This was
the third consecutive month of picking up, indicating that businesses are still keen to invest. However, business
spending may come under threat by the surge in yen to a 15-year high against the US dollar and a slowdown in
exports. Yoy, Japan’s core machinery orders strengthened to +24.1% in August, the strongest growth thus far this
year and from +15.9% in July.

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