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Saturday, August 27, 2005

Daily Times - Site Edition

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Asia to cheer as Japan economy steps up a gear

SINGAPORE: Japan’s decline for more than a decade — and China’s rise — have led many to dismiss the world’s second-largest economy as something of a has-been in terms of its regional impact. But times are changing.

Japan is showing signs of a sustainable, albeit gradual, recovery. And this could translate into an economic boost for Asia, economists say. With all the attention on China, it is easy to forget how important the yen is — most Asian currencies are still highly correlated with their Japanese counterpart.

As Japan’s economy rebounds, Asia is expected to benefit from increased demand for regional exports, more investment and a competitive edge as the yen strengthens. “Japan has been a bit of a forgotten economy over the past decade and its economic influence arguably has waned due to that,” said Standard Chartered regional economist Mike Moran. “But what we are now seeing is a genuinely sustainable recovery, that will put the spotlight back on Japan and how important it is from an Asian, as well as global, perspective.”

While recoveries in the past few years have given way to disappointment, the current rebound is largely driven by private-sector consumption and capital spending instead of just export growth, analysts say. This makes it more likely to stand the test of time. Japanese corporate bankruptcies are declining, while the jobless rate hit a seven-year low of 4.2 percent in June.

Merrill Lynch chief economist TJ Bond said Japan has become one of the most important drivers of Asian exports this year. In the first half of 2005, Asian exports to Japan rose 15.7 from a year earlier. Exports to the United States rose 5.1 percent.

Bond said that excluding China, Asia notched up $18 billion of extra exports to Japan in the first half, raising Asian gross domestic product by 0.6 of a percentage point. He said a healthy growth rate for the Asia economy ex-China is about 5.5 percent. Analysts say that because Japan has strong trade links with countries where wages are low, Southeast Asia stands to gain more than Northeast Asia from a Japanese domestic recovery. Indonesia, for instance, sends the bulk of its exports to Japan.

Slow, steady progress: Still, Japan is not expected to overtake the United States or China as a main export destination for Asia any time soon.

Japan accounted for 12 percent of average Asian trade in 2004, calculations from Merrill Lynch and data provider CEIC show. That compared with almost 20 percent for the United States, 17.4 percent for the Europe Union and 15.2 percent for China.

Also, Japan is likely to pick up gradually, rather than show stellar growth.

Japan’s economy is expected to grow 2.0 percent in price-adjusted terms in the 2005/06 fiscal year. China’s economy is forecast to rack up GDP growth of 9.2 percent this year. “Growth will probably continue to come from China but the Japanese economy seems to be gaining its charge right now and that should be helpful in complementing demand from China and the US,” said David Cohen, economist at Action Economics.

Prices in Japan have fallen every year since 1998. But declines in the core consumer price index have been moderating and the index is expected to start rising from October.

“Reflation in the world’s second-largest economy is bound to have a positive spillover to the rest of Asia, which should not be underestimated,” Goldman Sachs said in a recent note. And a recovery in Japan should mean an increase in Japanese foreign direct investment (FDI) into Asia, analysts say.

Asian FDI by Japan has risen slightly in the past two years to about $9.39 billion in 2004, but is down from more than $12 billion in the mid 1990s, Japanese data shows.

Economists say the next wave of FDI from Japan should favour Asia, excluding China, as flows into China have reached a peak. A stronger yen, the likely result of a recovering Japanese economy, meanwhile is seen giving the region’s exporters a competitive edge.

Merrill Lynch’s Bond said the yen is especially important for South Korea as Korean and Japanese firms go head-to-head in areas such as cars and steel. A stronger yen is likely to be welcome by Korea, which has had to grapple with won strength. The Korean won has risen more than 15 percent against the dollar since the start of 2004 and more than 20 percent versus the yen to seven-year peaks in early August.

“If the yen rallied and broke 100 against the dollar that would be more significant for Asia than the tiny move we have seen so far in the renminbi,” said Bond. “To get there, we will need to see the recovery in Japan unfold. If we do see a sustained recovery, an end to deflation, those are things that will significantly change the outlook.” reuters

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