More evidence the world economy isn’t really rebalancing
The current account surplus of the world's big oil exporters is now falling. At least that is what the IMF believes, with good reason. All the oil exporters ramped up their spending and investment last year.
But rather than reducing the US deficit — my read of the latest US data is different than that of the New York Times(more on that later) — the fall in the oil surplus seems to be leading to an increase in Asia's surplus.
China's q1 surplus is up. Japan's q1 surplus is up too.
Japan's March current account surplus was close to $30b (more from the FT). $30b strikes me as rather large.
The rise in Japan's income surplus isn't really a surprise. Global interest rates are rising and Japan is a big net creditor. The coupon the US Treasury pays MoF on its large Treasury holdings has risen steadily as debt bought at low rates in 2003 and 2004 is refinanced at higher rates. That has implications for the US income balance and the US current account deficit as well.
The rising income surplus could have been used to finance a rising trade deficit. But Japan's trade surplus is also rising. The income surplus is just financing larger capital outflows.
The rise in the trade surplus isn't exactly a surprise either. Japan's soaring commodity import bill has masked the increase in Japan's manufacturing surplus over the past few years. While oil isn't exactly low, it isn't rising like it did in past years either.
Japan's exports to Europe are growing much faster (14% y/y) than its exports to the US (up 2% y/y). No surprise there. Exchange rates do matter.
It also isn't difficult to see why Japanese auto exports are increasing rapidly. Toyota's US sales have increased faster than its US production. At current yen/ dollar rates, my guess is that Toyota doesn't have much of an economic incentive to shift production to the US either.
Incidentally, the inflows associated with a rising current account surplus would normally put pressure on the yen to appreciate. But inflows from the current account clearly have been offset though by large private capital outflows.
Some of those outflows may come from unleveraged, real money Japanese investors. Some no doubt come from Japanese residents — fx day traders — who borrow yen to increase the returns on their fx bets. But some no doubt also come from international investors who borrow yen to buy a range of securities that have a higher coupon.
My guess is that the growing size of Japan's current account surplus provides indirect evidence that the size of the total short yen positions associated with the yen carry trade has continued to increase. After all, the size of Japan's current account surplus net of FDI flows and portfolio flows — i.e. the scale of bank lending to non-residents — is one potential measure of the size of the carry trade.
A full accounting, though, would require looking more closely at the scale of net portfolio flows — i.e. determining how much, on net, "real money" investors are taking out of Japan. And yes, that includes looking at equity outflows.
For more on the carry trade, see Box 1.4 — written by Hali Edison and Chris Walker — in the IMF's Asian-Pacific Regional Outlook.
Update: the April investment trust data from Japan — hat tip tmcgee — suggests solid portfolio outflows from Japan, and thus a somewhat smaller role for the leveraged carry trade. Calculating net portfolio flows though requires data on inflows as well as outflows.
Do remember though that one measure of the outstanding "short" yen position is the cumulative total of non-portfolio, non-FDI net capital outflows from Japan and that seems likely to be rising over time. As for that matter is the fx exposure of Japanese households!
From Martin Hutchinson,
http://www.prudentbear.com/articles/show/2014
For the United States, the reality is a darker one. Too much U.S. manufacturing capability has been redeployed to the Third World. Too much U.S. wealth has been squandered in speculation and overpriced real estate. Too much low quality immigration has taken place, undermining the living standards of the low-skill domestic workforce. An economic downturn will produce a Manichean struggle for the remaining resources, as occurred during the 1930s.
Thus burdened, U.S. business will find it very difficult indeed to climb out of recession and resume the process of improving living standards. U.S. commentators have since 1990 sneered at Japan, which found itself mired in stagnation for a decade and a half. However the future for the United States is likely to be more painful, as stock and real estate excesses must be worked off simultaneously at a time when the federal budget is under strain due to the retirement of the baby-boomers. This is however appropriate; it is the United States, through the Federal Reserve system that has since 1995 indulged in an orgy of irresponsible money creation that has fueled a decade of worldwide over-consumption. The Fed has been blamed for the onset of the Great Depression; that verdict is a little harsh but its responsibility for the unpleasantnesses ahead is unequivocal.
From Puru Saxena.
http://www.financialsense.com/editorials/saxena/2007/0508.html
Over the past decades, the US has been the engine of global growth; however its dominance will be challenged in the not too distant future. If my assessment is correct, China will replace the US as the world’s single most important economy. Before you dismiss my claim as a far-fetched fantasy, I want you to consider that China has the biggest population in the world, the largest foreign exchange reserves (over US$1 trillion), a booming economy, an extremely high savings rate and expanding surpluses. Moreover, China (despite extremely low per-capita consumption levels) has already surpassed the US as the biggest consumer nation.
Sceptics who doubt China’s role in the global economy should take note of the fact that Europe already imports more from China than it does from the US. To top it all, the US is the largest debtor nation the world has ever seen, its debt to GDP ratio is over 400%, it has a negative personal savings rate, its currency is overvalued and its society is heavily dependent on consuming cheap, imported goods.
Hi, Brad,
As you are obsessed with China (paraphrasing Macro Man) and hi thinks that SAFE is boss of yen carry trade, lets add a little concept a bit out of topic but very important in economy: Energy. Very important details in those days we are listening about protectionism measures from USA’s government.
A little excerpt from a banker blog, links latter:
“Right, the Chinese coal is more significant to the World energy than the Saudi oil (1106 Mtoe vs. 540 Mtoe.). China is probably now the biggest fossil energy producer (not consumer) in the world just before the US (China coal+gas+oil in 2005: 1334 Mtoe, the US 1359 Mtoe, but considering the Chinese coal growth China is probably now the #1). Nuclear and hydro don’t change this.
Here we see the secret of the Chinese economy. The energy production of China has risen 44% from 2002 to 2005, and this at absolute volumes comparable to the US! The Chinese total energy production growth has supplied almost half of the total World energy supply growth during that time (450 Mtoe of 1010 Mtoe growth). China has been literally the engine of the World energy and economy.
It is absolutely clear that low costs are not the main reason for production moving to China. The industrial growth there would have been impossible without this huge growth in domestic energy production. This is the biggest “energy surge” in the World history and the driving force of globalization.”
It seems that energy problems will end with globalization in not many years, imbalances or wars in between.
Thanks for your blog, by the way, we can’t keep learning!
Two interesting things by Jerome Trichet:
“China’s coal production to peak in a few years”
“Countdown to $100 oil (40) - Oil production plateauing”
http://www.dailykos.com/user/Jerome%20a%20Paris
His Bio: Energy banker based, yes, in Paris, France. Writing about energy, economics, international geopolitics, European and French stuff, and whatever else catches my attention. Very strongly pro-European. Liberal in the US, liberal in France and proud of both.
From Reuters, China COSCO to route 500,000 containers through Canada Railway terminal to U.S.
http://ca.today.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2007-05-14T164613Z_01_N14451241_RTRIDST_0_BUSINESS-CNRAIL-COSCO-COL.XML&archived=False
TORONTO (Reuters) - COSCO Container Lines Americas Inc. will be the first shipping company to route Asian freight through the new Port of Prince Rupert terminal on Canada’s West Coast after signing a deal with Canadian National Railway Co. (CNR.TO: Quote), CN said on Monday.
COSCO, part of Beijing-based China Ocean Shipping (Group) Co. (0517.HK: Quote), is to begin service via Prince Rupert and CN for container shipments starting in the fourth quarter, CN said.
The first phase of the Prince Rupert terminal project will have initial annual container capacity of about 500,000 twenty-foot equivalent units.
It is part of a broader plan to build a facility capable of handling 2 million TEUs per year.
hmmm — watch us imports from canada start to soar (really imports from China, via prince rupert … )
i suspect macroman meant that China is the king of the carry trade …. tis a yuan carry trade not a yen carry trade.
Sorry for being out of topic, but Kasriel is getting closer to Nouriel, and his arguments are a little diferent from Nouriel, I like the cleansing idea that I read first to Henry C.K. Liu in atimes poit dot (I’m shure DC remembers it):
“Now, of course, this is a different FOMC and every business cycle is different. So, this FOMC may decide for various reasons that the U.S. economy needs a “cleansing” recession later this year or early next. If the FOMC does not cut the funds rate early in the second half, we think it will get a recession. But our base case is that a combination of weak real economic growth, a rising unemployment rate and moderating core inflation will move the FOMC to begin cutting the fed funds rate at its August 7th meeting and, with much luck, the economy might avoid a recession later this year or early next a la 1995.”
I forgot the link:
http://www.financialsense.com/editorials/kasriel/2007/0514.html