Radical: that’s probably the single adjective that best covers the disparate economic policies being pursued in Asia’s three largest economies. In Japan, the government of Shinzo Abe is embarked on the 2.0 iteration of his programme to break out of the country’s deflationary slump. In China, President Xi Jinping’s government is in the midst of a supertanker like turn towards domestic consumption. In India, well, Modinomics. These three countries hardly make for isolated laboratories for such experiments. Together they’re home to 40 per cent of the planet’s people and churn out 24 per cent of the world’s gross domestic product. Here’s a roundup of how things are changing in these important economies.
India
Fully 27 per cent of the 1.28 billion people who inhabit the world’s fastest-growing major economy are under age 15 and set to join the country’s workforce in the next decade. Foreign direct investment commitments of more than $75 billion in 2014 and 2015 were secured due to Modi’s overseas trips in his initial two years. Last year, an additional $33 billion of FDI flowed in. To ease entry barriers for businesses, he took steps such as instituting one-stop shops for clearances, hastening the permit process, and relaxing government restrictions in various sectors.
The demonetization of large-denomination rupee bills was meant to tackle tax avoidance and corruption and move India toward becoming a cashless society. In addition, a national goods-and-services tax, which would subsume 14 separate central and state taxes into one uniform structure, aims to broaden the tax base and reduce compliance costs and tax-induced inefficiencies in the transportation of goods across the country.
The results of Modinomics have been mixed. Economic growth picked up to 7.3 per cent in the third quarter, up from 5.8 per cent in the first quarter of 2014. Inflation cooled to 3.4 per cent, a drop that was partly aided by softer prices of the many commodities imported by India The central bank has cut interest rates by 175 basis points since 2014, making credit cheaper for companies and bringing bond yields down to 6.4 per cent. However, starting or running businesses in India still remains difficult. According to the World Bank, India ranked 130 out of 190 countries on the list regarding “ease of doing business”.
China
The swift transformation from being the world’s factory to a maturing economy, it seems that President Xi’s government has focused on steadying China by controlling excessive leverage and the spillover onto foreign exchange, rates, and stocks. The economic growth rate of more than 10 per cent has leveled off as well as the GDP also increased 6.7 per cent in 2016
The country’s equity market underperformed the world in 2016. The onshore benchmark CSI 300 Index lost 9.3 percent in total return. The offshore MSCI China Index gained 1.2 percent. Both lagged the MSCI World Index, which climbed 8.2 percent. For global investors, the main concerns are slowing growth and Yuan’s devaluation risk. Beijing wants to promote the internationalization of China’s financial markets but remains concerned about the potential impact on stability. The high volatility seen in the onshore equity market in 2014 and 2015 has made regulators more cautious. However, the general trend is towards opening more financial markets.
Japan
Prime Minister Abe unveiled Abenomics 2.0 in September 2015. This iteration of his four-year-old reform agenda aims to break the vicious deflationary cycle which has afflicted the Japanese economy for two decades now. To do that, it seeks to foster confidence and a sense of security, putting the country back on track to nominal GDP of 600 trillion yen ($5.2 trillion) by 2020 which requires a yearly growth of 3 per cent.
In addition to boosting short-term economic activity, Abenomics seeks to finance long-term goals such as fixing pension systems and improving social security which partly involves raising taxes to trim Japan’s mountain of debt. Consumption taxes and individual income taxes account are representing almost 30 per cent. Corporate taxes account for about 20 per cent—relatively high compared with peer countries. Japan is easing corporate taxes while keeping income taxes untouched. Thus, without a substantial increase in economic activity, a consumption tax hike would be crucial to make up lost revenue.
However, the government last year deferred raising the consumption tax until 2019, taking into account the fragile economy and uncertain global environment in the first half of 2016. A challenge for Abe now is how to maintain the positive momentum until the introduction of the new consumption tax rate. Even with time at hand, Abe’s task may be to provide “floors” to the economy, rather than pursuing the remarkable economic growth that he advocates—at least until the consumption tax rate hike.
The BOJ will likely continue to pay the costs of such floors. The biggest risk for the government and the central bank is yen appreciation. The “Trump shock” weakened the yen by almost 10 per cent from the time of the U.S. election through the end of 2016. That pushed Japan’s stock indexes into positive territory for the year—and helped Abenomics.
Courtesy: Bloomberg
