“The central bank still sees room for more rate cuts,”

TO BE NOTED: From Bloomberg:

"China Has Room to Cut Interest Rates on Low Inflation (Update2)

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By Li Yanping

March 28 (Bloomberg) -- China has room to cut interest rates as consumer prices may end the year unchanged, the central bank said after inflation fell in February for the first time since 2002.

“The central bank still sees room for more rate cuts,” Zhang Jianhua, the research head of the People’s Bank of China, told an economic forum in Beijing today. “We haven’t yet cut rates because money market rates have dropped to quite low levels and banks have abundant liquidity.”

China’s consumer price index may stand at zero for 2009 and the nation may escape deflation because of “strong loan growth” and the government’s 4 trillion yuan ($585 billion) stimulus package to spark an economic recovery, Zhang said.

Plunging prices have increased the risk that deflation will become entrenched, prompting consumers to delay purchases, squeezing company margins and triggering wage cuts. Premier Wen Jiabao, who this month set a 4 percent inflation target for 2009, is relying on a surge in lending and the support measures to spark an economic recovery.

Wen said March 13 the nation’s 8 percent growth target for this year is “difficult but possible” to achieve. People’s Bank of China Governor Zhou Xiaochuan said this week that leading indicators are pointing to an economic recovery.

Second Quarter

“By mid-June, government leaders will have a better idea how well the stimulus package worked,” Jia Kang, head of the Institute of Fiscal Science under the Ministry of Finance, told reporters at today’s forum. “Growth in the second quarter will be key for further policy moves, and if recovery is not seen the government is likely to roll out more stimulus.”

Wen said this month at the closing of the national congress that the government has “adequate ammunition” to add to its 4 trillion yuan stimulus package at any time.

“Economic indicators may look ugly this quarter because of the high comparative basis last year,” Jia said.

Inventories at local companies have started to fall and stockpiles may need replenishing in the second quarter, the central bank’s Zhang said. “An increase in inventories will provide concrete proof industrial production and the economy are recovering,” he said.

China’s economy in the fourth quarter grew 6.8 percent from the same period a year earlier, lagging the 9 percent expansion for all of 2008 and 13 percent for 2007. Industrial output growth slowed, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.

Domestic Demand

“The rest of the year will be a struggle between coping with falling external demand and stimulating local consumption,” Zhang Yansheng, a researcher with the National Development and Reform Commission, said today. “Whether the government can achieve its 8 percent growth target hinges on domestic demand.”

Gross domestic product’s growth will gradually recover to 8 percent or more this year after touching a low of about 6 percent this quarter, Zhang Liqun, a researcher at the State Council Development and Research Center, said at a separate conference.

The government’s stimulus measures may add 2 percentage points to growth and may help make up for the loss caused by the drop in exports, Zhang said. Car sales may continue to rise for the rest of 2009 and property transactions may grow, Zhang said. These private investments will add to the government stimulus package and help bolster growth, he said.

Loan Growth

China’s new local-currency loans more than quadrupled from a year earlier in February to 1.07 trillion yuan, the central bank said on its Web site March 12, after it cut borrowing costs five times last year, scrapped quotas limiting lending and urged support for the stimulus plan.

Vehicle sales rose 25 percent in February and urban fixed- asset investment jumped 26.5 percent in the first two months from a year earlier.

Lending continued to rise in March and the growth “isn’t that much smaller” than in previous months, the central bank’s Zhang said, without giving a number. “We are likely to see sustained loan growth for the rest of the year.” The stimulus package is showing some results, he added.

Falling Exports

Zhang at the reform commission, China’s top policy maker, said the country’s exports may fall 10 percent this year while imports may drop 5 percent. China’s trade surplus may shrink $200 billion this year, compared with a gap of $295.5 billion in 2008, he said.

The World Bank cut its forecast for China’s growth this year to 6.5 percent from 7.5 percent previously. The Organization for Economic Cooperation and Development said it will reduce its estimate this month to between 6 percent and 7 percent as the global slump deepens. The International Monetary Fund sees a 6.7 percent expansion, the least since 1990."

"Japan’s exports plunged the most on record in November "

Bloomberg with some ugly numbers from Japan:

"By Toru Fujioka

Dec. 22 (Bloomberg) -- Japan’s exports plunged the most on record in November as global demand for cars and electronics collapsed, signaling more factory shutdowns and job cuts are likely as the recession deepens.

Exports fell 26.7 percent from a year earlier, the Finance Ministry said today in Tokyo. Economists surveyed by Bloomberg News predicted a 22.3 percent decline. The drop was the sharpest since comparable data were made available in 1980.

The Bank of Japan lowered its benchmark interest rate to 0.1 percent last week after business sentiment dropped the most since 1975 and the yen surged to a 13-year high against the dollar. Honda Motor Co. said last week that it may shift manufacturing overseas if the currency strengthens further( INTERESTING. WHERE? ).

“Japan’s export crash is finally upon us, and this is the worst thing that could happen,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The recession will be very severe as companies adjust investment, production and labor.”

The yen traded at 89.70 per dollar as of 9:35 a.m. in Tokyo from 89.50 before the report was published and 87.14 on Dec. 17, the strongest since 1995. The Nikkei 225 Stock Average edged 0.6 percent higher after the U.S. government agreed to provide General Motors Corp. and Chrysler LLC with emergency loans.

Gross domestic product shrank in the past two quarters, sending the world’s second-largest economy into the first recession since 2001. The government last week forecast zero growth for the year starting April 1.

Toyota, Sony

Honda, Toyota Motor Corp. and Sony Corp. are among the companies that are shedding thousands of workers and closing production lines as profits dwindle. Car exports slid 32 percent last month, the most ever, and semiconductors slumped 29 percent, the ministry said.

Today’s report showed the global recession is spreading to the emerging markets that propped up exports earlier this year as demand from the U.S. and Europe evaporated. Exports to Asia fell 27 percent, the most since 1986, after the first decline in six years in October. Shipments to China, Japan’s largest trading partner, fell 25 percent, the steepest drop in 13 years.

“There are no markets that can make up for the drop in demand for Japanese-made goods,” Dai-Ichi Life’s Shinke said.

Exports to the U.S. tumbled a record 34 percent, and those to Europe slid 31 percent, the second-most ever.

Imports fell 14.4 percent, the first decline in 14 months, as oil costs eased and the yen gained. That wasn’t enough to prevent a trade deficit of 223.4 billion yen (2.5 billion), the third shortfall in four months.

Yen’s Damage

The yen strengthened 25 percent against the dollar this year as the global financial crisis prompted investors to sell riskier assets purchased with money borrowed in the currency( THAT'S THE CAUSE. THE FLIGHT TO SAFETY AGAIN ).

Honda President Takeo Fukui last week said the government should take action to halt the yen’s rise. Every 1 yen gain against the dollar cuts Honda’s annual operating profit by 18 billion yen ($201 million), according to the automaker. About 90 percent of Honda’s revenue comes from overseas.

Companies are also struggling to obtain funding as the market turmoil dissuades investors from buying corporate debt( THE SAME AS HERE ). To help businesses get financing, the Bank of Japan last week decided to buy commercial paper for the first time( SOUND FAMILIAR ).

Sales at home are unlikely to make up for the collapse in demand from abroad. Households, whose confidence is at a record low, pared spending in each of the eight months to October as wage growth stagnated and job prospects worsened.( JAPAN IS A SAVER COUNTRY )

The Finance Ministry last week submitted an extra budget for the year ending March that includes 2 trillion yen in cash handouts for households as Prime Minister Taro Aso tries to spur spending. That may be too little, too late, economists say.

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad( SOUND FAMILIAR ? ).

No wonder there's a global recession. There's no learning curve anywhere. I wonder what Asano is saying now?

"mortgage applications for home purchases has fallen this year. A similar refinancing gauge has more than doubled in the past month"

Bloomberg says that refinancing is the main beneficiary of lower rates:

"By David Wilson

Dec. 17 (Bloomberg) -- The Federal Reserve’s efforts to make homes more affordable have yet to bolster buying and instead are fueling a surge in refinancing, according to data compiled by the Mortgage Bankers Association.

As the CHART OF THE DAY shows, the association’s index of mortgage applications for home purchases has fallen this year. A similar refinancing gauge has more than doubled in the past month. Last week’s figures came out today.

Both indicators appear in the top panel. The bottom panel shows refinancings as a percentage of all applications, which climbed last week to the highest level since June 2003.

“The dramatic steps the Fed is taking to lower mortgage rates are mainly intended to spur purchases” and stem a decline in prices, Peter Boockvar, a strategist at Miller Tabak & Co., wrote today in an e-mail.

There is “very little evidence” so far to suggest the central bank’s moves are working, Boockvar wrote. “The Fed is truly out of bullets” to support housing if the industry fails to recover by next year’s second quarter, he added.

The average rate on a 30-year, fixed-rate home loan has declined about a percentage point since the end of October to 5.47 percent, according to Freddie Mac."

I didn't think this would do much good.

"This led me to correctly predict that as the housing bust picked up steam in the U.S., the trade deficit would peak as a percent of GDP."

From Calculated Risk, an interesting chart:

"Perhaps we have seen a Virtuous Cycle as depicted in the following diagram:

Click on graph for larger image in new window.Starting from the top ... lower interest rates have led to an increase in housing prices. And those higher housing prices have led to an ever increasing equity withdrawal by homeowners. ... it is reasonable to assume that a large percentage of this equity withdrawal has flowed to consumption, increasing both GDP and imports over the last few years. ... it appears mortgage equity withdrawal has been a meaningful contributor to the ever widening trade and current account deficits.

To finance the current account deficit, foreign Central Banks (CBs) have been investing heavily in dollar denominated securities. Some analysts have suggested that these investments have lowered interest rates by between 40 bps and 200 bps (Roubini and Setser: "Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006")

If these analysts are correct, and foreign CB intervention is lowering treasury yields, then this has also lowered mortgage interest rates ... and the cycle repeats. The result: a Virtuous Cycle with higher housing prices, more consumption and lower interest rates.

As a result of the rapidly increasing housing prices, we are now seeing significant speculation, excessive leverage and poor credit quality of new homebuyers; all the signs of an overheated market. ... What happens if the housing market cools down? "

It's very informative, and there's a counterclockwise one as well called the Vicious cycle.

It's truly informative as to the what and why, but not the who. Here's my comment:

Don the libertarian Democrat writes:

Are there any human agents in these cycles, or is this like a mechanism? At what point do individual human decisions pass over from possible to inevitable in this schema, or do humans even matter? Or only the movement of money and other financial products?
Don the libertarian Democrat | Homepage | 11.01.08 - 10:52 pm | #