China Research

1. Financial markets have become nervous again about emerging markets. We have seen this flock mentality some months ago. Now it’s back again. Surprised?

2. The answer is “yes” and “no”. Yes, because many analysts never seem to understand how emerging markets really work. They are far from perfect. Shortcomings can be found in many respects: politics, social issues, the financial system, other institutional conditions, macroeconomic balance, etc. No, because financial markets frequently tend to show flock mentality, overconfidence and overreactions also when it comes to emerging markets. This is not new. Now, it’s time again.

3. Many financial analysts complain about lame structural efforts in many emerging economies. What do they expect? Sure, there are so many institutional and political impediments for improvements in this group of countries. Corruption, nepotism and rent seeking are just three of them. How on earth can rapid reduction or elimination be expected in all these complicated areas? By the way, emerging countries do not have homogeneous political, social and economic conditions

4. Consequently, emerging markets have been analyzed too negligent for a long time – and they still are. They are, of course, different from mature countries which by the way can be very reluctant on economic reforms as well. Thus, we should analyze the group of emerging economies and their individual “member countries” at least somewhat differently.

5. One of the major analytical problems is the fact that Western emerging market analysts too much and for too long time have been concentrating on GDP growth and too little on other important indicators, those from microeconomics and financial markets included. Too much focus on GDP growth may be misguiding, particularly in the medium and longer run.

6. Furthermore, it’s not good enough to watch developments in China, India or other emerging economies only from the screen. All these emerging countries function differently compared to our part of the world. “Screen analysis” gives, of course, country analysis even more herd behavior.

7. However, it’s not easy to get out of this analytical dilemma. Most employers would not allow their economists, strategists or sales planners to travel to all these interesting emerging countries in order to get more necessary impressions from “field research”. But it should be done wherever the financial resources are in place.

8. Speaking on my own behalf, I have to conclude that my recent trip to China a few weeks ago gave me more input for the interpretation of the Third Plenum’s communiqué than all the hundreds of pages I read about China’s new economic strategy. Or I should put the following way: just reading about these 16 major points of reforms and their 60 subtitles would not have been enough.

9. What makes future economic developments in China particularly exciting is the great number of goal conflicts that may emerge from these 60, more detailed reform areas. Such an analytical exercise demonstrates that structural reforms in emerging countries are not easy at all.

10. Deepened studies of this kind could make many Western analysts a little bit more humble. The current arrogance against many emerging countries – despite all their really existing shortcomings – cannot always be considered as fair.

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

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Japan has a problem. The problem is called “Abenomics”. “Abenomics” is actually not “Abenomics”. It is “Ahonomics”. “Aho” is a Japanese word meaning “silly”, “stupid”, “idiotic” and so forth. You get the general idea. I have been trying to make the word “Ahonomics” catch on ever since I thought of it. Indeed I have succeeded to some extent since the word made it onto the short list for “The Word of the Year” award which is given out by a well-known publisher in Japan at each year-end.

“Abenomics” is “Ahonomics” for a variety of reasons. Let me focus on just one for this piece. It is targeted at the wrong problem. And it is applying wrong and dangerous tactics to solve this wrong problem.

The Abe government thinks that what the Japanese economy lacks is growth. This is wrong. For one thing the Japanese economy has actually been growing albeit very modestly for much of the past decade. Moreover, it is already a very large economy. It is also a mature economy with more than enough socio-economic infrastructure to keep it functioning smoothly. It is also a very rich economy. It really does not need to keep on growing faster to make ends meet.

Yet for all these accomplishments it is not a perfect economy. Far from it. It has one very pointed issue that needs to be addressed. This is the issue of what I would like to call poverty in affluence. Japan is immersed in all this affluence. Yet in the midst of it, we have growing numbers of people who are the working poor. Who suffer harsh working conditions. Who live highly precariously under short-term labour contracts whose terms are apt to infringe on codes of human rights protection. Recent figures have it that 16% of the working population in Japan lives below the poverty line. The countries with the lowest rate of poverty are Denmark and Sweden both with only 5.3% of the working population falling below the poverty line. Their low rates of poverty do them much credit. By comparison, for the Japanese economy with its maturity and affluence to have a poverty ratio that is three times as large as those of the Nordic nations is a very strange state of affairs.

Not only is this strange. It is scandalous. Not only is this strange and scandalous, it is also bad for the economy. Mr. Abe claims he wants to get rid of deflation in Japan. He will never accomplish this if he does not pay attention to this issue of poverty. With this many people living in poverty there is no way that Japan could ever get out of the deflationary cycle.

So how do you go about resolving this problem. The obvious answer is redistribution. Japan’s affluence is not being distributed properly. There is too much concentration of wealth. Japan’s rising Gini index indicates this. Policies need to be put in place which can redistribute the overall wealth in our hands in a more equitable fashion.

There are two very immediate ways in which this redistribution can be achieved. One is to raise wages. The other is to raise interest rates. Wage increases speak for themselves. People need to be paid more if they are to spend more. For the sake of fairness it has to be said that the Abe government has been working on this. But only through cajoling and bullying companies to raise headline wage rates. This would only drive companies to resort more extensively on short-term low paid labour.

For interest rates to start earning some money for ordinary small investors is also important. People’s deposits should reap soe interest for them. But this is not going to happen under a monetary regime which sticks with zero interest rates. Yet Japan’s monetary policy will never be able to stop the quantitative easing and the zero interest rates that go with it. This is because this great monetary easing is the only thing that is standing between the Japanese government and bankruptcy. Team Abe at the Bank of Japan has gone out of its way to turn the BOJ from a central bank into a spcialised money lender for the Japanese government. The BOJ might as well stop calling itself a central bank since propping up the government is all that they seem interested in these days.

Yet another name I have for “Abenomics” is “Dopingnomics”. It is an attempt to inject all kinds of questionable substances into the Japanese body economic so that it can start running at top speed again on the strength of very artificially pumped up muscles.

One wonders what all this is really in aid of. The suspicion deepens that it is all about “Fukoku-Kyohei”. “Fukoku” means a rich country. “Kyohei” means a strong military. Is there a hidden agenda here of building up a nation that can go to war again ? Indeed this agenda seems to become less hidden and more apparent by the day as Mr. Abe bulldozes his official secrets act through parliament.

Noriko Hama
Professor & Dean at Doshisha Business School, Kyoto

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– This is the big issue and partly a generational thing. Interest rates have been going down since the early 80’s. Younger people are just complacent about this, believing that interest rates always go down. Apart from that, there is a feeling of desperation in some areas. Los Angeles is an interesting example of this. People there seem to think that the real estate bubble will never end – or if it ends it will be at a much higher level than now.

These people worry that they can miss the chance of buying a house. They want to lock it in. They want to get the house and feel a sense of urgency. Many are borrowing very large amounts on flexible-rate mortgages because payments are affordable when interests rates are very low. They are not concerned about rising interest rates because they assume their incomes will be going up.

However, a lot can happen which people tend to forget. By the way, real interest rates are not really low in a historical perspective.

Buying a home is a very emotional decision, especially buying a home for the first time. Right now, the decision is what kind of house to buy. You could buy a depressing and affordable house, or a nicer one that will not be affordable when rates rise.

The importance of behavioral finance for financial markets is now widely accepted. However, a number of economists argue that behavioral finance now needs more support from psychological research.

What should be done?

– Much more can be done. I think we are just at the beginning. It is still at the frontier. The combination of economics and psychology is probably the most exciting area in the profession today. Mathematical economics has been dominating for some decades and has had an impressive development. But it has cut economics off from other sciences.

Meanwhile psychology, sociology. anthropology, political science and ecology are gaining momentum as factors driving economic behavior. These disciplines have to be combined with economics which is not easy to do. Academia needs more professional interaction. Especially professors have to promote this.

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