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Schroders: Economic and Strategy Viewpoint

27 March 2013. For professional investors only by Schroder Investment Management Limited.

Can Japan beat deflation? (page 2)
- The election of Shinzo Abe as Prime Minister has brought a renewed effort to end deflation in Japan. The Japanese Yen (JPY) has weakened significantly as markets anticipate a step up in the rate of asset purchases and further expansion of the Bank of Japan’s balance sheet. The fall in the currency will boost activity in Japan, but given the size of the output gap not by enough to hit the 2% inflation target. We estimate the JPY would have to fall another 10% to achieve this, unwinding much of the appreciation since the financial crisis.
- For the rest of the world a weaker JPY means greater competition from Japan and weaker trade performance. Most affected will be the rest of Asia, which has significantly increased its trade with Japan over the past decade. Further out, the main influence is likely to be an increase in capital flows as Japanese savers are squeezed by lower yields and higher inflation. The Yen funded carry trade is likely to return and there is a risk that efforts to resist currency appreciation result in overheating problems for Asia and the emerging economies.

UK: Going nowhere fast (page 8)
- The Chancellor’s fourth budget felt like a case of déjà vu – growth revised down, the deficit revised up, and austerity extended for another year. However, some measures for the corporate sector could be beneficial while measures for the household sector could spur activity in construction and related retail sectors.
- The Bank of England’s target has been tweaked as a signal that the government wants more activism. However, the bank appears to be hesitant for fear of a loss of credibility as an inflation fighter (see chart), which could drive sterling even lower.
- Finally, the labour market continues to surprise. Full-time employees are now dominating the gains in jobs, while the number of self-employed and part-time workers is falling. So are the numbers of people that are inactive. Could this be a sign that the labour market recovery is gathering momentum?

China: property sector shows signs of overheating (page 13)
- China is a country that can go from fears of a hard-landing to overheating rapidly, and there are tentative signs that the housing market may be beginning to experience the latter. New restrictions on the sector have been announced, but it would be unwise to rule out more.

Whilst we tend to focus on the US, Europe and China in our analysis, this month we take a look at Japan. The recent shift in policy could prove to be one of the key developments in the world economy this year as a reinvigorated Bank of Japan tries to bring an end to deflation. We assess whether it will succeed and how its actions may affect the rest of the world.

Another economy revamping its monetary policy is the UK. Here the problem is stagflation rather than deflation and we look at the state of the economy and some of the options facing incoming Bank of England governor Mark Carney. Bond Markets in Japan and the UK have pushed inflation expectations higher in response to these changes (see chart front page).

Read more: download the PDF below (18 pages in english)

economic_strategy_viewpoint_march_2013.pdf Economic Strategy Viewpoint March 2013.pdf  (279.94 Ko)

Jeudi 4 Avril 2013

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