In case you had not noticed, the IMF is blogging and it is not "merely" the garden variety IMF staffers they are rolling out to fill the pages; nope here we are treated to the likes of Blanchard, Atkinson, Lipsky, Cottarelli and a host of other of the Fund's A-listers. Consequently, it would seem that in an already (over)crowded world of econblogging, the IMFdirect blog merits more than a little bit attention.

In the past week, the dual post coverage by Mr. Anoop Singh of the recent Regional Economic Outlook for the Asian and Pacific Region caught my attention in particular. In the first, Mr. Singh invokes among other things the puzzle of Asia's relatively sharp recovery given the notion that the region is largely dependent on exports to grow. Two reasons especially are important here. One is the simple fact that as these economies moved into the crisis with bulging coffers (especially on the reserves vis-a-vis the rest of the world), the room for fiscal manoeuvre was greater and it was used decisively. According to calculations by the IMF, the collective stimulus programs in the Asia-Pacific region added 1.75% to GDP growth in the first half of 2009 and it makes the programs even more generous than those observed in the OECD and other emerging markets. Secondly, Asian economies has benefited from the, so far, V-shaped comeback by part of the global economy and key regions who are likely to grow smartly in h02-2009.

It is indeed an old adage that while goods things are to be preferred over bad things, it is possible to get too much of the former. Looking at recent comments from the governor of the Reserve Bank of Australia, it is not difficult to imagine how these, albeit old and worn, pearls of wisdom may well have inspired Mr. Stevens in his effort to tiptoe the tightrope between signalling the intention to raise rates into an expected economic recovery and trying to prevent the Aussie shoot of on helium into the sun with wings of wax on the other.

To quote Bloomberg:

Last week, we learned that industrial production rose yet again in Japan clocking in at 1.4% month-on-month in September after having increased by 1.6% in August.

Companies said they planned to increase production in October and November as well, indicating the recovery from a record export collapse in the first quarter is holding up. Growth in China is generating sales for manufacturers including Hitachi Construction Machinery Co., which this week said it has worked off stockpiles that piled up during the recession.

After a nice and entertaining week in Barcelona where I had the privilege not only to hold a seminar at the Universitat Autònoma de Barcelona, but also to meet a host of interesting people, I thought that it would be about time that I finished my piece on the latest data from Japan which admittedly will be a bit backward looking, but hopefully interesting nonetheless.

Beauty, as they say, lies in the eye of the beholder and perhaps this axiom is worthwhile contemplating when thinking about the immediate condition of the Japanese economy or indeed the global economy and her asset markets, but for the sake for simplicity . Consider for example the news, out a week ago, that Japan's current account surplus widened 10% in August over the year. In an economy where external demand is the main driver of economic growth, this is a significant piece of news and should rightly be interpreted as a positive sign. Or should it?

I am a sucker for a good argument presented with the correct dose of eloquence and cold facts, and John Hempton's latest tour of the balance sheet of the Spanish bank BBVA is just that. Essentially, John sets out to address the question of whether Spanish banks are hiding their losses or, as John ultimately goes on to argue, front-loading their eventual losses by extending credit to bad debtors in stead of writing down on the balance sheet.

Of course, this is not only a question of the practices of BBVA and whether you buy John's extrapolation from the case of BBVA to the case of the entire Spanish banking industry and on to the Spanish economy and the Eurozone itself, I believe the analysis and underlying points deserve a closer look. Personally, I do think that this is one of the most important questions we face in the context of the ongoing financial crisis, namely the extent to which the periphery of the Eurozone (and in particular Spain) harbour the ingredients to pull the whole edifice down or very close to the brink as a result of an unravelling which lies ahead in the beginning of 2010 as government and monetary stimulus begins to wane and/or the pressure from deleveraging and internal devaluation becomes too much.

The analysis that follows accompanies Manuel's political overview, over at GEM, of the recent events in Germany as well as Edward's economic survey of the current state of play in the German economy (forthcoming). Essentially we are going to have a look at, arguably, one of the more salient features of the German economy in the recent period, namely that of her dependence on exports to grow. What we are going to ask here is then furthermore whether this presence of export dependency is related to the fact that Germany is one of the oldest economies in the world measured on median age (currently running at approximately 44 years)[1]. This is a bold claim and if it is unlikely that we will be able to provide decisive evidence for our claims that Germany; 1) is dependent on exports to grow and 2) that this can be traced back the economy’s aging population, we hope that at least we will provide some perspective. As an editorial note, the arguments presented follows closely Vistesen (2010) which is essentially a working paper under preparation at this point in time.

In the first instance, it is worthwhile to point out that while export dependency in the form it will be presented here enjoys very little, if any, backing in the academic literature it remains one of the more popular ways to narrate the German situation in the context of its recent economic performance, not least in a financial crisis context (see e.g. Martin Wolf Martin Wolf (2008) – Global Imbalances Threatens the Survival of Free Trade). The main question which arises is thus how the global economy will, or indeed can, emerge in a situation where hitherto external deficit nations (the US, Spain, etc) now have to live less off of foreign borrowing while those surplus nations supporting these deficits cannot arrive at stimulating domestic demand. This question which ties together a lot of the contemporary discourses on the global economy is important to keep in my as we move along into a more static world of academic theory.

I should immediately reassure my readers that I am not going to re-account or even continue Macro Man's story of 2007 in which Sherlock Holmes was looking for a vanishing bid in risky assets. Also, I am not sure that we are actually looking at a bid which will vanish but one which will perhaps taper off gradually or so at least is the estimated scenario policy makers would like markets to believe in. Of course, recent messages from the BOJ suggested a very cautious stance towards the economic outlook and although the ECB's chairman Trichet has ardently argued that an exit strategy from extraordinary financing provisions, the statement that, now is not the time to exit, still echoes most of the official messages coming from the ECB.

But perhaps more important than when to exit is the question of how and whether indeed it will be so easy and simple for central banks to simply wind down the supply of medicine. In the context of the ECB for example, I remain rather sceptical.

As the discourse is slowly but surely tilting towards exit strategies, by part of central banks, from ultra low interest rates and unconventional measures the BOJ opted to day to maintain a very cautious stance towards the incoming green shoots and whether they will prove enough to lift Japan out of the mire.

(Quote: Bloomberg)

What follows is essentially the fruit of the last week's labour. It is a detailed look at the ECB's balance and the related question of whether we can call, what it is that ECB the is doing quantiative easing or not? Needless to say, I think that this question is an important one in a general context since if I am right and if the crisis has indeed now moved to the center and periphery of Europe, in stead of the US, then a close look at the ECB's policies is not only merited, but quite important.

With the distinct risk of turning this into a cheesy copy of the Oscars show I should thank Edward Hugh for his patient and thorough back-editing of the piece for English language as well as the actual arguments themselves. All mistakes and mishaps naturally fall entirely on my shoulders and criticism should be directed accordingly. I reproduce the executive summary below and the full report is online here where you can download it in PDF format. The analysis includes data up until week 35 (and July for the monthly data). If you want a copy of the spread sheet, please let me know.

Much pomp and circumstance was certainly made in relation to the fact that Japan actually grew in the second quarter at a full annualized 3.7 percent in the second quarter of 2009. Yet, the underlying numbers to suggest a recovery are still sorely missing. Deflation now seems to have taken hold, unemployment is rising fast and although the recent manufacturing PMI provided us with an upbeat signal, the underlying trend still is still that of a very tepid recover, if at all, or just a plain slump.

(quote Bloomberg)

China! China! burning bright

In a bubble, Day and Night

Is it Bust or is it Boom

According to the well known textbook in international economics by Maurice Obstfeld and Paul Krugman [1] the notion of original sin refers to the fact that many developing economies are not able to borrow in their own currencies but are forced to denominate large parts of their sovereign debt in order to attract capital from foreign investors. The argument then goes that if and when the goings get tough those countries will face difficulties paying off their liabilities and once the dust has settled, the sin as it were, has only become more binding when these same economies yet again venture into international capital markets.

It is interesting to ponder this story in relation to Eastern Europe where far from being a sin the ability to denominate liabilities in foreign currencies such as Euros and Swiss Francs was almost seen as a virtue of modern capital markets during the boom years which followed the famous meeting in Copenhagen which saw the European family expand to 25 countries, a number which now has risen to 27. On the face of it, it is not difficult to see where this virtue came from. Aggressive expansion by western European banks into the CEE and a low volatility environment ultimately driven by the notion of a road map towards convergence bound to bring forth an equalization in living standards and, in the case of many CE economies, a certain membership into the Eurozone underpinned the fact that the ability to shop foreign currency loans was hardly a sin, but a natural counter product of the newly formed European community.

In a recent article published in Slate, Daniel Gross gets to the heart of the matter. Essentially, he argues that one of the principal reasons that Japan is not rising is that it has failed to do its homework in the human capital department or as Gross phrases it, while Japan is still leading in engineering, this is not the case with respect to social engineering.

Japan still retains its lead in engineering. A showroom at Panasonic's headquarters displayed a heated, multifunction toilet seat that conserves energy. (Wouldn't leaving the seat cold conserve even more?) The sleek Shinkansen bullet trains roll up to their appointed spots on time. TKX, an 87-year-old Osaka-based company that makes abrasives, has adapted its expertise to cutting silicon ingots into wafers for solar panels.

For regular observers of Japanese politics (which does not include yours truly), this will be something of a non event. In fact, it has been brewing for more than a while given the rising unpopularity of the ruling LDP and its stifled leadership (a wobbly minister at a G7 meeting springs to mind). However, it is still significant, I think, that the troubled PM Aso and his equally troubled party, the LDP have decided, in all probability, to throw in the towel.

Now, one would imagine, begins a political war over economic policies, consumption taxes, pension systems etc. The economic effects of this may be important once we get an indication of what the opposing parties have in store. Clearly, the Aso and the LDP in general look set to suffer a crunching defeat come August, but I won't even dare to venture a formal prediction. According to Reuters (see below), markets appear dissapointed that the elections would not come sooner, but then again; August sounds pretty soon to me.

I really don't want to beat a dead horse here and although I already gave it a kick in the context of the release of the May consumer price data, I do think that this is a pretty significant [quote from Bloomberg with my emphasis].

Japan’s producer prices fell at a record pace in June as oil costs declined and companies required fewer materials amid a global recession. The costs companies pay for commodities and unfinished goods tumbled 6.6 percent from a year earlier after sliding a revised 5.5 percent in May, the Bank of Japan said today in Tokyo. The median estimate of 22 economists surveyed by Bloomberg News was for a 6.4 percent drop.

"Being a Keynesian means being a Keynesian in both the good and bad times."

Andres Velasco (Finance Minister in Chile) [1]

I have had a nice weekend not least because I have finally received my new laptop and as the first, of many, blog entries to be typed I would like to point your attention to some recent comments made by the German finance minister Peer Steinbrueck in the context of the increasing risk of further downgrades of European sovereigns following the decision by Standard and Poor's to downgrade Ireland's debt rating for the second time in 2009. As I think a bit about what it actually is Mr. Steinbrueck is saying, I cannot help but feel that our good Finance Minister is perhaps feeling a bit too smug here. Now, as Mr. Steinbrueck points out and as has been the source of wide debate, this is an issue which reflects itself in the widening of sovereign yield spreads among economies in the Eurozone (picture courtesy of Ibex Salad).

click to enlarge

It appears that there is still some green shoots left in the news from Japan even though the underlying picture is one of deteriorating fundamentals. We learned recently how Q1 was absolutely horrid in Japan with out declining at an annualized 15.2% which, I a dread to say, are numbers normally reserved to the likes of the Baltics, Ukraine and Hungary [1]. The second quarter will no doubt offer some improvement and the second derivative is likely to be all over the Q2 data in general. However, the real question is what kind of recovery or stabilization we will observe and as Edward pointed out recently those two things are not the same and what we most likely to see is the latter and not the former.

In Japan the green shoots crowd soldier on with the news that industrial production showed second consecutive month of expansion in April. Output consequently rose a healthy 5.2% from March and factories are estimated to continue the increase in production throughout May and June:

Daedalus warned his son not to fly too close to the sun, nor too close to the sea. Overcome by the giddiness that flying lent him, Icarus soared through the sky curiously, but in the process he came too close to the sun, which melted the wax. Icarus kept flapping his wings but soon realized that he had no feathers left and that he was only flapping his bare arms. And so, Icarus fell into the sea. - Wikipedia entry on Icarus

Whether it is merely temporary or a sign of something more durable, it is hard to escape the fact that as the discourse on green shoots and second derivatives linger we might be entering a new leg of this crisis. Thus, there should be no mistake. We are very much still stuck in the mire and especially so in the context of the so-called developed OECD economies where it is difficult to see where any speedy recovery is going to come from. On the other hand the world is not made up entirely by the OECD edifice and it is exactly the potential for an asymmetric "recovery" and how global monetary policy might serve to transmit such a recovery which is the topic of this entry.

I am sure all investors, analysts, and commentators have been tracking a wide range of indicators to gauge whether the shoots of green would continue to spark or whether it was merely a blip on the way down. Clearly, this seems to have been little more than a blip and for my own part, decisive evidence came today that things might have changed. I am of course talking about the Bloomberg report (also here) that Japanese housewives are once again making their presence felt in currency markets playing the carry wheel.

Individual investors in Japan increased bets to the most in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.