Debt, demographics and disinflation: Japan's 3-D lessons for Asia


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People cross a street in a business district in Tokyo, Japan, February 16, 2016. REUTERS/Thomas Peter
People cross a street in a business district in Tokyo, Japan, February 16, 2016. REUTERS/Thomas Peter


A rapidly aging workforce, soaring debt and tumbling factory prices. Sound familiar? The same problems that crippled Japan’s economy now threaten the rest of Asia.
The so called 3-D challenge -- debt, demographics and disinflation -- is most pronounced in China, Hong Kong, South Korea, Singapore, Taiwan and Thailand, according to Morgan Stanley analysts led by Chetan Ahya, co-head of global economics and chief Asia economist.
“We think that the experience of Japan in the 1990s could serve as a useful framework,” the analysts wrote in a Feb. 17 note.
The similarities between Japan then and Asia now include: an excessive reliance on exports and manufacturing, high leverage, aging workers, overcapacity, overly tight monetary policy, persistent deflationary pressures and high corporate debt levels. Six of 10 economies in Asia examined by Morgan Stanley, excluding Japan, are faced with aging populations. Seven of the countries have debt which is close to, or more than double the size of the economy, and nine have factory prices stuck in deflation.
Asia’s fast-growing emerging markets, led by China, were pointed to as a beacon of hope for the world economy in the aftermath of the 2008 financial crisis. Now, pain is increasingly evident as exports fall. South Korea shipments in January declined the most since 2009. Taiwan and Thailand are among those countries to recently warn of slower output and falling prices.
That’s pressuring central banks and governments to do more to boost growth. China’s authorities are stepping up infrastructure spending to keep the economy growing at an annual pace of at least 6.5 percent. Analysts say Asian central banks including those in South Korea and Singapore will have to ease policy over coming months.
Morgan Stanley’s team proscribe a five-step solution:
  • Accept slower growth in line with structural factors such as the aging demographics, high debt levels and slowing productivity.
  • Clean up the banking system and tighten prudential oversight.
  • Cut real interest rates to boost borrowing but also allow for the ensuing exchange rate fluctuations.
  • Unleash fiscal stimulus as necessary.
  • Drive through structural reforms that would boost investment.
As the largest economies, China and South Korea will be most able to influence their outcomes, the Morgan Stanley analysts wrote. “In contrast, the other economies, due to their smaller and open nature, will be to a large extent affected by external conditions and tied to the pace of the adjustment that China will be taking up.”
Fresh Chinese inflation data today underscored the scale of the issue for the rest of Asia. Producer prices fell 5.3 percent in January, extending declines to a record 47 months. China surpassed Japan as the world’s No. 2 economy by gross domestic product in 2010.
The weaker pricing pressures across Asia mean that Japan is no longer an outlier on the inflation front. Core inflation in Japan is higher than in Singapore and Thailand and half that of China and Vietnam, according to Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong.
“That gap used to be a lot wider. But no longer,” Neumann said. “When it comes to inflation, everyone is starting to resemble Japan.”

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