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By HaleStewart March 11, 2018 7:12 am
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International Economic Week in Review: Australia and Japan Are Doing Fine

            The RBA kept Australian rates at 1.5%.  The bank’s policy announcement contained a standard overview of the Australian economy.  Let’s start with any central banks first focus: inflation:


The top chart shows overall Australia CPI, which rose to 3% a few years ago but has since fallen back to just under 2%.  The middle chart shows that “tradeables” were the primary reason for price increases (Australia is more export-dependent than other developed countries).  The bottom chart shows a number of underlying or trend CPI measures, all of which track the top chart in showing an overall decline in inflation over the last few years.   Australian prices are acting in much the same manner as a number of other developed countries.

            Turning to the employment market, we have the following sets of data:


The top chart shows that the employment and participation rates have increased over the last year, meaning the jobs market is pulling people in.  This doesn’t happen unless the prospects for employment have improved.  The bottom chart shows that the unemployment rate has been in a solid, long-term decline.  It currently stands below 6%.  The same chart also shows that underemployment rate has been steady.  This has been a problem for most developed economies during this expansion.      

            In other Australian news, 4Q17 GDP was up 2.4% Y/Y.  Household spending increased 2.9%.  While CRE investing declined 5.8%, investments in industrial goods rose 8.7% Y/Y.  Exports only rose .6%, while imports were 6.6% higher.  Retail sales advanced .3% M/M and 2.3% Y/Y; all subcategories of spending contributed save for the .2% M/M decline in department stores.

            Turning to the Australian dollar, consider the following two charts:

The top chart shows the AUD/JPY.  After falling from mid-2015 through mid-2016, the pair is now trading between the low-mid 80s and mid-high 90s.  The bottom chart shows the AUS/CNY, which rose from mid-2015 to mid-2017.  It moved sideways until recently when it trended slightly lower.  Currently, it’s in the 4.8/5 level.

            The Bank of Japan maintained their current interest rate policy on Friday.  They will maintain their “yield curve control” program, which means they will buy 10-year JCBs to keep the 10-year rate at or near 0%.  The offered the following analysis of the Japanese economy:

Japan's economy is expanding moderately, with a virtuous cycle from income to spending operating. Overseas economies have continued to grow firmly on the whole. In this situation, exports have been on an increasing trend. On the domestic demand side, business fixed investment has continued on an increasing trend with corporate profits and business sentiment improving. Private consumption has been increasing moderately, albeit with fluctuations, against the background of steady improvement in the employment and income situation. Housing investment has been weakening somewhat. Meanwhile, public investment has been more or less flat, remaining at a relatively high level. Reflecting these increases in demand both at home and abroad, industrial production has been on an increasing trend, and labor market conditions have continued to tighten steadily. Financial conditions are highly accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is around 1 percent. Inflation expectations have been more or less unchanged.

The markets also received the second estimate of Japanese 4Q17 GDP which was a good report and confirmed the bank's bullishness.  This table from the report shows the Y/Y percentage change figures for the last four quarters:

The pace of overall growth is accelerating; it has risen from 1.4% in 1Q17 to 2% in the latest reading.  Domestic demand is also rising.  Non-residential investment has grown over 3% in the last two quarters while exports have advanced between 6.7% and 6.9% for the entire year.  The low level of the yen relative to the dollar has no doubt helped:

The BOJ describes its economy as a “virtuous cycle:” employment leads to consumption and profits lead to investment.  Both cycles are now operating at full steam.

            Next week, two members of the RBA will give speeches.  We’ll also get a new RBA Bulletin and information on auto sales.  Japanese news includes the latest meeting minutes, industrial production and PPI.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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