The Taiwan Banker

The US is planning to raise interest rates this year. The New Taiwan dollar has been depreciating against the US dollar, falling below NT$ 30.4 to US$ 1 for all of June, a depreciation of 4.6% when compared with 29.06 at the end of January. Meanwhile, the yen rose to a recent high of ¥105.46 at the end of March, before falling back to around ¥110.3. (All currency rates below are relative to US$ 1). Has the dollar started becoming stronger, as the central bank raises rates, stimulated by the large tax cuts at the beginning of US President Donald Trump’s term? What impact will a strong US economy have on the rest of the world? Eisuke Sakakibara, known as “Mr. Yen,” said at a seminar in June that the yen will have the opportunity to hit the ¥100 mark in 2019.The dollar may weaken in the coming year, and the yen may reach ¥100Sakakibara argues that economic growth in the US has exceeded market expectations this year, so the dollar is stronger, and the yen will depreciate. “But I think that the US economy is reaching its peak this year. The Dow will reach a high, then slowly decline," he says. He said that the US is the fastest-growing advanced economy. This growth will continue into 2019, remaining higher than in the euro zone and Japan. President Trump was successful in stimulating the US economy, but unfortunately, this growth will not continue into the next year, he says. The Dow may decline, and the yen will appreciate – which will be a problem for Asia, particularly Japan.When the US economy peaks and then begins to decline, other currencies, such as the euro and renminbi, will appreciate. Sakakibara forecasts that the yen will hover at around ¥110-105 this year. He argues that if the US reaches its peak in the next two years, then declines, the dollar will depreciate, and other currencies will rise, and the yen could reach the ¥100 threshold as early as next year.The first event that will have a major impact on the global economy in the short term is the tariffs caused by the trade war between China and the US. Sakakibara said that the reason the US is trying to reduce its deficit with China is that China has the largest trade surplus with America. “Before, America’s largest trade deficit was with Japan. Our talks with the US were very difficult. I believe that the talks between China and the US will also be fraught with problems.”Such conflict is unfavorable to either China or the US. He speculates that there may be some closed-door negotiations between the two countries. “I suspect they may soon reach a certain understanding: after all, constant friction is good for neither country.”For Europe, he reminds us to pay attention to the voices who want to distance themselves from the EU, particularly movements advocating exiting the Eurozone. These exist in Italy, France and Germany. “Some voices have advocated for France and Germany leaving the EU, but I believe they are unlikely to do so.”Japan is a mature economy and can accept lower GDP growthAs for Japan, looking back on the last few years, Sakakibara believes that, Abenomics “has been very successful" to date particularly the monetary easing policy actively pursued by Bank of Japan Governor Haruhiko Kuroda, which caused the stock market to surge. Kuroda won’t be able to continue his easing policies until he is re-appointed, but central banks all over the world are starting to tighten their policies, so the market expects that Japan’s monetary easing will have an exit mechanism in as little as a year. He argues that “the global economy has already reached an inflection point on inflation.”Sakakibara says that Taiwan is already a mature economy, and as such, like Japan, a GDP growth rate of 1% is acceptable. Although growth will be slower than in the past, which might look like a recession, it is not.“Our great efforts for the economy have enriched peoples’ lives. The level of the economy is already quite high, and most Japanese people are quite satisfied with 1% growth.” Furthermore, although Prime Minister Abe hopes to see 2-3% growth, Sakakibara believes that it is not important – and it would not be easy for Japan to accomplish. Sakakibara continued, “If it is hard to implement, it may cause bubbles; further insisting on 3-4% growth may cause lower growth in the long run. I am quite worried that the next 10 years may see this kind of development.”The social values of Japan as a whole are now changing with the maturity of the economy. He pointed out that Japanese people are focusing more on quality of life, and less on career development, than in the past. “I see many gyms in Tokyo. At age 77, I go to the gym three times a week. Many elderly people go to the gym. I do weight training, and I also see a lot of 60 and 70 year-olds doing so.” He pointed out that there are 15-20 marathons in Japan every year, showing that people’s pursuits have shifted from accumulating wealth to being healthy, enjoying life, and other aspects of self-discovery. This is a manifestation of maturity, not of a recession.Three decades ago, however, Japan indeed did experience high growth. In fact, although the global economy is centered upon Europe and the US, Asia as a whole is still the fastest growing region in the world. The world’s top 10 fastest growing economies are all in Asia.After World War II, Asian countries became independent in turn, and Japan led economic growth during the 1950’s and 60’s, with annual growth rates of 9-10%.“Between 1979 and 2008, Asia was the fastest-growing region in the world. Although China is led by the Communist Party, it is much closer to a market economy than a planned economy.” Sakakibara mentioned that China’s 30-year average growth rate is 9.8%, Singapore’s is 7%, Vietnam’s is 6%, and Korea’s and Taiwan’s are 6.3% respectively. With China's rise, the growth engine of Asia has moved westward from Japan. The top 10 fastest growing countries in the world are all AsianSakakibara argues that Asia may remain the fastest growing part of the world for the next 30 years, and in 2050, the world's economic center may “return” to Asia.Sakakibara uses several examples to illustrate Asia's historical economic preeminence. For instance, he notes that before the 19th century, Asia had long been the economic center of the world. At that time, China accounted for 29% of global GDP. In the early 18th century, the combined GDP of China and India made up over half of that of the world as a whole, England made up 5.2%, and Japan was only 3%.During the mid-19th century, due to the influence of colonialism, Asia began to decline. The Opium Wars broke out in 1840, but Japan became one of a few countries not colonized by Western powers. Although Thailand claims to have never been colonized, it was in fact under the control of the British at the time. In the 20th century, the world economy was dominated by the US and Europe. Sakakibara made clear that in the 21st century, Asia will become the economic center of the world. He expects that China’s GDP will surpass the US's within 10 years. Meanwhile, the world's advanced economies are largely growing at a slow pace – in the case of Europe and Japan, just 1% annually. The US's growth rate is slightly higher, maintaining a consistent 2-2.5%. One of the reasons the US can grow faster than Europe and Japan is that it attracts a large number of immigrants, which help to stave off population decline. With young immigrants from Africa and Latin America bolstering its labor force, the US can be seen as "a developing country among developed countries,” Sakakibara said. In the next 40 years, Europe and the US will remain advanced economies, while Asian countries will be emerging economies, “but Asian countries will move towards the ranks of developed countries over the next 20-30 years, at which point the Asian era will arrive," he said. He reiterated that China’s GDP will surpass that of the US within 10 years, and its importance will continue to rise, but its era of double-digit growth is over. Economic growth began to steadily decline beginning in 2010, when it was 10%. This year the IMF predicts that the Chinese economy will expand 6%. Citing a report released by the US-based consultancy firm PwC, he noted that in the 35 years from 2015 until 2050, the countries with the highest growth prospects are ranked as follows: Nigeria first, and Vietnam second, both at 5.3%; India third, at 4.9%, while China will be 3.4%. By 2050, China’s GDP will be the largest in the world, estimated to reach US$ 61.7 trillion. India, in second place, will reach US$ 42.21 trillion, surpassing the US, in third place, at US$ 41.38 trillion.China or India: who will be the next great power?Based on the estimations by the IMF and PWC, as early as in 2014, India’s GDP growth exceeded that of China’s. In 2018, it is projected to reach 7.36%, surpassing China’s. Although China’s GDP will exceed that of America’s within 10 years, India’s is also expected to pass the US in 2040, at which point Asia will once again become the economic center of the world.More specifically, Sakakibara believes that India’s long-term economic growth potential exceeds China's. He notes that India’s economic base is only 1/5 of China’s. With effective economic policy, it can continue growing at 7% annually. Moreover, its population is still growing. 54% of India's working population is under age 25, so its labor force will continue to grow. In contrast, China’s population has plateaued. India’s population will reach 1.6 billion in 2050, while China will stay at roughly 1.3 billion.Meanwhile, Sakakibara points out that Japan and India have had close relations since World War II, and that their prime ministers regularly make reciprocal annual visits. Sakakibara said that Japan understands India very well. During the war, Japan supported its national army against Britain, so many Indian independence activists came to Japan. Although historical burdens have strained relationships with China, and relations with Korea are delicate, Japan’s relationship with India has remained quite positive.Sakakibara said that India’s current Prime Minister, Narendra Modi, has 15 years of experience governing Gujarat, and has transformed it into India's fastest growing state. It has successfully industrialized, giving Modi a reputation as an effective leader, and a party leadership post. With good economic conditions and governance, India will continue to achieve 7% or even 8% annual growth.