Aurelia Butler

Simon Kuznets, the Nobel laureate known for his work on standardising the measurement of gross national product, used to group economies into four broad categories: under-developed, developed, Argentina and Japan.From the 1960s, Japan’s extraordinary growth appeared so unique to Kuznets that it warranted its own category. But, starting in the late 1990s, Japan became an outlier in another way: it was the only advanced economy in the world where inflation, interest rates and wage growth all remained near zero — or in some cases below it. Now, Japan’s central bankers and government officials say the country is at a historic inflection point and may finally become a “normal” economy. Companies will be able to pass on increased costs to consumers in the form of higher prices, and workers will respond by demanding better pay. “We have obtained a once-in-a-lifetime historic opportunity to exit from deflation,” Prime Minister Fumio Kishida said at a recent news conference. “We are going to make sure that a positive mindset that will see rising wages as the norm will be firmly established across the entire society.” Prices in Japan began to rise from the spring of 2022, following the twin shocks of the Covid-19 pandemic and Russia’s invasion of Ukraine. Core inflation, which excludes volatile food prices, rose 2.8 per cent year-on-year in February.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Wages and markets have responded. The country’s largest employers agreed to increase wages by an average 5.3 per cent during this spring’s shunto pay negotiations, the biggest increase since 1991. In February, the Nikkei 225 stock index finally surpassed a previous peak reached 34 years ago. The following month, the Bank of Japan ended negative interest rates, one of its most controversial monetary policy experiments, raising borrowing costs for the first time since 2007.Following two years of mild inflation, “the virtuous cycle between rising wages and prices began to emerge and the BoJ started to raise interest rates,” says Tsutomu Watanabe, professor of economics at the University of Tokyo and an expert on inflation measurement. “It’s not complete yet, but Japan is gradually heading towards a normal direction,” he adds.BoJ governor Kazuo Ueda declared in March that the central bank would be able to carry out “a normal monetary policy” following the end of yield curve control. “People should be living without being conscious of the BoJ’s existence,” he said in an internal BoJ magazine produced by the bank. “We are now at a transition period where we might be able to shift to that kind of a situation if things go well.”But not everyone is so confident. Some economists point to the slow societal acceptance of the idea of permanently rising prices, while others debate how accurately official economic data reflects the real-world picture. No one is arguing that long-standing structural challenges, primarily demographics and debt levels, have gone away. “Significant evidence is yet to be seen in terms of real wage rises, ability of households to weather broader price rises, and shifts in consumption, savings and investment choices that would signal that the ‘virtuous circle’ is here to stay,” says Naomi Fink, chief strategist at Nikko Asset Management. Some economists point to the slow societal acceptance of the idea of permanently rising prices More

European defence contractors have warned that reliance on Chinese cotton used in gunpowder for ammunition threatens their ability to expand output as western countries race to bolster Ukraine’s overstretched military.Cotton linters, a byproduct and a primary ingredient needed to produce nitrocellulose, are used in artillery shells and other explosives.Demand for ammunition has soared with Ukraine consuming shells at high rates in its war against Russia. But defence contractors have struggled to scale up output because of supply chain constraints of various inputs, including nitrocellulose, also known as “guncotton”.Leading arms producers, including Sweden’s Saab and Germany’s Rheinmetall, warned that Europe was overly dependent on linters from China, which accounts for just under half of the global trade.Armin Papperger, chief executive of Rheinmetall, a leading ammunition producer, told the Financial Times that Europe relied on China for “more than 70 per cent” of its cotton linters.“There is a risk [that China could withhold linters for geopolitical reasons]. And that is the reason why we buy as much as possible to fill our stocks,” he said. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The EU aims to increase production of Nato-standard 155mm shells to 1.4mn annually to replenish member states’ stocks, which have been depleted to help Ukrainian armed forces in the face of superior Russian production capacities. It has launched a €2bn fund to boost European explosives production.“There is a huge undersupply of [nitrocellulose], which is causing difficulties elsewhere within the industry,” said another industry executive.“The shortage just highlights the need to strengthen the responsiveness and ability of the European Union’s defence industry to ensure the timely supply of ammunition and missiles in Europe.”European leaders have highlighted the gunpowder shortage. “We have all become aware of the need to face up to the scarcity of some components, especially gunpowders,” French President Emmanuel Macron said in March after a meeting of Ukraine’s main backers.China accounts for almost half of cotton linters pulp traded globally, according to the International Trade Centre. The largest importers of the material include Germany, Sweden and Belgium.The companies warned that it would be difficult to rapidly scale up production of explosives while being dependent on Chinese sources and there was a danger that China could restrict exports of the material if relations worsened.Saab said that “[the reliance on China] can pose an increased future risk as we and the industry ramp up capacity and production in Europe”, while stressing that there were no current supply chain issues.Concerns about cotton linters supplies come as Germany and other European nations look to diversify and “de-risk” their supply of critical materials away from China, which for decades was a low-cost, reliable outsourcing destination.Russia, which also has been boosting its ammunition output, has increased imports of nitrocellulose from China in the past two years. Its purchases from China jumped from $3.4mn in 2022 to $7.18mn in the first 10 months of 2023, according to import data examined by the UK’s Royal United Services Institute. Saab said that in the long run, companies might have to consider alternative ways of manufacturing critical materials to secure Europe’s “ammunition ecosystem”. While work was ongoing on making cellulose from wood, the company said this was not yet in production.The Swedish group’s chief Micael Johansson recently told the FT that nitrocellulose was an example of how defence companies would have to build new supply chains in a “multipolar world” where “not only the western rules-based order will be present”.He added: “We have to think about like-minded countries and who can we work with in the long term, who can we trust.”Britain’s BAE Systems, which supplies the UK’s armed forces with ammunition, said that while there were sufficient inventories of raw materials for its munitions production, it was “aware of potential concerns relating to the future availability of nitrocellulose” and was actively engaging with its partners to ensure future supplies.Rheinmetall, whose subsidiary Nitrochemie produces nitrocellulose, confirmed that it was considering setting up a linters production unit in Lower Saxony as part of a new ammunition manufacturing site. Papperger said the company had amassed a three-year stockpile of linters after Russia’s full-scale invasion of Ukraine, and deliveries continued “every month from China”. “But the point is Europe should be independent in the long term,” he added. Christian Mölling, the German Council of Foreign Relations lead for security and defence, said nitrocellulose was a “cheap chemical product”, and the production of one of its key ingredients had long been outsourced to places like China.“If you want to scale ammunition production, it’s not just about raw materials, it’s also about building new production sites, which depending on standards can take between six months and two years.”Additional reporting by Richard Milne in Oslo More

SINGAPORE (Reuters) – The dollar was firm but sluggish in Asian trading on Monday as investors looked ahead to U.S. inflation data after the big payrolls number last week, and as Treasury yields reached for December highs.U.S. consumer price inflation for March on Wednesday and a European Central Bank (ECB) policy meeting on Thursday will be the main economic markers for the big global currencies this week. Those follow a week of vacillation as traders watched Japanese authorities talk their currency higher, and as U.S. services, the closely watched employment report on Friday and a bunch of Federal Reserve speakers sent mixed signals on rates.The dollar was just marginally higher, with the Canadian dollar the biggest loser at 0.5% among the six currencies in the dollar’s trade-weighted index.The dollar “can remain supported this week if the U.S. CPI for March remains solid as we expect,” analysts at Commonwealth Bank of Australia (OTC:CMWAY) said.In the United States, a tight job market and limited progress on inflation in the last couple of months have amplified calls among top officials, including Chair Jerome Powell, to be “patient” as they approach the decision on when to cut rates. The March consumer price index is key for market participants seeking evidence that factors that made inflation accelerate more than expected at the start of the year are abating.”In the absence of a clear message from the Fedspeak, markets have focused on the optics of recent data, in which three consecutive payroll surprises and two CPI surprises have made it very difficult for investors to discuss a cooler economy and rate cuts,” analysts at Morgan Stanley wrote on the weekend.Yields on U.S. debt have meanwhile pushed higher. At the short end of the curve, the two-year yield, which reflects interest rate move expectations, hit 4.765%, the highest since Dec. 11. Following the jobs data, the U.S. rate futures market has reduced the odds of a June rate cut to 50%, down from 66% late on Thursday, the CME’s FedWatch tool showed.The dollar’s biggest gains this year have been against the two big funding currencies for carry trades, the yen and Swiss franc. Both are down roughly 7% each versus the dollar this year. The euro was down 0.09% at $1.0825. The Japanese yen weakened 0.06% versus the greenback to 151.70 per dollar, while sterling was last trading at $1.2615, down 0.17% on the day.The base case for the ECB is to hold rates this week and possibly reinforce the possibility of a cut in June. But, while the ECB is increasingly confident that inflation is heading back to its 2% target, it has remained vague about further easing.The kiwi was a tad weaker at $0.6010 heading into a Reserve Bank of New Zealand policy meeting on Wednesday. It has shed 3.5% in three weeks, however, as markets bet the recent weakness in economic data could make the RBNZ dovish. Westpac analysts said the scenario of “a less dovish Fed contrasting with a more dovish RBNZ” could potentially push the currency to November lows around $0.59.Chinese markets reopen after holidays on Thursday and Friday to possibly more weakness in the currency and efforts by state banks to guide it higher, as they did last week when the yuan fell to a four-and-a-half-month low.In cryptocurrencies, bitcoin last rose 2.2% to $69,149.92. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.South Korea’s economy needs to adapt urgently to rising competition from China, the country’s finance minister has warned, as its biggest exporters battle for market share in sectors ranging from chips to shipbuilding and display panels.Choi Sang-mok said in an interview that South Korea had gone from being a beneficiary of Chinese growth to an economic rival and that his country needed to diversify its export-led economy.“Our economic relationship with China has changed — rather than being a beneficiary of China’s export boom, a rivalry has emerged over the past 10 years,” Choi told the Financial Times ahead of South Korea’s parliamentary election on Wednesday.“We need stronger competitiveness to better compete with China,” he added. “The Korean economy will face big challenges if we stick to the past growth model.”South Korea’s economic growth slowed from 2.6 per cent in 2022 to 1.4 per cent last year, hampered by high interest rates, China’s economic slowdown, and a slump in global demand for memory chips, the country’s leading export.The Bank of Korea estimated that growth would recover to 2.1 per cent this year but many economists have issued warnings about the country’s long-term growth prospects.The East Asian country has the lowest fertility rate in the world, while household debt levels as a proportion of gross domestic product are among the highest of any developed country, according to OECD figures. Officials also worry that South Korea is at risk of losing its historic technological edge over China in a range of areas, in part because of a campaign by Chinese companies to accumulate South Korean expertise in critical technologies.Last year, the US overtook China as South Korea’s leading export destination for the first time in more than two decades. Several Korean conglomerates have sharply reduced operations in China over the past decade amid falling sales.“China’s rise is likely to erode Korea’s economic growth and competitiveness in the medium to long term,” said Park Chong-hoon, head of research at Standard Chartered in Seoul.Choi said the country needed to reform its research and development efforts, which have historically focused on developing and commercialising technologies invented elsewhere.The government recently signalled it was preparing to reverse a 15 per cent cut in the R&D budget for 2024 after it provoked a fierce backlash from South Korea’s research community.“As we strive to become an innovative leader rather than a fast follower, some changes in our R&D strategy are needed” said Choi. “Although our R&D budget fell this year, we will provide utmost support for R&D spending next year, reflecting the reform results.”Choi also said the South Korean government was seeking to bring down and restructure the country’s private and public debts, which both surged during the coronavirus pandemic. “I don’t believe that we are facing an immediate debt problem,” he said.A more pressing issue, he added, was the country’s acute demographic crisis. South Korea’s total fertility rate — the average number of children a woman is expected to give birth to — fell from 0.78 in 2022 to 0.72 in 2023, according to government figures.“The labour force is decreasing due to the low birth rate,” said Choi, suggesting that South Korea needed to reduce its concentration on the capital, Seoul, and its reliance on manufacturing and the country’s big conglomerates. “To boost productivity, more balanced growth is needed from domestic spending, SMEs and provinces beyond Seoul.”Analysts said the economic reform efforts of South Korea’s conservative President Yoon Suk Yeol would suffer if leftwing parties retained their parliamentary majority in Wednesday’s elections, as many polls forecast. While the country’s cabinet is appointed by the president, legislative initiatives require parliamentary support.“The Yoon administration has struggled to pass reform bills and things are unlikely to change much after the elections,” said Park, noting voter anger over high consumer prices. “Reform efforts, including of the capital markets and the pensions system, could stall further if the opposition parties win the elections.” More

The wage trend is among the key data the Bank of Japan examines for pay and inflation outlooks, crucial factors for the central bank to consider in deciding whether to unwind its stimulus policy further. Inflation-adjusted real wages, a barometer of consumer purchasing power, fell 1.3% in February from a year earlier, down for 23 straight months, data from the labour ministry showed. It followed a revised decline of 1.1% in January. The consumer inflation rate the government uses to calculate real wages, which includes fresh food prices but excludes rent or equivalent, grew 3.3%, accelerating from 2.5% in January.But nominal pay grew at 1.8% in February on the year, for its fastest increase since last June. “We will monitor how growth in nominal pay will develop while price gains are weighing down real wages,” a ministry official said. Japanese firms agreed to raise wages 5.24% this year, the biggest increase in 33 years, a survey by the nation’s largest union group Rengo showed last week.Regular or base salary in February grew 2.2% from a year earlier, faster than a revised figure in the previous month, the ministry said.Special payments, which include bonuses, slipped 5.5% year-on-year after a revised 12.4% gain in January.Last month the BOJ scrapped eight years of negative interest rates and other remnants of its unorthodox policy, in a historic shift away from its focus on reflating growth with decades of massive monetary stimulus. Here is preliminary data for monthly incomes and number of workers in February: —————————————————————-Payments (amount) (yr/yr % change)-Total cash earnings 282,265 yen ($1,865.84) +1.8-Monthly wage 277,479 yen +2.0-Regular pay 258,319 yen +2.2-Overtime pay 19,160 yen -1.0-Special payments 4,786 yen -5.5—————————————————————-Number of workers (million) (yr/yr % change)Overall 50.236 +1.3-General employees 34.821 +3.5-Part-time employees 15.415 -3.6—————————————————————-The labour ministry defines “workers” as 1) those employed for more than one month at a company that employs more than five people, or 2) those employed on a daily basis or had less than a one-month contract but had worked more than 18 days during the two months before the survey was conducted, at a company that employs more than five people.To view the full tables, see the labour ministry’s website at: ($1=151.2800 yen) More

“When I assumed my post a year ago, I felt the BOJ’s policy framework had become a technically difficult one due to various reasons. If economic conditions allowed, I had hoped to make the framework simpler and easier to understand,” Ueda said.”Thankfully, the economy was in fairly good shape in the previous fiscal year (that ended March), so I was able to fulfil my mission,” he told parliament. More