Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of Japan still has “some distance to cover” before it can sustainably meet its 2 per cent inflation target, its governor, Kazuo Ueda, has told the Financial Times Global Boardroom. This is a vital objective. The central bank’s slow and cautious approach to normalising its ultra-easy monetary policy therefore makes a great deal of sense. What makes less sense, however — except as a matter of electoral politics — are plans by Japan’s government for a fiscal stimulus, much of it timed to arrive in the middle of next year. Fumio Kishida, the prime minister, should think again.In the latest tweak to its monetary policy, which the BoJ announced at its meeting last month, the central bank changed its 1 per cent limit on 10-year government bond yields from a strict cap into a “reference” around which it will “nimbly conduct” the buying of assets. The move gets zero marks for comprehensibility — but the strategy behind it is solid enough. Ueda is trying to keep policy as easy as he can while allowing some adjustment to market pressures, fuelled by the gap between negative interest rates in Japan and 5 per cent interest rates elsewhere, that have forced the yen below ¥150 against the dollar.Even though Japan’s headline inflation rate has been above 2 per cent for many months, there are several reasons why Ueda is correct to delay a substantive tightening of policy. First, as he notes, much of the pressure on Japanese prices is imported, with domestic wages still not rising fast enough to meet the inflation target over the long term.Second, global interest rates are likely to turn at some point, with Ueda highlighting doubts about the outlook in China and the US. There is a window in which to embed inflation in Japan, but it may not last for long. Third, while above-target inflation can be tackled by raising interest rates, Japan has little scope to cut rates if prices undershoot. It therefore makes sense to err on the side of higher inflation.By contrast, the Kishida government’s fiscal policy is harder to understand. Last week it announced a stimulus that could, in theory, run to 3 per cent of gross domestic product. Headline numbers usually overstate the real value of a Japanese stimulus.The package includes quite large tax cuts and rebates for households — although they only last for a year, so their impact on consumption is questionable — as well as some sensible corporate tax changes designed to encourage investment. Overall, economists do not expect a large effect on growth. The package has the strong flavour of an unpopular government trying to curry favour with a grumpy electorate.At many moments during the past 30 years, Japan needed fiscal stimulus to tackle slack in its economy and the risk of deflation. One purpose of such stimulus was always to get the economy into a healthier equilibrium, with positive inflation, so the business cycle could be managed by changing interest rates, and the budget deficit kept under control. It remains important to avoid a premature tightening of policy. It is perverse, however, to ease fiscal policy just as the central bank is finally moving in the other direction.Doing so risks making the Bank of Japan’s exit from easy policy, which Ueda already describes as a “serious challenge”, even harder. It also uses up scarce fiscal space that will be needed in the case of a global economic shock.Repeatedly during the past three decades, the Bank of Japan has been knocked off course by badly timed tax rises. It would be more than unfortunate if the next mistake went in the other direction. More

This article is an on-site version of our Britain after Brexit newsletter. Sign up here to get the newsletter sent straight to your inbox every weekAfternoon. It’s been a rather depressing week in Brexitland, where some days it seems as if time stands still.This week investors attending the Department for Trade’s International Trade Week were treated to the UK business secretary Kemi Badenoch telling the world that:“Contrary to some media reports and many pre-Brexit establishment voices, the data says Brexit has not had a major impact on UK-EU trade.”It was presumably intended in a positive, boosterish kind of way to signal that the UK was ‘open for business’, but the sight of a UK minister dismissing the work of multiple serious trade economists on the effects of Brexit as mere “media reports” raises questions of credibility with both international investors and UK business.From a narrow political point of view, the speech had the desired effect on domestic headlines, with both the Sun and The Express berating the Brexit “doom-mongers”, a phrase used by both in near-identical headlines.“‘Stop talking ourselves down!’ Kemi Badenoch blasts Brexit doom-mongers as exports soar” was the headline in the Express. The basis for these newspaper claims of “soaring” exports was a paper by the Institute of Economic Affairs, the free-trade think-tank. The top lines in the press release sent to journalists said that UK goods exports “rose by” 13.5 per cent to EU countries and 14.3 per cent to non-EU countries between 2019 and 2022, which “indicates no impact of Brexit on goods trade”. It didn’t take long for the likes of Jonathan Portes, professor of economics and public policy at King’s College, London to accuse the IEA and Badenoch of taking people for fools, since when you adjust for inflation you get a very different picture.Do that, and you find UK goods exports to the EU falling over the period by 7.2 per cent and non-EU exports by 9.8 per cent, what Portes calls a “significant deterioration in UK export performance”. The IEA report did include these numbers, but of course it was the unadjusted numbers headlined in the press release that made it into the Express and the Sun.More recent OECD real trade data, adds Sophie Hale at the Resolution Foundation, shows that by the middle of 2023, total UK goods imports and exports remained 11.3 and 14.7 per cent down, respectively, on pre-Brexit levels (Q1 2019) which was “by far the most negative shift in the G7”.The central argument of the IEA’s report is actually that since UK trade has fallen to both EU and non-EU destinations, then logically the contraction cannot be attributed to Brexit, it must be due to wider global factors. At first blush, that feels like something of a clincher — you would expect trade to the EU to fall more after the UK did a ‘reverse trade deal’ with the bloc — but that overlooks the fact that modern trade and supply chains are deeply intertwined.As John Springford at the Centre for European Reform pointed out, the drop in imports from the EU to the UK (while the rest of the EU’s have risen) points clearly to a Brexit impact on UK trade which is plausibly the result of the UK being slowly cut out of EU value-chains.Nicolo Tamberi, research fellow at the Centre for Inclusive Trade Policy at the University of Sussex, also suggests that the weak overall performance of UK goods exports post-TCA “might be a consequence of the large fall in imports from the EU, which translates into higher cost/less intermediate inputs hence the overall fall in UK exports.”It’s worth noting that the impact of this effect also falls “behind the border”. So while larger companies do the bulk of exporting and importing, if the amount of trade they are doing shrinks, it will impact the smaller companies that supply them. Another indirect effect of Brexit.There is also a substantial and growing body of academic work that shows the number of products and trading relations between the UK and the EU have fallen very sharply since Brexit — in simple terms, this is mostly SMEs giving up trading with the EU because it is too complicated.The IEA report argues that SMEs were given an adjustment fund to help adapt to the new trading arrangements, but trade group surveys repeatedly show this isn’t happening. This is partly because new and emerging regulatory barriers, including carbon taxes and various forms of supply chain due diligence (the so-called ‘Brexit 2.0’ effects I’ve written about), keep appearing over time.You could still argue this doesn’t matter, since big companies do most of the trading and they can absorb the bureaucracy and costs, but that overlooks the fact that some of those smaller exporting companies would have become bigger companies and now won’t. (Last week’s report on cosmetics companies like Doncaster’s Apothecary 87 is a case in point. As the boss Sam Martin told me: “My original vision for the company was more grand, more global and I’d love to get back to that, but we have to cut our cloth to the world as it is now.”)Another way to measure potential Brexit effects is to look at the UK’s “trade openness” (imports + exports as a share of GDP) and compare it to peer economies that were suffering other headwinds, like the pandemic and Ukraine energy price shock.Hale at the Resolution Foundation finds that UK trade openness was 3.6 percentage points below pre-pandemic levels (H1 2019 to H1 2023), compared to a rise in trade openness of 0.2 points across the G7, excluding the UK. That included a 0.4 percentage point rise in France, which has a similar trade profile to the UK.It was notable that in the same week Badenoch gave her speech saying “nothing to see here” the governor of the Bank of England Andrew Bailey was giving a speech in Ireland warning that Brexit had “led to a reduction in the openness of the UK economy”.Step back, and what is most concerning about the Badenoch speech is that while there’s lots of legitimate argument to be had over Brexit effects, which remain uncertain both in terms of the size and the relative impact on goods versus services, is it really credible just to wish them away?For much of the Brexit process the UK has spent too much time talking to itself. The Badenoch booster strategy is, I fear, another example of this — designed to win headlines in the Sun and the Express and burnish her Conservative leadership credentials but attracting weary derision from both investors and economists.Talking to investors, diplomats and trade bodies the refrain you hear is that the UK needs “a plan” and it needs the political capacity to implement it in the real world, staying the course over political cycles. The Badenoch speech does little to signal that the UK is really moving on, notwithstanding Rishi Sunak’s creditable efforts to stabilise relations with Brussels. His own party conference speech claiming Brexit had boosted growth in the UK was in the same vein.And as Stephen Hunsaker, the economics researcher who authors the UK in a Changing Europe’s quarterly trade tracker, observes, the danger in not really confronting the challenges of Brexit is that UK trade slides deeper into the doldrums.“Stagnation is the danger of ‘nothing to see here’,” he said, “because eventually it will become more clear the UK is being left behind in future trade deals and business strategies which will become evident when it’s too late down the road to change it.” Brexit in numbersYou are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.This week’s chart comes courtesy of a sobering piece of reporting by my Europe-facing colleagues Henry Foy and Ian Johnston analysing the EU’s own struggles to discover its competitive edge after the Covid-19 pandemic.Part of the challenge is the deluge of state subsidies that have undermined the core level playing field of the EU single market, which relies on a tough state aid regime precisely to avoid big countries distorting the market for others. And the numbers are extraordinary. According to unofficial commission figures seen by the FT they report that EU state aid expenditure rose from €102.8bn in 2015 to €334.54bn in 2021, but between March 2022 and August this year, Europe approved €733bn in state support — with Germany accounting for almost half of that figure (although not all of it will necessarily be spent).At the same time, the EU is larding its trade processes with a welter of new regulations — on supply chains, plastic packaging, carbon adjustments — that are causing the “Brexit 2.0” issues that we’ve discussed before in this newsletter.The EU’s detractors will argue that this deepens the case for Brexit — unshackling ourselves from the corpse, so to speak — but the challenge remains that the UK continues to conduct half its trade with a bloc where it no longer has a seat at the table to make the case for a more competitive approach. As it once did.Britain after Brexit is edited by Gordon Smith. 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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK productivity has barely grown since the financial crisis, according to new official figures, underscoring the challenge facing chancellor Jeremy Hunt as he attempts to use the Autumn Statement to lift growth and investment. Total factor productivity — a measure of how efficiently resources are used in the economy — was last year only 1.7 per cent above the level recorded in 2007, when the country was heading into the credit crunch. It was also just a fraction of the pace recorded in the 16 years up to 2007, when productivity increased 27 per cent, according to the figures published on Thursday by the Office for National Statistics. The numbers go to the heart of the UK’s economic challenges, given productivity is the key driver of rising living standards over the longer term. Hunt said last month that his Autumn Statement on November 22 would lay out a plan for escaping the low-growth trap, saying it was about “supply side reforms”.The ONS reported that productivity fell by an annual rate of 0.1 per cent in 2022, following a 0.3 per cent fall in 2021. The data revealed big differences between sectors, with total factor productivity in information and communication more than doubling since 2007, reflecting technological advancement in the sector. Manufacturing productivity was also up 11 per cent compared with 2007, while most of the other sectors — including financial services, hospitality, retail, professional services and construction — registered a contraction. Many advanced economies have experienced a productivity slowdown since the financial crisis, but the trend has been particularly pronounced in the UK. Separate data by the OECD show that between 2007 and 2022 labour productivity grew less in the UK than in the US and was below the OECD average.With limited funds at his disposal, the chancellor is seeking to drive up business investment and improve the country’s potential growth via labour market reforms, such as changing planning rules and lowering barriers to infrastructure. In March, for example, he introduced a £10bn-a-year tax break that will last three years, permitting companies to “fully expense” investment. Business groups want him to extend the measure. In the third quarter of 2022, business investment was unchanged from the level it reached in the same period in 2016, but it has now risen to 6 per cent above that figure — in part boosted by spending on aircraft in the three months to June.Paul Dales, UK economist at Capital Economics, said any attempt to improve the UK’s performance would need to address three key areas: improving the labour supply, lifting the investment rate and reinvigorating productivity growth. This would entail “a deep and wide-ranging reform effort that takes in everything from pensions to planning and taxation to public services”, he added.The ONS’s total factor productivity numbers are experimental, which means they are subject to revisions to a greater extent than other economic data. There is further uncertainty surrounding recent readings because of the difficulty of measuring output during the pandemic, as well as lower response rates to labour market surveys. Bart van Ark, the head of the Productivity Institute, a UK research organisation, said the trend in productivity was “alarming”. “It ultimately implies we are not making any progress on translating technological change and innovation into better results for the economy,” he said. “It really calls for a national strategy to improve productivity across the British economy.” A Treasury spokesperson said: “Increasing investment is one of the best ways we can raise productivity, which is why this month’s the Autumn Statement will set out plans to unlock investment, get people back into work and reform our public sector so that we can boost supply and deliver growth.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Prices at the pump are not falling in line with wholesale fuel costs, according to the Competition and Markets Authority, raising concerns that weak forecourt competition is exacerbating the cost of living crisis.In September and October, wholesale costs fell “while retail prices did not”, the competition watchdog said on Thursday, noting that prices increased by 11 pence per litre for petrol and 13.9 ppl for diesel since May 2023.The difference between the average price drivers paid at the pump and the price retailers buy fuel was 17-18 ppl at the end of October, “significantly higher” than the long-term average of 5-10 ppl, the CMA added.For the period from June to August, increasing prices were probably driven by “global factors” such as increased crude oil prices, the CMA said.“Drivers are feeling the pain again as petrol prices at the pump have been on the rise since June,” said Sarah Cardell, chief executive of the CMA. “More recent trends give cause for concern that competition is still not working well in this market to hold down pump prices,” she added.The data is the first monitoring report of the market by the CMA as part of an initiative introduced this summer to boost competition.It comes after the body found in July that Asda and Morrisons had raised their margins on fuel since being taken over by private equity groups in 2020 and 2021 respectively. This led to raised prices across the market, due to the two supermarkets’ size and traditional roles as cost-cutters, according to the CMA.Average fuel margins of supermarkets fell from 11.9 ppl in May to 7.3 ppl in August, according to the data released on Thursday, but this was still higher than the annual average before 2021.Data on margins, which is provided voluntarily by retailers, was not yet available for September to October, the CMA said.“Old habits die hard in the road fuel trade. Failure to pass on the full savings from lower wholesale costs to hard-pressed motorists, their families and businesses is unacceptable in a cost of living crisis,” said Luke Bosdet of the AA, the roadside recovery group.Gordon Balmer, executive director of the Petrol Retailers Association, which represents independent fuel retailers, said his members face pressures that mean margins “have to be higher”.“We’ve had increases in energy costs, increases in wages and increased theft of fuel so all these costs have to be paid for,” he said.The CMA has recommended the establishment of a statutory monitoring body and an online fuel-finder scheme to give drivers access to live, station-by-station fuel prices. The government had said it would consult on the proposals this autumn but consultations have not yet begun. The RAC said the findings showed that the recommended “price monitoring body” was “desperately needed”, but that it should have “the power to take action against major retailers that don’t lower prices quickly enough in a falling wholesale market”.Video: Has Big Oil changed? | FT Film More

TOKYO (Reuters) -Japan’s central bank and the private sector must prepare for positive interest rates and a normalisation of monetary policy, an influential business leader said on Thursday, acknowledging that it could take a year to achieve.Takeshi Niinami, chairman of business lobby Keizai Doyukai and who also heads Suntory Holdings, said the Bank of Japan “must normalise” monetary policy to help weed out incompetent firms and facilitate labour turnover towards growth industries.The BOJ remains a dovish outlier amid a global wave of aggressive central bank policy tightening. Last month, it stuck to its negative interest rate policy targeting short-term interest rates at minus 0.1%.It also kept the 10-year government bond yield target around 0% under its yield curve control (YCC) policy, but redefined 1.0% as a loose “upper bound” rather than a rigid cap.”The BOJ must make a move,” Niinami, who also serves as a private-sector member of a top government economic advisory panel, told Reuters in an interview. “We must live in a world that contains (positive) interest rates.”Many private-sector economists speculate that the BOJ may phase out crisis-mode stimulus if regular wage talks due early next year result in workers’ pay rising more than prices. “There must be quite a lot of political reservation about completely abandoning (current monetary policy settings),” he said. “That’s why the BOJ may be thinking it would be better off falling behind the curve.”That should be taken as a message that the BOJ is leaving the YCC behind gradually,” Niinami said.Niinami, who is also a former chairman of convenience store chain Lawson Inc, said in January that he expected the BOJ to lay out a clear policy roadmap, including criteria for ending its practice of controlling long- and short-term yields. More