Aurelia Butler

JACKSON HOLE, Wyoming (Reuters) – U.S. trade has shifted away from China due to policies enacted by the Biden and Trump administrations, but U.S. reliance on China-linked supply chains has not necessarily been reduced and consumers have faced higher costs, according to new research presented on Saturday at a Federal Reserve economic symposium.Despite deglobalization fears after the coronavirus pandemic and Russia’s invasion of Ukraine, overall trade “has held steady at just under 60% of world (gross domestic product)rather than gone into freefall,” Laura Alfaro, an economist at Harvard Business School, and Davin Chor, an associate professor at the Tuck School of Business at Dartmouth, concluded in their paper, which was presented at the annual gathering of central bankers and economists in Jackson Hole, Wyoming. But U.S. tariffs on Chinese goods, recently enacted industrial policies, and the pandemic, do seem to have touched off a “‘great reallocation’ in supply chain activity: Direct US sourcing from China has decreased,” from 21.6% of U.S. imports as of 2016 to 16.5% last year, Alfaro and Chor wrote.What’s less certain is what that means, with the authors saying the shift from China is raising prices for consumers without clearly providing offsetting benefits in the form of, for example, improved manufacturing efficiency in the U.S.It is not even certain that the decline in China’s U.S. import share represents a true delinking, they said.Vietnam and Mexico, for example, appear to have captured much of the reallocated trade, the authors said, based on an analysis of goods import and export patterns, while an increase in U.S. purchases of less processed goods from abroad was “indicative of some reshoring of production stages.”And among companies, they said, “concerns are being voiced over the wisdom of sprawling supply chains that can expose firms and countries to the risk of disruptions,” from events like the pandemic or severe weather, or policy shocks like tariffs.Yet in the background, the researchers noted that China had “stepped up” its trade and investment activity with Vietnam and Mexico, as well as other countries.”The U.S. could well remain indirectly connected to China through its trade and global value chain links with these third-party countries,” they argued.Prices for goods from some countries, moreover, were beginning to rise. “The recent policy restrictions to shift sourcing patterns or even to encourage substitution toward domestic inputs are poised to add to wage and cost pressures in the U.S.,” the research found, a pointed conclusion as the Fed tries to lower inflation by slowing the U.S. economy. More

The economy ministry in April revised higher its 2023 GDP forecast to growth of 1.2% from a contraction of 0.8%, although it is expected to revise this again soon. The central bank forecasts GDP growth of 1.5%-2.5% this year.”If, last year, the economy shrank by 2.1%, then this year we expect it to recover by about 2.5%, maybe even more,” state news agencies quoted Siluanov as saying in an interview with the CGTV channel.He forecast inflation would return to the target of 4% in 2024. The central bank has forecast it will fall to 5.0%-6.5% this year.”We together with the Central Bank will be taking all measures to bring inflation down to our targeted level,” Siluanov said. More

The yen slumped to its lowest level against the dollar since November on Friday, cranking up pressure on the Bank of Japan to tighten its ultra-loose monetary policy and support the faltering currency.The Japanese currency slid to ¥146.6 per dollar after Jay Powell, chair of the US Federal Reserve, raised the prospect of further domestic interest rate rises, potentially widening the vast gap between US and Japanese borrowing costs.Japan has been the only major developed market not to raise interest rates over the past 18 months as countries have grappled with the worst inflation shock for a generation. Although the country has spent decades fighting the threat of deflation, recent signs of economic resilience and domestically driven price rises are raising market expectations that the BoJ will tighten its stance. “Given the resilience of the Japanese economy with the most recent services producer prices surprising to the upside, I believe that there will be greater pressure on the Bank of Japan to tighten monetary policy at a faster pace to lean against a yen depreciation,” said Tomasz Wieladek, chief European economist at T Rowe Price. The strain on the currency comes only weeks after the BoJ’s surprise decision to loosen the controls on its government bond market, easing a cornerstone of its ultra-loose monetary policy. At the end of July the BoJ said it would tolerate yields on 10-year government bonds of up to 1 per cent, from a previous level of 0.5 per cent. Yields on benchmark Japanese government bonds have drifted higher since, rising 0.03 percentage points this week to 0.66 per cent. Investors expect this trend to continue while inflation remains above its 2 per cent target.“We think that higher inflation will cause the BoJ to adjust their forecasts at their next quarterly monetary policy meeting . . . this may serve as a prelude to the BoJ declaring victory over deflation and scrapping yield curve control,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management. “We would see this pushing 10-year yields towards 1.25 per cent, until then we think that yields will continue to creep higher.”Investors say the rise of Japanese yields will accelerate bond sales in other major markets as Japanese investors seek out higher returns closer to home.“As yields increase, large domestic investors have a growing incentive to repatriate funds, selling foreign bonds and investing back in Japanese government bonds,” said Christian Abuide, head of asset allocation at Lombard Odier. “The benefit of doing so is as high as it has been in the last decade.”T Rowe Price’s Wieladek added that there was already a “significant spillover” from the BoJ’s decision in July: “It’s keeping yields globally more resilient and at higher levels than what people expected.”Years of higher returns abroad have made foreign assets more attractive to own, meaning Japanese investors are some of the biggest owners of bonds in the US and Europe. According to Commerzbank research, Japanese investors owned more than $2tn in foreign long-term debt securities at the end of 2022, with large holdings in the US, France, the Netherlands and Germany.A rise in bond yields is expected to accelerate a trend of Japanese investors selling overseas bonds, a shift that had already started owing to the soaring cost of currency hedging. Many big Japanese investors such as insurers routinely hedge their currency exposure when they buy foreign bonds. Rising interest rates in the rest of the developed world have sharply driven up the cost of doing so, in many cases more than cancelling out the growing yield gap between Japan and other economies. More