Economy

US chipmaker Micron will receive up to $320mn in Japanese government subsidies, marking the first of an expected series of deals to fortify supply chains against the disruptive threat from China.Beijing does not currently compete with Washington and Tokyo in the most advanced segment of semiconductor technology. But Covid-19 disruptions have underscored supply chain fragility, while Russia’s invasion of Ukraine has intensified fears that China could invade Taiwan, the global centre of cutting-edge chip production.The Micron deal announced on Friday followed months of negotiations between the US and Japan to expand co-operation in semiconductor production, with the goal of reducing heavy dependence on Taiwanese chipmaker TSMC.The notice came within 48 hours of a meeting in Tokyo between US vice-president Kamala Harris and senior executives of more than a dozen Japanese technology groups to discuss the Chips and Science Act passed by the US Congress in July, which offers $52bn in grants to support advanced semiconductor manufacturing in the US.“We have to diversify our reliance on essential supplies, Japan, the United States and the world. We also understand, on this issue, that no one country can satisfy the globe’s demand,” said Harris at the start of the meeting on Wednesday.Micron, which acquired Japan’s Elpida Memory in 2012, said it would use the investment to develop new Dram memory chips at its plant in Hiroshima. Rahm Emanuel, US ambassador to Japan, said the Micron deal symbolised “the investment and integration of our two economies and supply chains. And that will only accelerate from here forward.” In July, Japan’s Ministry of Economy, Trade and Industry (Meti) announced that it would give a grant of up to ¥92.9bn ($644mn) to Western Digital, the US manufacturing partner of Japanese chipmaker Kioxia, to expand production in Japan.

Last year, TSMC said it would build a $7bn chip manufacturing plant in Japan with Sony, with half the investment to be subsidised by Meti.The Japanese investments in Micron and TSMC are not intended to support development of the most advanced chip technology, but an industry executive close to the negotiations said Japan and the US were discussing co-operation in that area with IBM.“The talks with IBM are really about cutting edge technology, and progress is being made,” the person said. IBM did not immediately respond to a request for comment. More

Good morning. Yesterday, we avoided writing about the UK’s fiscal/financial/economic car crash, pleading that we were simple provincials focused on the American colonies. Readers wrote to say this was a dumb excuse for avoiding the biggest story in markets. We fold. Email us: [email protected] and [email protected], Monday will bring another collaborative edition of Unhedged, this time on Japan. We’re excited.The mess in the UKFinancial journalists know that something has probably gone badly wrong when they have to learn a new acronym. This week it was LDI.Liability-driven investing is a niche concept from the pension industry, of particular importance in the UK. But as much fun as it is to blame feckless pension managers or witless politicians, nothing about this week’s crackup is intrinsically pension-specific or British. It is exactly the type of event one expects at moments like this — at the end of a long bull market, with financial conditions tightening and growth slowing. So, lesson number one:1. The LDI near-catastrophe was not a one-offHere is what appears to have happened with pension funds and the gilt collapse this week:Some big UK pension plans had a lot of long-term liabilities. The plans didn’t have enough money to buy long-term government bonds that closely matched all their liabilities — because bond yields have been miserably low for years.The plans therefore bought things with higher expected returns than bonds, such as equities. This put the plans at risk for asset-liability mismatches. If interest rates fell — that is, if bond prices rose — the value of their liabilities will rise. Their equity (or whatever) assets might not rise at the same time, leaving them in a badly unfunded position on their next accounting statement. So the plans signed derivative contracts, under which they would receive money from their counterparties when bond prices rose and pay money to those counterparties when bond prices fell. These were probably some flavour of receive-fixed pay-floating swaps. A while later, UK chancellor Kwasi Kwarteng, dumped a petrol can of unfunded tax cuts on to the UK’s inflationary fire. UK gilt prices fall a lot. The plans now had to pay a lot of money. To raise this money, the plans had to sell whatever’s handy. Gilts were one of the handy things. Gilts fell more. More margin calls followed. More selling. Finally, the BoE was forced to intervene. The key feature of this sorry tale is that some financial institutions had de facto or actual financial leverage that did not seem to be particularly risky to them, or to almost anyone else. This time around the leverage took the forms of those derivatives. They may have thought: what are the chances of gilt yields moving more than a full percentage point in a few days? Why, that’s a six-sigma event (or whatever)! Hidden leverage of this sort grows, like black mould in a basement, during long placid periods in markets. Low interest rates also provide a humid environment for financial fungi to grow. More floorboards will be ripped up, and more mould will be found, before this policy tightening cycle ends. Relatedly:2. Stressed markets are non-linear marketsWe learned in the great financial crisis that financial market outcomes are not normally distributed — not when it counts, anyway. The point was repeated in research reports, articles, books, movies and bumper stickers. But before long we all default to thinking in terms of average annual performance, standard deviations and so on. We just can’t help it. Well, friends, tail risk is back. How many UK investors were positioned for 30-year gilts to rise 121 basis points in three trading days? Investors who can’t handle high volatility — say, middle-aged journalists with big mortgages and twins who will be in college in a few years — should think about cutting risk now. 3. Central banks want to fight inflation, but they have other priorities, tooThe Bank of England’s (temporary) resumption of bond-buying shows that the fight against inflation is conditional. It is stunning that the central bank would buy bonds with UK headline inflation at 10 per cent. It nodded to this awkward fact in a statement issued by the BoE financial policy committee (notably, not its Monetary Policy Committee):Were dysfunction in [the long-dated gilt] market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy …These purchases will be strictly time limited. They are intended to tackle a specific problem in the long-dated government bond market.This mini-QE is supposed to last two weeks and, if it goes no further, the ultimate impact on UK inflation will probably be small. But if the gilt market remains unsteady, the BoE could end up removing monetary stimulus with one hand (through higher rates) while adding to it with the other (through bond-buying). In other words, the cost of stopping a financial meltdown is higher longer-term inflation risk. Relatedly:4. Another developed economy is using yield curve control, or at least an impromptu version of it. Others could followBy pinning down long rates while not backing down from further short rate increases, the BoE is dabbling in yield curve control. It hasn’t gone full Japan; there is no explicit long yield cap. But the move will revive the argument over whether YCC should be part of the central bank toolbox. Over at Free Lunch (subscribe here), the FT’s Martin Sandbu has made the case:If financial markets are so sensitive to moves in longer-term government bonds, then why should central banks not focus more on controlling those rather than the short rates? We know two things. First, that if monetary policy controlled long yields, changing them gradually as the macroeconomic picture required, this week’s UK pension funds debacle would not have happened. Second, that central banks can choose to target long rates: the Bank of Japan has, for years, demonstrated how. Other central banks have adopted Japanese policies before. It seems time to consider doing so again.This makes Unhedged nervous. True, Japan’s experience with YCC has not looked catastrophic. But Japan is Japan; its circumstances are sui generis. In a different context, might YCC, basically open-ended QE, drive private capital out of government bond markets and fuel speculative excess elsewhere? How much the unwinding of QE has frazzled US Treasury markets hints at another unappreciated risk: the process only works smoothly and predictably in one direction. Any unforeseen consequences may prove hard to undo.5. End-of-an-era arguments just got a little stronger Some people think that after the current inflationary incident is over, we will return to what was once called “the new normal”: low inflation, low growth, low rates, low volatility, high asset prices. Other people think that the pandemic only hastened the end of this pleasant economic regime. They argue it was doomed anyway, driven by demographics, global politics, the energy transition and huge accumulation of debt. Unhedged has written about this debate a number of times. One leg of the fin-de-siècle argument is that, under demographic, political and financial pressure, governments will resort to fiscal as well as monetary excess, pushing inflation and rates up and asset prices down. The argument was articulated by Albert Edwards of Société Générale, with characteristic flourish, a few days before the Truss budget came out: Until recently, economic ideology had prevented [politicians] breaking free from fiscal austerity. That had caused central bankers to fill the economic void with super-expansionary monetary policy. Those days are now over and aggressive fiscal activism reigns supreme, most visible currently in the UK. This will bring higher growth, higher inflation, and higher interest rates across the curve. The party for investors is over.It is easy to laugh off the so-called perma-bears who have argued (for as much as a decade) that the post-financial crisis financial settlement was unsustainable and would end in tears: Edwards, John Hussman, Nouriel Roubini, Jeremy Grantham, and a few others. But if we do get a crash, they will be forgiven for being early. And the events in the UK this week fit nicely with their dreary prognostications. (Armstrong & Wu)One good readThis is true. More

Turmoil in UK government debt has sent shockwaves through global markets, sparking big swings in US and European bonds.“Bond markets are always highly correlated, but we’ve definitely seen the tail wagging the dog this week,” said Dickie Hodges, head of unconstrained fixed income at Nomura Asset Management. “The moves in gilts were so big that they filtered through to European and US bond markets.”The 10-year US Treasury, the benchmark in the world’s biggest and most important debt market, on Wednesday posted its biggest one-day rally since March 2020 after the Bank of England announced emergency bond purchases to halt the freefall in UK government debt. Those gains followed heavy losses for global bond markets since last Friday as the heavy sell-off in gilts spread around the world.Analysts and investors say some of the moves in Treasuries or German Bunds have been caused by leveraged investors — who use debt to amp up their gains and losses — dumping easily tradeable assets elsewhere in order to cover their losses in the UK. But the similar — albeit much more muted — moves in the US and Europe are also down to the shared challenges facing most big economies of how to tame runaway inflation without choking off economic growth. “Even though the UK is a basket case of its own making, the fact is the same pressures are being acutely felt elsewhere,” said Richard McGuire, a rates strategist at Rabobank. “Investors see the government’s ill-conceived experiment, and wonder if it’s a sign of things to come in other countries.”Following chancellor Kwasi Kwarteng’s £45bn package of tax cuts and energy subsidies last Friday, traders swiftly priced in a steeper rise in UK interest rates, betting that the BoE would need to tighten monetary policy faster in order to offset the inflationary effects of the fiscal stimulus. Eurozone markets also added expectations for an extra European Central Bank rate increase over the coming year “in sympathy,” said McGuire. He added that his clients, who invest in eurozone sovereign debt, currently have the UK at the top of their list of questions. The global alignment of monetary policy has also meant that when one central bank changes direction, like when the BoE this week decided to delay its quantitative tightening process, it raises questions about whether other central banks will follow suit. “In the US market we’re a bunch of single-celled monkeys. You see the Bank of England ending quantitative tightening suddenly and you think that maybe the US will end quantitative tightening too,” said Edward Al-Hussainy, a senior interest rate strategist at Columbia Threadneedle. The aftershocks of the UK crisis have been particularly evident in the US because of the volatile state of markets more broadly, said analysts and investors. The US and UK, among central banks globally, are raising interest rates at a rapid rate, which has created unusual price swings, even in markets that are typically ultra-stable, like Treasury bonds. Two- and 10-year Treasury notes are both on track to record their biggest sell-off on record this year. A significant reaction in markets is to be expected, given the historic shift in monetary policy this year. But those moves have also been exacerbated as the uncertainty about the future direction of monetary policy have pushed more cautious investors on to the sidelines. With fewer investors in the market, price swings become even more dramatic, a phenomenon some investors have described as a “volatility vortex.” “In higher volatility moments, everything becomes correlated,” said John Briggs, head of US rates strategy at NatWest Markets. “Even though what is going on in the UK, objectively, shouldn’t have any impact on the Fed outlook or inflation, the fact is that when markets move to that degree, no one is going to be immune. Volatility begets volatility,” said Briggs. Two Fed officials this week have indicated that the crisis in the UK could potentially create problems for the US. Raphael Bostic, president of the Atlanta Fed said that the UK’s tax plan and the ensuing market volatility could increase the chances of tipping the world economy into a recession. New Boston Fed president Susan Collins also said that “a significant economic or geopolitical event could push our economy into a recession as policy tightens further.”“There is money moving back and forth that keeps various national markets in line with one another,” said Gregory Whiteley, portfolio manager at DoubleLine. “It is natural spillover as money moves between markets to take advantage of changing prices.” More

The stinging rebuke from the IMF arrived at the worst moment for the UK government.With sterling selling off and borrowing costs rising on Tuesday, the fund issued a statement at about 8pm London time, chiding the UK for its plan to implement £45bn of debt-funded tax cuts and urging it to “re-evaluate” the package.Using language reminiscent of missives directed at emerging markets in the grip of currency crises, the IMF said it was “closely monitoring recent economic developments in the UK” and was “engaged with the authorities”. Chief among the fund’s objections was that the “untargeted” fiscal package risked working “at cross purposes” to the Bank of England trying to stamp out soaring inflation.Coming almost five days after UK chancellor Kwasi Kwarteng delivered his “mini” Budget, the timing of the IMF statement raised eyebrows. It was sent out in response to media requests, rather than as a planned statement from the fund, raising speculation it might not have been fully vetted.In fact, senior managers at the IMF, including managing director Kristalina Georgieva, were consulted on and ultimately approved its release, according to a person familiar with the matter. While the UK knew the fund was critical of the tax-cutting package, it was not given an advance copy of the statement, said another person briefed on the events. The IMF declined to comment.One former IMF official said he almost “fell out” of his chair after reading the statement. In just 130 words, the fund had sparked a global debate about its role as surveyor and commentator on global financial risks and its status as a lender of last resort. “If you have a mandate for global financial and economic stability, you have to have a view,” the person said. “The question is how much of that do you convey?”The unusually sharp criticism directed at a G7 country also raised questions about whether the IMF had overstepped its remit by commenting on domestic policy outside of a normally scheduled review, an update to its global economic outlook, or bailout talks.For the opposition UK Labour party, which was in the middle of its annual party conference, the statement was a gift. In addition to fuelling a sense of crisis engulfing the British government, the IMF’s criticism of tax cuts that would “benefit high-income earners” and “likely increase inequality” chimed perfectly with Labour’s own attacks on Kwarteng’s fiscal plan.The IMF also paved the way for a chorus of international censure, especially from the US. Later on Tuesday, US Treasury secretary Janet Yellen stopped short of condemning the tax cuts but echoed the fund’s language by saying Washington was “monitoring developments very closely”. Yellen also noted that, like the US, the UK had a “significant inflation” problem and a central bank focused on trying to stem rising prices.By Thursday, the Biden administration had sharpened its attacks. “Business people want to see world leaders taking inflation very seriously,” said commerce secretary Gina Raimondo. “And it’s hard to see that out of this new [UK] government.” But two people familiar with the matter said the US did not push the IMF to intervene. Finance ministers in France, Germany and Spain have also criticised the fiscal package. Regardless of the timing and tone of the statement, remaining silent was not an option, according to people familiar with the IMF’s approach. The UK’s fiscal policy was so directly at odds with the advice the fund had repeatedly given: that countries should refrain from “large and untargeted fiscal packages” at a time when central banks were trying to stamp out inflation. Adding to a sense of urgency at the fund was the scale of the financial turmoil in the UK, and the possibility it could soon spread to other major markets.“This is a time when everywhere monetary policy has to fight inflation and fiscal policy needs to help,” said one IMF insider. “But they are doing exactly the opposite and the central bank now has to print money to buy debt,” the person added, referring to the Bank of England’s emergency £65bn intervention in the gilt market to prevent a pensions meltdown. “It’s the worst thing you could imagine.”Lawrence Summers, a former US Treasury secretary who had criticised the IMF for not weighing in earlier, said the statement had “underscored how aberrant the behaviour” of the UK’s government had been.“When there’s a crisis situation or policies that are manifestly irresponsible, it’s kind of natural for the IMF to take some kind of note,” he told the Financial Times after the fund’s intervention. “I don’t think the IMF should distinguish between its rich country shareholders and its emerging market shareholders.”

Some economists said the economic instability in the UK would have triggered alarm even in tranquil times, but that the fraught global backdrop had served to magnify Britain’s problems. “We are dealing with a level of fragility that turns things that possibly would not have been shocking into shocks,” Sarah Bloom Raskin, former deputy Treasury secretary in the Obama administration, said in an interview.Raskin, who also served as a Federal Reserve governor, added: “When self-imposed wounds of the sort we see in the UK occur, in the midst of non-neutral and active central bank policymaking, the cascading effects on financial stability may be all the more unpredictable and unprecedented.”However, the IMF has also come under fire for being overzealous in its rebuke of the UK and its unscheduled statement has generated criticism from former officials, UK Conservative MPs and US Republican lawmakers. One prominent British financial commentator called for a boycott of the “outrageously arrogant” institution, arguing it was a “faddish, hypocritical body” that had become “explicitly aligned with the Joe Biden left”.One former IMF official said: “The fund has real problems coming up with so many developing countries, so why go and mess around with one country that, no matter what it does, will be in reasonably good shape for the next year or two?”They added: “I certainly don’t recall any uninvited, unwarranted and off-the-cuff comment like that on anybody’s economic proposal.” Republican lawmakers demanded to know why the fund had not commented on what they see as the Biden administration’s fiscal irresponsibility.Although the recently passed US package of clean energy and healthcare measures was offset with tax increases, last year’s $1.9tn Covid-19 stimulus was unfunded while a student loan forgiveness programme was this week estimated to cost $400bn. Yet the IMF has largely backed Biden’s fiscal policies, touting the positive impact of the last pandemic stimulus.“It is puzzling that the IMF felt it necessary to opine on a G20 nation’s domestic policy, and to only now oppose a ‘large and untargeted fiscal package’,” said Bill Hagerty, senator from Tennessee. “Where were the IMF warnings when the Biden administration pushed through trillions in fiscal stimulus as our economy was overheating?”Additional reporting by Chris Giles in London and Kiran Stacey in Washington More

Regardless of your income level or political leanings, one thing currently unites almost all of us as a nation — collective panic about the state of our personal finances. In the seven days since last week’s “mini” Budget, the cost of living crisis is fast turning into a full-blown financial one. I am sure readers are deeply troubled by this, yet our government appears indifferent. The question is, for how much longer can they ignore our distress?As mortgage rates soar and pension funds wobble, the new chancellor’s “gamble” of borrowing to fund unnecessary tax cuts is a bet that Middle England now finds itself on the losing side of. As a result, households will be spending hundreds of extra pounds per month on mortgages much sooner than we expected. People’s happiness now directly correlates with the length of their fixed-rate deal.With the whiff of a property crash hanging in the air and now fresh threats to the pensions triple-lock, older voters are not impressed — dangerous territory for the ‘Trussonomics’ experiment. The Bank of England’s intervention has calmed the waters for now, but ministers show no signs of remorse about the catastrophe this has unleashed for our personal finances. Of course, we can’t blame all of the market falls on the new occupants of Nos 10 and 11 Downing Street — but Liz Truss and Kwasi Kwarteng have turned decline into disaster in a week.Anyone checking their company pension, Sipp or Isa is likely to see double-digit percentage falls in value in recent months. Add to this the prospect of big drops in property prices and more costly mortgage repayments, and we’re suddenly all feeling much poorer.Economists have urged the chancellor and prime minister to reassure the markets and communicate “the plan” more clearly — but what about reassuring the people who voted for you?As much I want to muster words of comfort for readers, I cannot lie. We were already facing some incredibly tough years ahead, and the events of the past seven days will undoubtedly make them tougher. But we also need to accept that the days of easy credit and QE-powered asset inflation are nearly behind us. This means it will become much harder for people (and policymakers) to perpetuate two widely held financial myths; the first being that property prices will keep rising forever.The sudden repricing in the bond market means that mortgage rates are going to rocket. If they get to 6 per cent, the average household refinancing a two-year deal would see monthly repayments jump more than 70 per cent from £863 to £1,490. However, only buyers with a decent slug of equity who pass affordability tests will be able to grab the best deals. With people already fretting about losing their homes, what needs to be accelerated are solutions to help borrowers restructure their debts. This might sound premature, but with the prospect of widespread distress, how this is handled will be the difference between a correction and a crash. The second myth is that tin-plated pensions (less generous than the gold-plated variety) will be enough to fund the kind of retirement previous generations enjoyed.As property prices have soared, equity release has been the retirement “get out of jail” card for millions, but this is not sustainable. The Bank of England’s move this week shored up the finances of final salary pension schemes shaken by the rapid repricing of gilts. However, the majority of workers today are saving into defined contribution (DC) schemes where the risk is very much “on us” in retirement. Millions have been nudged into auto enrolment, but this still doesn’t resolve the problem of people not saving enough. Politicians have been on the back foot with this one for years, but they will no longer be in office by the time today’s workers realise the gaping shortfall. We already know that the cost of living crisis is causing workers to cut or stop their pension contributions, but news this week showed how retail investors are now accessing their pensions in record numbers.

In the second quarter of this year, more than half a million people withdrew a total of £3.6bn; a 23 per cent year-on-year increase. This is the first time quarterly withdrawals have exceeded £3bn. The average sum taken out was £7,000 (compared with £5,800 in quarter one).Experts sense that many people in their 50s and 60s are accessing pots for the first time to tide themselves over. But if older workers want to build their savings back up again in future years, they could be snared by the Money Purchase Annual Allowance (MPAA). Withdraw too much and this permanently cuts your annual pensions saving allowance from £40,000 to just £4,000, and is one future tax tweak that the government should consider.In the wake of the financial crisis, the broken annuities market caused retirees to enter riskier drawdown plans where their money remains invested in the markets — and these are nervous times for such investors.As interest rates rise, however, annuities are making a sudden comeback. Rates are now at their highest level in a decade, rising 42 per cent this year according to Helen Morrissey, senior pensions analyst at Hargreaves Lansdown. Even so, the income on offer is pretty thin. Someone aged 65 with a £100,000 pension can now buy a level annuity income of £6,994 a year. That’s up from £4,900 a year ago — but it’s not linked to inflation.As rates rise further, she expects more retirees to take a “mix and match” approach by annuitising in stages, securing enough income to meet their needs and continuing to take investment risk with the rest.Like many of you, I have been prudent all my life, living within my means and prioritising saving for the future over spending today. As the mood of panic rises further up the income distribution scale, people are in danger of making knee-jerk decisions with their life savings, and could lose faith in the financial system altogether.

Hitting the slots in Las Vegas would be the last thing on earth that a sensible financial goody two-shoes like me would ever recommend. But I feel like this government has done it for us, taking additional risks with our money when rising inflation and quantitative tightening loom large over our future financial security. I am lucky to have time on my side. I’ll hopefully have another 20 years (at least) of being able to earn money and rebuild my investments. However shortlived this gamble for growth turns out to be, our personal finances will bear the consequences for years to come.Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb More

There is a fashionable line of attack against Liz Truss’s single-minded focus on growth: what about the poor? What about the planet? In chasing GDP growth, this critique runs, Truss shows herself to be a politician who knows the price of everything and the value of nothing.This criticism is misguided. The UK’s new prime minister is absolutely right to believe that economic growth should be her top priority. The problem is that she seems to have no idea how to go about it.Let’s start with the case for economic growth. Gross domestic product is not, and never has been, an attempt to measure the wellbeing of a society. It is easy to list activities which promote wellbeing but not growth, and plenty more which promote growth but not wellbeing. Nevertheless, it is striking how countries with a high GDP also have flourishing citizens. Pick your issue, from life expectancy to child mortality, from opportunities for women to the protection of basic human rights, cleaner streets, lower crime, even better-quality art, from TV to opera. Somehow, people who live in richer countries are likely to be enjoying more of the good stuff.

Of course, causation probably runs both ways in many of these cases. Healthy people, safe cities and empowered women are all both causes and consequences of economic growth. When one looks through the lens of complex, sophisticated, multidimensional efforts to measure wellbeing, there is plenty to suggest that growth is good. For example, the Social Progress Index combines “60 social and environmental outcome indicators” to produce “a nuanced picture of what a successful society looks like”. This valuable effort throws up few surprises. The 25 most “successful societies” are the Nordics, western Europe, the US, Canada, Australia and New Zealand, and Japan and South Korea. Aside from a few petrostates, the list of the countries with the highest GDP per capita contains much the same names.Focus on less fortunate places and you’ll see that Burundi, South Sudan, the Central African Republic, the Democratic Republic of Congo, Somalia and Chad are in the bottom ten. The bottom ten by GDP per capita, or according to the Social Progress Index? Both, of course. GDP per capita is not a measure of social progress. It just happens to be extraordinarily closely correlated with social progress. Nor should we forget Benjamin Friedman’s prescient argument, in The Moral Consequences of Economic Growth (2005), that “economic growth — meaning a rising standard of living for the clear majority of citizens — more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.” Stagnant growth — which many rich countries, particularly the UK, have seen since 2008 — clearly risks the reverse. If you doubt that, look around.Economic growth promotes all these good things, and it has one further benefit: it tends to last. The best predictor of which economies will be complex, sophisticated, productive and rich next year is the list of economies which were complex, sophisticated, productive and rich last year. Grow faster now, and there is reason to expect you’ll be richer indefinitely. That, then, is the case for prioritising economic growth — not to the exclusion of all else, but as a central goal of policy. Truss and her chancellor Kwasi Kwarteng deserve credit for recognising this. Prioritising growth in the recent past would have avoided some obvious policy blunders, such as Theresa May’s insistence on leaving the EU’s customs union and single market, or George Osborne’s disastrous obsession with balancing the budget in the teeth of a deep recession.But while recent governments have demonstrated how to depress growth, we know far less about how to increase it. And Truss’s statements so far do not inspire confidence. Her rant about the “disgrace” of cheese imports suggests someone who hasn’t appreciated the importance of free trade in goods to a prosperous modern economy. Her sorrow at seeing solar panels on agricultural land speaks of a soul who values bucolic tradition over a vital technology that is growing more productive at an astonishing rate — not to mention a strange taste for heavy-handed intervention.Her vast and open-ended energy price cap is a kick in the teeth for market forces. By some measures the largest fiscal event in living memory, it feels closer to Mao than Thatcher. And it is unnecessary: a truly pro-growth government would have achieved the same social goal by letting prices rise, but giving an offsetting cash grant to each household. That would let the price system encourage the efficient use of old technology and the embrace of the new. It may be that her tax cuts and enterprise zones will boost growth, but the currency and debt markets appear to disagree. Most policy wonks suspect that fundamental reforms of housebuilding, infrastructure and education are likely to be required. Better access to large markets on our doorstep might also help, but that ship seems to have sailed.It is good to have a prime minister focused on the goal of growth, but what we really need is for her to show signs of being able to stick the ball in the back of the net. Tim Harford’s new book is ‘How to Make the World Add Up’Follow @FTMag on Twitter to find out about our latest stories first More

The renminbi’s sharp fall over the past week started after regulators told traders they were relaxing informal foreign exchange trading limits, according to people familiar with the matter. The State Administration of Foreign Exchange frequently uses informal “window guidance” to manage the exchange rate, sometimes discouraging participation in renminbi-dollar trading in order to slow depreciation of the Chinese currency.But two people familiar with the matter said Safe officials privately communicated an easing of the informal limits on transactions in China’s interbank market to foreign exchange brokers on Wednesday last week, in the wake of the US Federal Reserve’s 0.75 percentage point interest rate rise.The move to relax curbs on transactions was made because policymakers “believed it was the proper time to let the renminbi depreciate a bit”, one of the people said.The FT is seeking comment from Safe.The easing of informal trading limits marks an inflection point for the tightly managed renminbi. The currency is subject to extensive capital controls and its dollar exchange rate cannot swing more than 2 per cent in either direction of a daily trading band midpoint set by the People’s Bank of China.Less than a week after the move by Safe, however, top officials began making public statements that pushed back against sharp falls for the renminbi. This about-face reflected what traders and strategists said was Beijing’s focus on preventing runaway depreciation that could threaten financial stability and spur more capital outflows, as Chinese policymakers attempt to boost lagging economic growth.In the highest-profile comments from a government official since the currency dropped below Rmb7 against the dollar last week, Liu Guoqiang, vice-governor of the People’s Bank of China, struck out on Wednesday at traders betting on losses for China’s currency.“Do not bet on either one-way depreciation or appreciation of the exchange rate,” he warned, at a meeting held by the industry body responsible for self-regulating China’s foreign exchange markets. “The longer you bet, the bigger the chance you’ll lose.”The comments helped bolster the renminbi, which rose 1.1 per cent against the dollar after the PBoC also released a statement late on Thursday afternoon vowing to “strengthen expectation management and maintain the basic stability of the renminbi exchange rate at a reasonable and balanced level”.But foreign exchange traders, economists and markets strategists said Liu’s warning was unlikely to turn the tide in favour of the renminbi, which is down almost 11 per cent against the dollar this year at about Rmb7.13 and on course for a record yearly fall.Traders in Shanghai said losses for the renminbi were primarily driven by a widening policy divergence between a hawkish Fed and a dovish PBoC working to shore up flagging growth.The upshot is that the longstanding interest rate advantage of Chinese government debt has been reversed, removing a critical driver of global investor inflows. Data from Hong Kong’s Bond Connect programme show foreign outflows of almost Rmb530bn ($74bn) from China’s renminbi bond market during the first eight months of 2022.Another reason Beijing has taken a relaxed attitude towards the renminbi’s depreciation is that exchange rates have remained relatively stable against a broader basket of global peers. The CFETS Renminbi index measuring the currency against China’s biggest trading partners is down less than 5 per cent from its most recent peak in March.“I would say this time the PBoC won’t have to sell a lot of foreign reserves,” said Wei He, an analyst at consultancy Gavekal Economics in Beijing, who pointed to the capacity of domestic financial institutions to step in when called upon by the state.With rate rises by the Fed boosting returns on dollar debt, and as Chinese policymakers continue easing to support growth, analyst expectations are growing that the most likely reason for a halt in the renminbi’s fall may be a US recession.“If the US goes into recession, the Fed might actually pivot and start lowering interest rates — that would help the renminbi because the interest rate spread [between the two countries’ bonds] would narrow,” said Steve Cochrane, chief economist for Asia-Pacific at Moody’s.But he added that while this would help stabilise the renminbi’s exchange rate, “from the point of view of exports, a US recession would weaken the Chinese economy” as external demand for goods from China waned.Until the Fed stops raising rates, the PBoC is unlikely to burn through the country’s foreign exchange reserves trying to defend any specific level for the renminbi’s dollar exchange rate, according to analysts.Instead, many expect China to continue a drip feed of measures such as those seen this week. On Monday, the PBoC introduced measures to discourage bets against the renminbi through the country’s derivatives markets. Such moves are typically introduced in China during periods of currency depreciation.One Shanghai-based foreign exchange trader with a European bank said the move on Monday “can be counted as a gesture, instead of really a game changer for the market’s direction”.

Another major factor in the renminbi’s trajectory is how China manages its anticipated loosening of strict zero-Covid policies over the coming quarters. Some strategists expect that a swift and comprehensive opening that allows for outbound tourism would be negative for the renminbi — but others warn that this scenario is unlikely.“If China’s opening is staggered in the way we expect, without any outbound tourism, that will be risk-on and good for the domestic economy, which will send the renminbi higher against the dollar,” said Danny Suwanapruti, head of Asia emerging markets foreign exchange and rates strategy at Goldman Sachs.However, Suwanapruti added that because of low liquidity in the offshore market for the renminbi in Hong Kong, traders would focus on other currencies in the region that often serve as proxies for the renminbi’s exchange rate, following the Chinese currency higher when it rallies.“The South Korean won is just cleaner than trying to play the dollar-offshore renminbi,” he said.

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TOKYO (Reuters) -Japan’s factories ramped up output for a third straight month in August, as the manufacturing sector showed resilience amid high material costs and worries about a global economic slowdown.Policymakers in the world’s third-largest economy are concerned about recession risks in the United States and other major trading partners, which would make Japan increasingly reliant on domestic consumption for growth.Factory output gained a seasonally adjusted 2.7% in August from a month earlier, official data showed on Friday, extending rises in the prior two months.Separate figures showed retail sales rose sharply to expand for a sixth straight month in August, while the latest jobs data pointed to tightening labour market conditions.”Manufacturers’ production activity was firm and production was on an upward trend, as far as for the August data,” said Koya Miyamae, senior economist at SMBC Nikko Securities.”But there is a possibility that production may stagnate in October-December due to the global economy slowing down.”The increase, which was much stronger than a median market forecast for a 0.2% gain expected by economists in a Reuters poll, got a lift from firmer output of production machinery and iron, steel and non-ferrous metals.That helped offset a 6.3% slump in electronics parts and devices output and a decline in motor vehicle production, which swung into contraction after posting double-digit gains in June and July. Toyota Motor (NYSE:TM) Corp, the world’s top automaker by sales, reported a month-on-month decline in Japanese output in August, although its global production rose.The drop in electronic parts and devices production was largely due to falling output of memory chips on weaker smartphone and personal computer demand, a government official said, adding this presented downside risks to the outlook.Despite worries about the negative impact of surging prices, Japan’s economy was still expected to continue growing throughout 2022, as consumers were likely to keep going out, Miyamae added.Separate data showed retail sales grew more than expected, rising 4.1% in August from a year earlier, compared with a median forecast for a 2.8% gain in a Reuters poll.Retail sales were helped by stronger sales at medicine and toiletry stores as well as of fuel, general merchandise, and fabrics apparel and accessories.The seasonally adjusted jobless rate was 2.5% in August, compared with the previous month’s 2.6%, while the availability of jobs stood at 1.32, marking its highest since March 2020. More