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China, Japan Face Growth Pangs - Analyst Blog

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Growth pangs appear to dog China and Japan, two of the world's largest economies after the U.S. The two countries account for around 20% of global output. The Chinese province of Sichuan has raised minimum wages by 23% to attract workers. Most other provinces in China have increased wages by 13%.

Japan, on the other hand, has revised its growth forecast downward. The economy will contract by 0.1% this year and until next March. Japan had predicted growth of 0.5% earlier.

These developments do not augur well for the two Asian giants and of course, global growth. Although, higher wages would mean better living standards and more disposable income for workers, the move could well unleash cost-push inflation in the Chinese economy and blunt China's manufacturing edge.

Meanwhile, a strong yen, floods in Thailand, troubles in Europe and the overall economic weakness have impacted Japan. The country, which banks on export robustness has seen its overseas trade take a beating in recent times. November exports were 5.2 trillion yen ($67 billion) falling 4.5% year on year. Imports, on the other hand, have risen 11.4% year on year.

China is projected to grow at 8.8% in 2012, but less than 9.3% in 2011. The Asian Development Bank had earlier projected a growth rate of 9.1% for 2012. China has grown at 9.7% sinceDeng Xiaoping's market reforms began in 1978-79. Growth accelerated to 11% during 2003-07. Between 2008 and 2009, the average GDP growth was 9.4%. In 2010, China grew by 10.3%.

Japan was staging a patchy recovery after being felled by the earthquake and tsunami earlier in the year. Third quarter (July-September) growth was 1.5% after two quarters of contraction. According to the International Monetary Fund ( IMF ), Japan is expected to see GDP contract in 2011. However, the IMF projects Japan's GDP to grow 2.3% in 2012.

The floods in Thailand and a strong currency have impacted automakers like Honda Motor Co., Ltd. ( HMC">HMC ) and Toyota Motor Corp. ( TM ). Toyota has more than halved its fiscal 2012 earnings in its latest forecast compared to the previous forecast. While their products have lost price-competitiveness given the strong yen, the floods have upset their vendor chains. Output suffered, as these companies had to temporarily abandon some of their production lines.

The economic rationale for stepping up worker wages dovetails with China's broader strategy to re-orient its growth model from being export-driven (and with a large current account surplus) to domestic demand-focused. But it also faces a tough balancing act of easing monetary stringency to encourage credit and economic growth, and addressing the overheated real estate sector to put its economy on an even keel.

Incidentally, Japan tried to rein in the yen in October, after it had reached its peak since the Second World War, but to little avail. Apart from the supply chain disruptions owing to the Thai floods and a soft world economy, the strong currency is visibly hurting growth.

The country also faces the challenge of high public debt. Although, Japanese bond yields are currently low as investments seek safe harbors particularly in troubled times, further increases in debt could raise yields.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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