Sustainable pivot needed to secure Laos’ future 

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Laos, known for its flowing rivers and abundant biodiversity, is at a critical crossroads. It sits at the heart of Southeast Asia, as part of a very dynamic region that has recently experienced multiple transformative changes to its socio-economic fabric alongside equally rapid climate change. This has created a major shift in opportunities and risks that justify revisiting a development model set two decades ago. 

The ambitious drive for hydropower has transformed the country, bringing some positives alongside more challenging outcomes. One unanticipated consequence is how hydropower projects have contributed to the nation’s significant debt.

It is now critical that Laos pivots and diversifies its foreign revenue streams. By reducing its reliance on selling energy from hydropower, Laos could pursue alternatives that improve its current fiscal vulnerability while lowering environmental and social risks, and improving transboundary water security. 

The Mekong River and its tributaries are lifelines, supporting biodiversity, livelihoods, climate resilience and businesses. The river also offers significant potential for producing hydropower and, not surprisingly, Laos has been eager to tap this resource and establish itself as a significant energy player in Southeast Asia – in line with the country’s aspirations for economic advancement.

With the government setting its sights on achieving a remarkable 12 gigawatts of hydropower capacity by 2025 and an ambitious 20GW by 2030, substantial investments have been funneled into hydropower infrastructure. 

Laos’ pursuit of foreign investment and energy exports have been scrutinized by other riparian countries, gauging its conformity within the framework of Mekong River Commission procedures.

There was much discussion of the impact these hydropower projects would have on water flows, sediment flows, water quality and fisheries, with many analysts predicting that the projects developed through public-private partnerships would be financially profitable. And yet, overall, they have significantly contributed to Laos’ debt commitments that exceed 100% of the country’s GDP.

Hydropower was expected to drag its people out of poverty, but Laos is now walking a financial tightrope and teetering on the edge of a precarious economic situation.

Short-term benefits

Some positive changes have occurred, including temporary job opportunities and better infrastructure. However, these initial gains fall short of meeting needs, with the World Bank reporting in 2022 that total revenue from the power sector represents less than 10% of Laos’ fiscal revenue. 

These short-term benefits of hydropower projects on the nation’s prosperity also need to be further assessed with a wider lens. Local communities have borne the brunt of the social costs through forced relocations and disrupted livelihoods.

This has had an especially harmful impact on women and ethnic minority groups, whose right to land tenure is not explicitly recognized within domestic law, prohibiting them from compensation or access to ancestral lands and livelihoods. 

Not to mention these threats simply add on to existing impacts created by land-use change, unsustainable sand mining and the climate crisis. With fish migration blocked, sediment flows tumbling, and water levels changing more frequently in unpredictable and extreme ways, millions of people living downstream are increasingly impacted.

Pamok, Laos: Life along the banks of the Mekong River. Photo: Nicolas Axelrod / Ruom / WWF

Fish catches are dwindling, fresh water for irrigation is running short, and the delta is sinking much faster than the sea is rising. Countless sectors have taken a hit, but agriculture, tourism and energy have been especially impacted.  

Hydropower generation is also not immune to the uncertain effects of climate change in the region. Vulnerability arises from less predictable river flows, notably more frequent droughts and intense rainfall events, which bring significant risks to both the safety of hydropower projects and their electricity production.

Hydropower infrastructure, promoted as a climate mitigation measure, too often has counterproductive impacts on adaptation performance. Positive long-term climate outcomes are not always significant and may actually end up having unfavorable trade-offs for others.

Continuing on this capital-intensive, high-impact hydropower path bears the risk of further straining Laos’ financial situation and exacerbating tensions with its downstream neighbours. There are alternative, lower-risk, higher-reward paths for Laos that should be further explored.

A path forward

A new report by WWF proposes revisiting three undervalued sectors in Laos to bring in foreign revenue to drive development: agriculture, tourism and distributed energy. Investing in these sectors would create enabling environments for greener and more inclusive private-sector-led growth for Laos, with fewer risks stemming from uncertainty in power purchasing agreements.

It would also give the country a competitive edge on the sustainability front, boost efforts to meet its commitments under the Global Biodiversity Framework and support adaptation to the changing climate.

Fishing on the Mekong in Pamok, Laos. Photo: Nicolas Axelrod / Ruom / WWF

Laos’ agriculture and tourism sectors have already been recognized as areas that boast significant labor-force participation rates and foreign-exchange earning capabilities. The recent launch of the Lao-China railway will not only support increased exports of agricultural products to China, but also open doors to other rail-linked international destinations amid growing demand for healthy food and high-end tourism. 

Alternatives can also be found in distributed renewable energy sources, like solar, wind and sustainably sourced biomass. These can be viable substitutes for some planned hydropower investments and complement existing installed hydropower capacity.

By developing renewable low-impact energy, Laos can strengthen its energy security while also securing a greener, more sustainable future and continue to deliver against its climate mitigation ambitions.

Laos has a tremendous opportunity to leapfrog ahead by diversifying its foreign-revenue strategy and, in doing so, the nation could become a model for integrated economic advancement, climate resilience and environmental conservation.

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China strengthens capital management rules for banks

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BEIJING: China’s financial regulator is beefing up capital rules for banks to combat financial risks, the National Financial Regulatory Administration said in a statement on Wednesday (Nov 1). The move, which will come into effect on Jan 1, aims to help banks improve risk management and better serve the economy,Continue Reading

Japan can’t afford to let the yen go much lower

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Japan’s exchange rate environment made a big turnaround in 2022 when the yen began to depreciate sharply. When it exceeded 145 yen against the US dollar by September 2022, and then 150 yen in October, the Ministry of Finance conducted two rounds of foreign exchange interventions.

Partly due to a decline in long-term interest rates in the United States from November 2022, the exchange rate returned to below 140 yen. The response from the Bank of Japan (BoJ) also contributed to the appreciation, leading to the yen reaching 130 against the US dollar by early 2023. But the yen is still considered undervalued compared to Japan’s economic fundamentals, which are around 100 to 110 yen.

The extreme depreciation of the yen resumed from May 2023. Since early 2022, the yen has declined by an average of about 20% against major currencies. Against the US dollar, the yen depreciated by around 30%.

This is partly attributable to the BoJ’s monetary easing policy, namely yield curve control, that was adopted in 2016. This sets short-term interest rates at negative 0.1% and aims for 0% for 10-year long-term interest rates. For the 10-year interest rate, a small fluctuation range has been permitted.

While the United States and Europe are shifting to interest rate hikes to curb inflation, the BoJ has maintained yield curve control. The widening of the interest rate differential has led to a sharp depreciation of the yen. 

Market participants widely believe that the BoJ raised the fluctuation range of the 10-year interest rate from plus or minus 0.25% to plus or minus 0.5% in December 2022.

Under the new leadership of Governor Kazuo Ueda, the BoJ further raised the fluctuation range of long-term interest rates to 1% in July. But unlike in 2022, they left 0.5% as a reference. This meant that fluctuations of up to 1% can be tolerated, but the BoJ will try not to let the long-term interest rates deviate significantly from 0.5%.

Bank of Japan Governor Kazuo Ueda faces a QE dilemma. Image: Twitter / Screengrab

Investors found this policy difficult to understand. It was unclear whether the central bank wanted to maintain a low-interest policy to increase domestic demand to achieve the 2% inflation target or raise interest rates to alleviate excessive depreciation of the yen.

The depreciation of the yen progressed even after the policy adjustment. By leaving the reference rate at 0.5%, the exchange rate market judged there was little intention for the central bank to raise interest rates significantly, leading to foreign exchange transactions where people felt reassured to sell yen and buy high-interest dollars.

US monetary policy has greatly influenced the interest rate differential. The US economy is stronger than expected, with a tight labor market. Inflation stands at 3.7%, but excluding energy and food is still above 4%. To ensure inflation decreases toward the 2% target, there is a possibility of a further rate hike or maintaining current high interest rates (5.25 to 5.5%).

The sharp depreciation of the yen is causing import prices to soar, keeping Japan’s inflation well above the 2% target. The BoJ revised the inflation rate for the 2023 fiscal year from 1.8% to 2.5%. The current inflation rate is in the 3% range, with food prices accounting for 70% of this inflation. This is eroding the purchasing power of consumers, leading to a decline in real consumption.

Even with the yen’s depreciation, Japan’s trade deficit continues and export quantities have not increased. Industrial production and corporate investment remain sluggish. While the government’s revenue is increasing due to inflation-induced income and consumption taxes, this is essentially a tax hike. Wage growth has not caught up with the rate of inflation.

Japan’s services sector is enjoying an increase in foreign demand — driven by the yen’s depreciation. Hotels are full and tourist spots are overflowing. Another 10% of Japan’s inflation arises from rising hotel fees, thanks to the tourism boom. 

With the rising cost of construction materials and foreign demand for real estate, house prices have also increased. It is also a good time to buy Japanese stocks, which has contributed to good stock market performance in 2023.

The BoJ’s challenges are enormous. How to correct the extreme depreciation of the yen – without causing significant damage to markets, while also committing to a 2% inflation target — is an unprecedented challenge. 

The yen is depreciating fast against the US dollar. Photo: Asia Times Files / AFP

Markets widely anticipate the BoJ’s monetary policy normalization, including removing the negative interest rate policy and the yield curve control 10-year target within the next two years. Given rising government and corporate debt, a rapid interest rate hike is likely to cause significant stress to the economy. 

The BoJ needs to improve communication with the market and the public about its future monetary stance. It needs to explain how to achieve the 2 % inflation target in the long run, when interest rates become more flexible and possibly higher. 

Adopting an inflation target range, such as 1-3%, rather than sticking to a single 2% numerical target could be another option.

Sayuri Shirai is Professor at Keio University and a former policy board member of the Bank of Japan.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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PBOC in a liquidity dilemma of crucial proportions

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Any staffers at People’s Bank of China headquarters planning a vacation in the last two months of 2023 are almost surely hitting the “cancellation” button.

No major monetary authority is likely to be busier than Beijing’s between now and January 1 than the one Pan Gongsheng leads as governor. In the last 24 hours alone, the PBOC made headlines by, first, signaling a fresh liquidity surge to halt a jump in money market rates and then doing the opposite by draining about US$15 billion from money markets.

It dramatizes the ways in which the PBOC is caught between Federal Reserve rate hikes in Washington, Bank of Japan dovishness in Tokyo and credit market volatility everywhere else.

Add in China’s economic downshift, capital fleeing Shanghai and Shenzhen stocks, and enduring investor concerns about regulatory uncertainty in Beijing and it’s easy to see why holiday plans are likely being canceled at PBOC central.

Pan’s balancing act is made more precarious by the fact neither US Fed Chairman Jerome Powell nor BOJ Governor Kazuo Ueda knows where the next two-to-six months will take their respective monetary policies.

The US economy continues to surprise to the upside, growing at a barn-burning 4.9% annualized pace in the third quarter. Wages in Japan continue to underwhelm, taking BOJ tapering off the table.

The PBOC’s balancing act at home is getting dicier, too. At the same time, the yuan is under downward pressure, PBOC officials are trying to limit stimulus so that progress in reducing leverage and unproductive lending isn’t squandered. Yet there’s also a need to prop up a slumping economy and channel liquidity to troubled property developers.

Now, there’s an added test for Pan’s leadership team: President Xi Jinping’s new push to reduce debt risks plaguing local governments in order to increase economic dynamism around the nation.

At a twice-a-decade policy meeting of the Central Financial Work Conference this week, attended by Xi, officials unveiled plans for a long-term mechanism to clean up municipal balance sheets.

Naturally, it will fall to the PBOC to grease the skids via liquidity as local governments dispose of bad debts. The enterprise will echo the role the BOJ played in the early 2000s to facilitate the discarding of toxic loans undermining what was then Asia’s biggest economy.

PBOC Governor Pan Gongsheng has markets dissecting his every move. Image: BBC Screengrab

Resolving local government debt troubles, made worse by an explosion of local government financing vehicles (LGFVs), is vital to stabilizing China’s $61 trillion financial sector at a time when China Inc is already grappling with cratering real estate markets.

The idea, argues state-run Xinhua News, is to “optimize the debt structure of central and local governments” to improve the quality of national growth.

“This phrase suggests the central government may take up more funding responsibilities and leverage up further while local governments de-leverage and de-risk by resolving implicit debt problems,” says economist Maggie Wei at Goldman Sachs.

Lan Wang, an analyst at Fitch Ratings, says that “moving to diffuse refinancing strains” among LGFVs “could provide some potential for capex expansion under selected local governments,” bolstering Chinese growth.

Overall, Wang says, “property fallout continues.” Fitch, she adds, “recently downgraded several of the largest surviving homebuilders that are still rated in the investment-grade categories, underscoring the lack of stabilization.”

The local government debt plan coincides with Premier Li Qiang’s efforts to repair the property sector. So far, authorities have resisted calls for giant public bailouts of the kind Beijing resorted to in the past. Yet there are signs Xi and Li are becoming more open to easing regulatory pressure on a sector that has previously generated as much as 30% of gross domestic product.

In recent days, Communist Party leaders “vowed to meet the reasonable financing needs from developers,” says economist Larry Hu at Macquarie Bank. But, he adds, “it’s noteworthy that the conference didn’t mention the mantra ‘housing is for living, not for speculation.’” In other words, he notes, “this time around, the focus is to keep regulatory pressure to prevent the emergence of new risks, instead of launching another de-risking campaign.”

Even so, the extreme interconnectivity between property markets and local government finances means this week’s policy shift could be a major one for China’s macro performance in 2024 and beyond.

In the view of Bloomberg Intelligence economist David Qu, this “could turn out to be a monumental event for the financial sector. A debt-laden property sector that’s threatening to rock the financial system adds urgency to the agenda.”

The same goes for the urgency at PBOC headquarters to keep the financial peace. Pan’s team has more work to do as rising US yields and elevated global inflation generate intensifying headwinds.

“China’s structural economic downturn will continue,” says Raymond Yeung, an economist at ANZ Bank. Recent “data improvement doesn’t represent a turnaround in fundamental challenges, such as worsening demographics, a lack of productivity improvement and trade tension.”

It helps that Xi and Li are boosting fiscal stimulus, albeit modestly. Last week, Beijing announced a 1 trillion yuan ($137 billion) sovereign debt package for construction projects and that the national budget deficit would be allowed to widen to the largest in three decades.

New fiscal package will aim to revive construction. Image: Twitter

“Beijing’s rare budget expansion marks a critical step in reflation,” says Robin Xing, economist at Morgan Stanley. “We expect growth and inflation to improve but in a subpar fashion. More stimulus and reforms are likely needed and exiting deflation could be a two-year journey.”

Zhiwei Zhang, economist at Pinpoint Asset Management, says “I take this policy as another step in the right direction. China should make its fiscal policy more supportive, given the deflationary pressure in the economy. Part of the funds raised will be utilized next year, hence this helps to boost growth outlook beyond the fourth quarter.”

Jing Liu, an economist at HSBC, adds that “this should have a positive effect for growth, though the effect may be more backloaded into next year.” Yet, notes economist Arjen van Dijkhuizen at ABN Amro, China faces “fierce headwinds” from the property sector, related debt issues and the “global growth slowdown” and from “ongoing tensions” with the US, EU and the West in general.

These and other headwinds will increase the pressure at PBOC headquarters. One is how rising global energy prices affect inflation – and the risk of Chinese stagflation. Another: sluggish demand for mainland exports. In September, shipments to the US plunged 16.4% year on year.

What’s more, “measures of foreign orders point to a more substantial decline in foreign demand than what has been reflected in the customs data so far,” says Zichun Huang at Capital Economics. “And the lagged impact of higher interest rates is likely to dampen consumer spending in major export markets over the next few quarters.”

In late October, Xi reportedly visited the PBOC, a first since he became president in 2012. It spotlighted the key role Pan’s team is playing in supporting GDP growth and financial markets. Along with the PBOC, Xi and Vice Premier He Lifeng dropped by the State Administration of Foreign Exchange, which manages China’s $3 trillion of currency reserves.

Yet the PBOC faces an uphill struggle in the months ahead to overcome the myriad headwinds bearing down on China. Some are coming in from Washington, where the Fed is likely to hike rates again. Others are from Europe and Japan, where post-Covid-19 recoveries aren’t as robust as hoped.

“Whatever does emerge from Beijing over the coming months, it likely won’t be quick enough to make any meaningful difference to 2023,” says Robert Carnell, an economist at ING Bank. “At best, it should be viewed as a pain management tool for the transition to a less leveraged economy.”

The good news is that the pain management process is accelerating in ways that could put China on a firmer footing in 2024 and beyond. The bad news is that vacations are off at PBOC for the foreseeable future.

Follow William Pesek on X at @WilliamPesek

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South Africa must carefully manage ties with US, China

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South Africa must tread carefully in its economic relationships to avoid being caught in the escalating tension between East and West, and more specifically China and the US. The country’s hosting, and the outcome, of the 2023 AGOA Summit should strengthen its role in diplomatic relations and contribute toward safeguarding South Africa’s economic interests.

From November 2-4, the US and 35 sub-Saharan African countries will meet in Johannesburg for the 20th Africa Trade and Economic Cooperation Forum (AGOA Forum). It entails strengthening trade and investment ties between the US and sub-Saharan Africa through the Africa Growth and Opportunity Act (AGOA), US legislation that provides various trade preferences to eligible countries in the region.

Also read: Africa-focused US law reframed around countering China, Russia

Given Russia’s continuing war in Ukraine and its rising tension with the North Atlantic Treaty Organization, plus the China-US trade war, tensions between East and West are high. South Africa has come under attack for its non-alignment role in the Ukraine war. It refused to support UN resolutions condemning Russia. This resulted in some of the US Congress pushing for the forum to be moved out of South Africa.

The country recently hosted the 15th BRICS summit, which resolved to expand the Brazil, Russia, India, China and South Africa grouping to 11 member states. The enlargement will bolster BRICS’ role as a geopolitical alternative to the West, which is dominated by the US. Might this be a direct challenge to American hegemony?

I have been researching major global economic developments, such as globalization and the impact of the 2008 global financial crisis, for 20 years. This body of work shows the risks that come with behavior like South Africa’s. The country could find itself in the middle of a tense situation.

South Africa needs to pull off an exceptional balancing act in managing its international relations in a sensible way that protects and advances its economic interests.

Note that the geopolitical tensions between China and the US are not just about trade disputes. They also include espionage, China’s Belt and Road Initiative, climate change and environmental issues, and tensions over Hong Kong, Taiwan and South China Sea disputes.

As a major source of infrastructure financing to sub-Saharan Africa, China is now the region’s largest bilateral official lender. Its total sub-Saharan African external public debt – what these governments owe to China – rose from less than 2% before 2005 to more than 17% in 2021.

AGOA might present a challenge to China as competition for its own interests in Africa. China would like African countries to untie or loosen their agreements with the US. It is thus a good moment to take stock of the actual benefits South Africa has derived from the Agoa agreement with the US.

What AGOA is about

The AGOA agreement was approved as legislation by the US Congress in May 2000 for an initial 15 years. On June 29, 2015, it was extended and signed into law by then-president Barack Obama for a further 10 years, to 2025.

It will come into review again in 2024, hence the importance of the upcoming summit. Recently, Senator John Kennedy introduced a bill to the US Congress to extend AGOA by a further 20 years, to 2045. This is a bid to counter China’s growing influence in Africa, and to continue to allow sub-Saharan African countries preferential access to US markets.

AGOA’s benefits to South Africa

In 2021, the US was the second-most-significant destination for South Africa’s exports worldwide, mainly thanks to AGOA. China took the top spot; Germany was third. The US ranked third as a source of South Africa’s imports, following China and Germany.

In that year, the total trade volume between South Africa and the US reached its zenith at $24.5 billion, with a trade imbalance of $9.3 billion in South Africa’s favor.

AGOA offers preferential entry for about 20% of South Africa’s exports to the US, or 2% of South Africa’s global exports. The stock of South African investment in the US has more than doubled since 2011, amounting to $3.5 billion in 2020.

American foreign direct investment (FDI) in South Africa increased by more than 70% over that period, to $10 billion. This made the US South Africa’s fifth-largest source of FDI in 2019. The US was its third-largest destination for outward FDI.

US investment in South Africa is mainly concentrated in manufacturing, finance and insurance, and wholesale trade, which is vital for economic growth. American multinationals doing business in South Africa employ about 148,000 people.

More specifically, AGOA’s benefits include:

  • Duty-free and quota-free access to the US market for a wide range of South African products. This benefits South Africa’s textile and apparel industry in particular. To sub-Saharan African countries, Agoa provides duty-free access to the US market for more than 1,800 products. This is in addition to the more than 5,000 products that are eligible for duty-free access under the US Generalized System of Preferences program.
  • Export diversification, especially of items such as agricultural products, textiles, and manufactured goods. This is vital for increasing export earnings, which help to improve South Africa’s balance of payments, particularly its trade account.
  • Capacity-building through technical assistance and programs to help South African businesses meet US standards, thus becoming more competitive in the global marketplace.
  • Economic development and poverty reduction, which aligns with South Africa’s developmental goals.

Balancing economic interests

China is the largest consumer of South African commodity exports, and thus a key influencer of the rand exchange rate. In addition, China and Russia’s planned move toward de-dollarization (trying to replace the petrodollar system with their own system) puts American interests under threat. This means South Africa needs to navigate carefully its relations with the US and its BRICS partners, China and Russia.

It will want to keep strong ties with the US through AGOA without getting into a difficult position between China and the US. The outcome of this week’s meeting will have serious economic implications.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Japan reminds world why it’s stuck in QE quicksand

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TOKYO – The Bank of Japan bowed to financial realpolitik Tuesday (October 31) by allowing bond yields to top 1%. But Governor Kazuo Ueda remains tethered to a level of policy unreality sure to keep the yen under strong downward pressure.

Ueda’s step was the tiniest the BOJ could have gotten away with without shoulder-checking global markets. It means far less than currency traders may think in terms of when and how Japan might exit a 23-year-old quantitative easing (QE) experiment.

The BOJ meeting “ended up somewhat confusingly but largely dovish leaving the yen still vulnerable to a further sell-off versus the dollar,” says Gary Dugan, chief investment officer at Dalma Capital.

In fact, the events of the last month might have ensured that Ueda’s team remains stuck in the QE quicksand longer than markets appreciate.

Since taking the helm in April, Ueda has been testing markets’ readiness for BOJ “tapering.” It hasn’t gone well so far. A move in late July, for example, to let 10-year bond yields rise from 0.5% to 1% sent the yen higher than Tokyo expected.

In the weeks that followed, the BOJ executed countless large and unscheduled bond purchases. That signaled to traders that the July tweak was inevitable given the surge in US yields to 17-year highs and that overall BOJ rate policies hadn’t changed. It was similar to the one-step-forward-two-steps-back maneuver the BOJ pulled off in December.

Tuesday’s tweak is more of the same. As US rates continue drifting upward, causing extreme tensions between dollar and yen rates, the BOJ has no choice but to adjust. After all, it remains to be seen how many more US tightening moves are in store for global markets. News that US gross domestic product (GDP) rose at a 4.9% annualized pace in the third quarter upped the odds the Federal Reserve will keep hiking rates.

Yet Ueda’s challenge grew markedly bigger this month for other reasons, too. One is the sudden explosion of violence in the Middle East. The Hamas-Israel war threatens to accelerate increases in oil prices, adding to inflation risks caused by Russia’s 2022 Ukraine invasion. Japanese inflation is running the hottest in three decades at close to 3% year on year.

Significantly, the BOJ raised its inflation forecast to 2.8% from 2.5% for fiscal 2023. For 2024, price expectations have been raised to 2.8% as well.

But even as commodity price surges warrant tighter policies, China’s economic downshift is pulling BOJ priorities in the other direction. In October, mainland factory activity slid back into contraction, while the services sector slowed more than expected.

The manufacturing purchasing managers index dropped to 49.5 from 50.2 in September. Non-manufacturing activity fell to 50.6 from 51.7.

“China’s economic activity fell to an extent, and the foundation for a continued recovery still needs to be further solidified,” says Zhao Qinghe, senior statistician at China’s National Bureau of Statistics. Economist Raymond Yeung at Australia & New Zealand Bank adds this “downside surprise” means Beijing “will still need to deliver growth-supportive policy.” 

As Japan’s top trading partner stumbles, exporters are bracing for a rough 2024. That’s dimming hopes that Japan Inc might boost wages, kicking off a virtuous cycle of income and consumption gains.

As headwinds mount, Prime Minister Fumio Kishida’s government is rushing to roll out fresh stimulus. They include proposals for tax cuts for the middle class, reduced corporate levies and cash handouts to households facing higher inflation.

Japanese Prime Minister Fumio Kishida’s ‘new capitalism’ looks a lot like the old. Photo: Government of Japan

The large and growing price tag for fiscal initiatives could increase pressure on the BOJ to add more, not less, liquidity. Otherwise, government bond yields might surge, adding to financial pressures on banks and households.

Yet Kishida’s latest proposals complicate Ueda’s options in another way. By shoveling fiscal money to fill economic holes, the ruling Liberal Democratic Party is treating the symptoms of Japan’s troubles, not the underlying ailments.

As inflation spikes higher, Kishida’s approval ratings are plummeting, currently around 29%, to the lowest of his two years in power. Hence the rush to ramp up fiscal stimulus efforts.

Missing, though, are proposals to raise Japan’s political game. When he took power in October 2021, Kishida pledged to implement a “new capitalism” plan to spread more equitably the benefits of economic growth.

Part of the strategy was addressing the unfinished business from the “Abenomics” era, reference to Shinzo Abe’s 2012-2020 premiership, the longest in Japan’s history.

Abe promised a supply-side revolution the likes of which modern Japan had never seen. It included moves to loosen labor markets, reduce bureaucracy, boost innovation and productivity, empower women and restore Tokyo’s place as Asia’s premier financial center for multinational companies and stock listings.

Mostly, Abe leaned on the BOJ to supersize QE. In March 2013, he hired Haruhiko Kuroda as governor to turbocharge an experiment that the BOJ pioneered in 2000 and 2001.

Within five years, Kuroda’s binging on bonds and stocks pushed the BOJ’s balance sheet above $4.9 trillion, topping Japan’s annual GDP. A resulting plunge in the yen boosted exports, juicing the stock market and generating record corporate profits.

Yet Abe’s team put very few reform wins on the scoreboard. Other than steps to strengthen corporate governance, the Abe era failed at nearly every turn to recalibrate growth engines, level playing fields and give chieftains confidence to fatten paychecks.

One big concern is that Tokyo’s same-old-same-old policy approach has lost potency over time. Economist Sayuri Shirai at Keio University notes that, this time a falling yen isn’t altering Japan’s export and trade deficit dynamics like in the past. Industrial production and corporate investment also “remain sluggish,” says Shirai, a former BOJ policy board member.

“While the government’s revenue is increasing due to inflation-induced income and consumption taxes, this is essentially a tax hike,” she explains. “Wage growth has not caught up with the rate of inflation. Given rising government and corporate debt, a rapid interest rate hike is likely to cause significant stress to the economy.”

But weak exchange rates leave Japan uniquely vulnerable to surging energy and food prices. This dynamic is colliding with a domestic economy that might not be ready for a shift away from ultraloose monetary policy. One big worry: the risk of a Silicon Valley Bank-like blowup amongst Japan’s 100-plus regional lenders.

Worries about another SVB abound in the US, too. As Fed Chairman Jerome Powell’s team mulls another rate hike — perhaps as soon as November 1 – investors are scouring the financial landscape for the next bank that might buckle under the pressure of rising US yields.

A relentlessly strong dollar is also raising default risks in Asia, particularly in China. It’s making offshore debt harder to manage.

“The greenback continues to draw smaller benefits from strong US data and high rate advantage than it should, likely due to its overbought status, but upside risks remain predominant,” says Francesco Pesole, an analyst at ING Bank.

Analyst Adam Button at ForexLive says the constant threat that Japan’s Ministry of Finance might intervene to support the yen is capping the dollar’s gains – at least for now. But the dollar, Button notes, “should be stronger than it is this week, and I think it’s just a matter of time until it materializes.”

In general, though, traders need to figure out where both US and Japanese rates are heading to know where risks lie. “Additional positioning doesn’t really make sense until those two key risk events are out of the way,” says Bipan Rai, currency strategy at CIBC Capital Markets.

The fragility of Japan’s sprawling regional bank network remains a clear and present danger to Asia’s second-biggest economy. Many of these lenders service rapidly aging communities in already sparsely populated areas of the country. That squeezed profits well before the banking shocks of the last 15 years, including fallout from the 2008 “Lehman shock.”

That crisis, fast-aging customer bases and an accelerating exodus of companies to Tokyo had regional banks these last 15 years hoarding government and corporate bonds instead of lending the credit the BOJ has been churning out. It was a similar practice that blew up SVB and New York-based Signature Bank.

Earlier this month, Japan’s Financial Services Agency telegraphed efforts to stress-test at least 20 banks to surface any SVB-like landmines across the nation. Part of the worry is the specter of similar social-media-fueled bank runs.

No developed economy prizes stability and financial market decorum more than Japan. And few, if any, face greater concerns about hidden cracks than Japan with scores of fragile regional banks in harm’s way.

Photo. Reuters / Yuya Shino
The Bank of Japan has some tough decisions to make. Image: Asia Times Files / Reuters

At the start of 2023, SMBC Nikko Securities estimated that regional leaders were sitting on about $10.5 billion of unrealized losses on foreign bonds and other securities. That has Ueda’s team wondering how big losses might become if government bond yields rose to 2% or even higher.

The comparisons between midsize banks in the US and Japan are limited, of course. SMBC Nikko analyst Masahiko Sato argues that the average threat to capital ratios is only about 2%. Therefore, Sato does “not think potential losses are on a scale with systemic implications.”

At the same time, many of Japan’s regional lenders, like SVB, tend to prioritize bonds that can be sold rather than holding debt to maturity. But BOJ tapering or even a rate hike or two could change this calculus, and fast.

If regional banks face profit pressures with rates at zero, the fallout from a big rate pivot by Ueda could be extreme. This could explain in part why “markets are seemingly underpricing the risks of an early normalization,” says Charu Chanana, a senior market strategist at Saxo Capital Markets.

Stefan Angrick, senior economist at Moody’s Analytics, says “this doesn’t rule out the BOJ dropping negative rates at some point — we speculate this may happen in April 2024, after the spring wage negotiations that year.”

But, he concluded, “it suggests that the way forward is towards zero interest rate policy with some form of quantitative easing, rather than a sharp lift-off on the short end.”

Follow William Pesek on X at @WilliamPesek

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Woman who scammed 10 people of S0,000 and got lover to hand over parents’ life savings gets jail

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In: South-East Asia

SINGAPORE: A woman who duped 10 people of more than S$880,000 (US$646,000) and got her lover to cheat his parents into handing her their life savings was sentenced to jail for seven years and one month on Tuesday (Oct 31).

Joceyln Kwek Sok Koon, 49, had pleaded guilty to seven charges, mostly for cheating. Another 16 charges were considered in sentencing.

The prosecution had called Kwek a “serial cheat who preyed on all and sundry”, from her godparents to strangers on the internet.

She cheated her 10 victims over six years, committing offences even while she was on bail and scheduled for trial.

“She was a seasoned and skilled manipulator who repeatedly and brazenly flouted the law,” said Deputy Public Prosecutor Phoebe Tan, seeking 91 months to 100 months’ jail for Kwek.

THE OFFENCES

Kwek got to know her lover and co-accused Lai Sze Yin in July 2016, when the 24-year-old man delivered a parcel to her home.

She began dating the younger man, though she was married with two children.

She created a persona of a young woman named Rachel Lam Xin Yi who was studying in the National University of Singapore to conceal her real identity from Lai’s family.

She never met them in person but chatted to them over the phone, growing close to them this way.

She later got Lai to trick his parents and younger sister into handing over S$150,000, pretending they were for investments or a car loan.

Lai’s mother lodged a police report in October 2018, saying her son’s girlfriend had cheated her of her entire savings and was uncontactable.

Kwek, who was declared bankrupt in January 2014, also cheated her own godmother into handing over more than 50 pieces of jewellery.

She claimed she would get the precious items cleaned, but instead pawned them and used the money to settle her debts.

Kwek also cheated two other men who fell in love with her without seeing her real face.

One of them, a 35-year-old Certis Cisco employee, fell for Kwek after chatting with her following an email enquiry Kwek sent Certis Cisco.

Despite realising that photos Kwek had sent him of her belonged to a Korean blogger, the man continued their relationship and transferred Kwek a total of S$48,000 between September 2017 and March 2019.

The other man who fell for Kwek’s wiles was a 39-year-old salesman working at a piano shop.

He got to know her on WhatsApp when looking for potential customers. Kwek portrayed herself as a rich person, showing him pictures of her purported property and buying expensive abalone from his friend in bulk.

She sent a photo of another person to the salesman, claiming it was her. 

Although the man realised it was someone else, as Kwek had accidentally sent him a full screenshot containing the person’s profile, he continued his relationship with her.

In total, he sent her about almost S$104,000, taking loans from his friends and family. He quit his job as he believed Kwek was offering him a job, and fell into financial trouble when this did not materialise.

He realised he had been cheated only when another scam victim contacted him.

Kwek had also targeted her husband’s British ex-colleague after she was charged.

She told him she needed money to claim her inheritance and assured him that she would return the cash, engaging lawyers to draft letters to make her claims appear valid.

She posed as a male lawyer to deceive the 66-year-old man and cheated him of S$338,600 with various ruses, including lying that she had leukemia.

Knowing that the man wanted to apply to become a permanent resident, Kwek lied to him that she would be his sponsor and fund the application.

However, this was just to buy herself time to repay him the money she owed.

In January 2021, the man lost his job at a bank and his employment pass was cancelled. He stayed in Singapore on Kwek’s assurance that his PR application had been approved, and faced investigations by the authorities for overstaying.

He fell into debt as a result of Kwek’s actions and his mental health deteriorated.

Kwek’s jail term was backdated to April 2022, when she was remanded.

Lai, the 24-year-old man, was sentenced to 15 months’ jail in June 2021 for his role in cheating his family. At the time, he promised his parents that he would work extremely hard to return all their life savings.

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Study: Technical debt stalls growth and transformation for nearly half of global businesses

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In: Technology

99% of respondents recognised that technical debt is a risk to their organisations
Lack of awareness significantly affects leaders’ ability to manage technical debt

A study of business leaders by DXC Technology, a leading Fortune 500 global technology services company, has revealed that nearly half (46%) of executives say that technical debt, or…Continue Reading

Court gives Evergrande one last chance to agree debt deal

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In: Asia
Evergrande sign.Getty Images
By Peter Hoskins & Nick Marsh
BBC News

A Hong Kong High Court judge has given crisis-hit Chinese property giant Evergrande one last chance to come up with a new deal over its huge debts or face liquidation.

A winding-up hearing, initially scheduled for Monday, was adjourned to 4 December.

Justice Linda Chan said it would be the last hearing before a decision is made.

Evergrande is the world’s most indebted property developer with more than $325bn (£268.4bn) of total liabilities.

It defaulted on its debts two years ago and has been working on a new repayment plan ever since.

Justice Chan said Evergrande had to come up with a “concrete” proposal before that otherwise it was likely the company would be wound up. A liquidator would still be able negotiate with creditors, she added.

Evergrande did not immediately respond to a BBC request for comment.

The case was originally brought by Top Shine Global, an investor in Evergrande unit Fangchebao, in June 2022.

It said Evergrande had not honoured an agreement to buy back shares the investor had bought in the business.

Evergrande’s plans to rework its agreements with creditors were dealt a major blow last month when it confirmed that its founder Hui Ka Yan and one of its main subsidiaries were under investigation for suspected criminal activities.

The company also said that it was it barred by Chinese regulators from issuing new dollar bonds, which was a key part of its plan to restructure its debts.

It also cancelled planned votes by creditors on its restructuring plan, which were originally scheduled for late last month.

Most of Evergrande’s debt is owed to people within China, many of whom are ordinary citizens whose homes have not been finished.

When the firm defaulted on its huge debts in 2021, it sent shockwaves through global financial markets as the property sector contributes to roughly a quarter of China’s economy.

Several other of the country’s major developers have defaulted over the past year and many are struggling to find the money to complete developments.

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