Japan approves $157bn quake budget for reconstruction

Japan's government has approved a 12.1tn yen ($157bn; £100bn) budget for the reconstruction of areas devastated by the earthquake and tsunami. 

The extra budget is the latest effort by authorities to stimulate growth in the Japanese economy, which is currently in recession.

A part of the budget will also be used towards measures to help businesses counter the rising yen.
The budget will be presented to parliament next week.

This is the third extra budget introduced by the government this year after taking the size of the overall budget to a record 106.4tn yen.
Delayed implementation The proposal is the second-biggest extra budget ever approved by the Japanese government.

It comes after a 4tn yen supplementary budget in May and a 2tn yen special budget in July.
However, analysts said that although the government had been quick in sanctioning extra money, its impact had yet to be noticed.

"So far, we haven't seen any strong evidence of increase in public works projects," Takuji Okubo of Societe Generale told the BBC.

Mr Okubo added that the delay in implementation of plans was due to a lack of political will.
"Former prime minister Naoto Kan lingered on in his position and wasted precious time just pondering what to do with the money," he said.

Yen trouble The government said it will use almost 2tn yen from the extra budget to implement measures to keep the yen's price in check.

The move comes amid concerns over the long-term future of the manufacturing sector in the country as the Japanese currency continues to strengthen, despite recent efforts by the authorities to stem its rise.
Global economic uncertainty has seen investors flock to the yen, traditionally seen as a safe asset, sending the currency to record highs against the US dollar.

It was trading close to 76.78 yen against a US dollar in Asia trade on Friday.
A strong currency hurts Japanese exporters by not only making their goods more expensive but also denting their profits.

According to a recent survey by the government, 46% of big Japanese manufacturers said they would consider shifting their production oversees if the yen remained as high as current level for six months.
Any such moves by the big exporters could have a big impact on the country's economic growth.

Source: www.bbc.co.uk

Lessons From Li Ning's China Stumble

Companies can learn from the Chinese sporting-goods maker's failed attempt to reposition itself as an upscale brand, say columnists Anil K. Gupta and Haiyan Wang

 

The ongoing turmoil at Li Ning, China’s leading sporting-goods company, holds important lessons for Chinese as well as foreign companies about how to win in the country’s rapidly growing and constantly changing market. Founded in 1989 by the famous gymnast of the same name, Li Ning has established itself as a solid No. 2 in China’s sports footwear and apparel market—behind Nike (NKE) but just ahead of Adidas. With an unbroken record of rapid growth in both sales and profits, the company delivered 2010 revenue of more than $1.5 billion and aftertax profits of more than $170 million.
Over the last 12 months, however, Li Ning has stumbled badly, largely as a result of a major brand repositioning in mid-2010 that has gone awry. In the first half of 2011, the company’s revenues declined, in stark contrast to an average annual growth of more than 30 percent during the previous 10 years. In the 18 months to June 30, 2011, Li Ning’s stock price dropped by 55 percent, compared with a 20 percent gain for its downscale Chinese rival Anta  and 36 percent and 45 percent gains, respectively, for the global giants Nike and Adidas.
Li Ning’s missteps centered around an attempt to take its flagship brand upscale. Accompanied by a revamped logo and a new ad campaign (“Make the change”), the company hiked prices and started shifting its distribution focus from lower-tier markets to first-tier cities such as Beijing and Shanghai. These moves failed to attract brand-conscious youngsters who were happy to spend a bit more to buy Nike or Adidas. Worse, the price hikes gave Anta an opening to steal value-conscious customers away from Li Ning.
The Li Ning episode yields several important observations about the quest for the hearts, minds, and wallets of Chinese customers.

Two Economies

First, it is useful to think of China as two economies—China-1 (comprising most consumer goods and services such as sportswear, personal care products, food and beverages, fast food, and retailing) and China-2 (comprising many “strategic” industries such as steel, airlines, telecoms, financial services, and energy).
In China-1 industries, competitive battles are won or lost largely by the logic of the market. In these industries, who emerges as the market leader depends on company-specific advantages, strategic smarts, and timing. Depending on the context, victory could easily go either way: to a global giant or a Chinese champion. Nike is the favorite of Chinese customers in sports shoes and apparel. Procter & Gamble dominates fast-moving consumer goods, and Yum! Brands  is the clear leader in fast foods. In contrast, Haier dominates the home appliance sector and, in electronics retailing, the market leaders are the Chinese companies Gome and Suning rather than Best Buy .
China-2 industries are an entirely different story. In these industries, the government has an explicitly stated goal to help domestic companies emerge as first national and then global champions. Foreign companies face a tough challenge from state-owned or state-supported Chinese players. Often the best option for multinationals in these industries is to partner with Chinese players while lobbying (through their governments) for open markets. The wind turbine industry—where the Chinese company Goldwind has rapidly moved ahead of General Electric  and Denmark-headquartered Vestas—is a classic example of a China-2 industry.
Because the competitive dynamics differ radically across China-1 vs. China-2, it is important for corporate leaders as well as analysts to take note of the type of industry the company competes in.

Multi-Segmented Industries

Second, as the Chinese economy continues to power ahead, most industries are becoming even more multi-segmented than before. At the upper end, China is creating billionaires, millionaires, and the merely affluent in larger numbers than any other country. Even the top 2 percent wealthiest people in China add up to nearly 30 million—a large and very diverse customer base. At the lower end, the next 10 years will see about 150 million people move up from poverty to lower middle income status. Their buying power and needs will be very different from those of their less as well as more fortunate compatriots.

Li Ning was justified in wanting to compete not just in the mid- and low-tier segments (with its Li-Ning and Z-Do brands, respectively) but also the upper end of the market. It stumbled because it pursued an ill-conceived strategy to do so. Companies such as Nike and Adidas face a reverse challenge. They are well-positioned at the top end; however, given the multi-segmented nature of China’s market, they must figure out how to compete effectively against players such as Li Ning and Anta in the mid- and low-tier segments without diluting the brand cachet at the top end.

A Recipe for Disaster

Third, trying to reposition a solid mid-tier brand as an upscale brand is nearly always a recipe for disaster. Brand cachet is a far more important attribute at higher levels on the price spectrum. By definition, an established mid-tier brand does not have the cachet needed to attract brand-conscious customers at the top end. Trying to reposition the mid-tier brand is thus tantamount to competing without competitive advantage.
Companies such as Li Ning need to draw lessons from the strategies of other mid-tier players such as Tata Motors, Geely, and Toyota. It is hard to imagine how any of these brands could ever be associated with a luxury car. That is why Tata Motors acquired Jaguar and Land Rover, Geely acquired Volvo, and Toyota cracked open the luxury segment by launching an entirely new brand, Lexus.
In its zeal to carve out a share of the top end, Li Ning should also remember that, in China as well as other emerging economies, the middle income segment is and will remain the largest market segment for many decades to come. Thus, as the company attempts to diversify into adjacent segments, it should avoid, at all costs, any risk to its lock on this most important market segment.

Ani K. Guptais a professor of strategy at the Smith School of Business at the University of Maryland and a visiting professor in strategy at INSEAD. Haiyan Wang is managing partner of the China India Institute. They are the co-authors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).

Source: www.businessweek.com

Asia's contribution to global economy increasing: ADB

Underlining that Asia is playing a very important role in global economic restructuring, Asian Development Bank (ADB) managing director general Rajat M. Nag said Monday the continent's contribution to the global economy is increasing.

'Asia's share in global economy was 18 percent in 1980, it became 35 percent in 2009 and in 2050 it will be about 60 percent,' Nag said while speaking at an interactive session on 'South-East Asia Economic Integration', organised by the Indian Chamber of Commerce (ICC) here.

Singapore to benefit from rising optimism about business prospects in Asia

The growing optimism is because of the increasing number of MNCs setting up business operations in Asia.

A number of economic statistics and anecdotal evidence are pointing towards increased confidence over business prospects in Asia. The bullish market sentiment is likely to lead to a surge in Singapore company formation activity, predicts www.SingaporeSetup.com.

The results of the annual Asia Business Outlook Survey conducted by the Economist Corporate Network shows that most global companies expect 25% of their share of revenue to come from Asia by 2015. A separate survey by PricewaterhouseCoopers reveals that 92% of Western European CEOs expect growth in their Asian operations, while only 48% expected growth in Europe. Even the IMF has predicted the rise of Asia as the next economic powerhouse. According to IMF Director, Asia-Pacific Department, Anoop Singh, "By 2030, Asian gross domestic product (GDP) will exceed that of the Group of Seven major industrial economies (G-7)".

The result of growing optimism about the economic and business prospects in Asia is that an increasing number of MNCs are setting up business operations in Asia and are also making large-scale investment commitments in the region. According to SingaporeSetup.com, Singapore is one such country that stands to benefit from the shift in power from West to East. Ms. Catherine Lee - a senior editorial board member of the SingaporeSetup.com site said, "Foreign firms are choosing Singapore as a springboard to enter the Asian market and are either opting to setup a Singapore branch office or a Singapore subsidiary.

Singapore company registration statistics for the 4Q 2010 shows that companies and entrepreneurs from countries such as US, UK, Cayman Islands, and British Virgin Islands setup a Singapore company in the last three months of 2010. "

Global firms often choose Singapore as their regional base of operations as it the easiest place to do business in Asia. The ease of Singapore company formation, the system of low taxation in Singapore, the country's motivated and productive workforce, its top-notch infrastructure, political stability, efficient legal system, freedom from corruption, strong IPO regime, excellent living environment, and its strategic location in the Asian continent are the main reasons why foreign companies are expanding their presence in the city-state.

According to a recently released report by U.S. based Business Environment Risk Intelligence (BERI), Singapore has the best investment climate in the world, while the Heritage Foundation ranked the economy second in its '2011 Index of Economic Freedom'.

Singapore's Economic Development Board recently confirmed that a record high of S$12.9 bn investment commitments were made in 2010 while up to S$14 billion is expected to flow into the country this year. "Given the ascendancy of Asia as an economic superpower and the ease of doing business in Singapore we are expecting a surge in Singapore company incorporation activity this year," added Ms. Lee.

Targeted for global entrepreneurs and firms, SingaporeSetup.com is the leading business information portal that provides comprehensive and up-to-date information about establishing and operating business in Singapore.

Source: http://www.indiainfoline.com

India must play aggressive economic role in South Asia: Expert

Singapore, Feb 2 (PTI) India must play an "aggressiveeconomic" role in South Asia to win over smaller states in theregion in the face of the growing challenge to its influencefrom China, an expert said today.

Buzz up!
India has not played a leading role in the region like itshould have, particularly with respect to the South AsianAssociation of Regional Cooperation (SAARC), Professor T VPaul from McGill University of Canada told PTI here,indicating that China could benefit, given its "intimate"links with countries like Pakistan.


"But now, India must do more for the region," said Paulafter addressing a seminar on "State Capacity and South Asia''sInsecurity Predicament" at the Institute of South AsianStudies in Singapore.

India must convince the smaller South Asian states thatthe regional economy could benefit from the "huge Indianmarket", he said.

The frosty nature of relations between India and Pakistanis among the main causes of South Asia''s insecuritypredicament, he informed the audience of academics at theseminar.

He pointed out that Pakistan had given top priority tothe Kashmir issue, while ignoring bilateral tradeopportunities with India.

In this regard, bilateral trade between Pakistan andIndia could be 52 times more than it is now, he asserted,citing a wide range of estimates on South Asian intra-regionaltrade.

He cited the theory that "countries engaged in economicactivities would not engage in war" to back his presentationon the region.

Comparatively, trade relations between India and itsother neighbours -- Bhutan, Bangladesh, the Maldives and SriLanka -- have been improving in recent years, said Paul, adirector at the Universite de Montreal Centre forInternational Peace and Security Studies at McGill University.

India has proven the potential of its market benefits forthese countries, sourcing garments from Bangladesh and SriLanka and hydropower from Bhutan, he pointed out.

He also cited increasing Indian investment in Bangladesh,which could be emulated as the way forward to building aregional economy.

Nevertheless, the growth of China''s influence in SouthAsia is inevitable, Paul noted, pointing out that Beijing seesits own ties with India''s neighbours as a "balance of power",even though India sees the world''s fastest growing economy''sactions as "political moves".

Source: http://news.oneindia.in

PMI data raise fears over inflation in Asia

Inflation fears intensified across Asia on Tuesday as manufacturing data from China, India and other countries suggested that pressure on input prices rose in January amid continued strength in factory output.

Official figures indicated that the pace of expansion slowed slightly in China, where the state-approved purchasing managers’ index fell from its December high, reflecting the impact of a tightening of monetary policy since Chinese inflation peaked in November.

However, the index showed growth in factory activity for the 23rd consecutive month, underlining the robust nature of China’s manufacturing expansion. The sub-index recording input prices jumped to a fresh high.

“The new export orders sub-index continued to fall while the input prices sub-index went on rising, which suggests that enterprises could face relatively big difficulties in rising costs and slowing demand,” said Zhang Liqun, a government researcher, in a statement accompanying the release of the numbers by the China Federation of Logistics and Purchasing.

Adding to the impression of continuing manufacturing strength, there was also a rise in the unofficial but closely watched PMI index produced by HSBC and Markit, the economics consultancy, with the detailed numbers suggesting an increase in capacity pressures.

Hongbin Qu, HSBC’s chief China economist, said the upbeat numbers would give Beijing room “to fully focus on checking liquidity and inflation pressures”. Mr Qu said China’s central bank would probably use quantitative tightening in the form of an increase in banks’ reserve requirements rather than raising interest rates.

China’s inflation index fell slightly to 4.6 per cent in December, from a 28-month high of 5.1 per cent in November, in the wake of two interest rate rises and a series of administrative measures taken by Beijing to cool the economy.

However, some economists expect inflation to accelerate again in January in response to a global rise in food and energy prices, combined with a spike in demand caused by the Lunar New Year holiday this week.

In an indication of the spread of inflationary pressure around the region, Indonesia on Tuesday reported that consumer prices rose 7.02 per cent year on year in January, up from 6.96 per cent in the previous month and above consensus expectations. However, core inflation was lower than expected at 4.2 per cent, presenting the central bank with a difficult decision on whether to raise interest rates when it meets on Friday.

HSBC’s India Manufacturing PMI posted a small rise, with the details showing a big backlog of work and a substantial jump in input prices. Leif Eskesen, the bank’s India chief economist, said the strong numbers underlined the country’s robust growth, but would also give companies more leeway to pass on price rises.

“Inflation pressures are coming from all sides, demand and supply, and international commodity prices are now adding to the challenge,” Mr Eskesen said.

“The Reserve Bank of India [has] already prepared the ground for more rate hikes near term with their latest policy statement, and we expect they will deliver, [probably] as soon as March, with another 25 basis points.”

Factory activity was also strong in January in South Korea, Taiwan and Japan, with very strong economic growth figures in Taiwan for the fourth quarter of 2010 adding to the overall picture of rising inflationary pressures.

The Taiwanese Statistics Bureau said in a preliminary estimate on Tuesday that the economy expanded by 6.48 per cent in the three months to the end of December compared with the same period in 2009, after rising 9.8 per cent in the third quarter.

The strength of the economy prompted the government to raise its estimate of GDP growth for 2010 to 10.47 per cent. It raised its growth forecast for 2011 to 5.03 per cent, up from a November estimate of 4.51 per cent. It also raised its inflation forecast for this year to 2.04 per cent from 1.85 per cent.

The PMI and GDP data followed strong industrial output numbers released on Monday for Japan – often a laggard in manufacturing recently – which showed the country’s manufacturing activity expanding in January for the first time in five months.

Source: http://www.ft.com

China bans German pork and eggs in dioxin scare

China has banned imports of German pork and egg goods after tests last week had revealed levels of dioxin at 77 times the permitted level in animal feed.

The country has ceased imports of "German-produced edible pork and egg products" China's product safety watchdog said in a statement.

The authorities will also inspect goods shipped from Germany before the ban was imposed to see if they are safe.

Previously only South Korea had banned German pork imports.

Slovakia had halted sales of German eggs and poultry meat, even though Germany has said there is no immediate risk to human health.

The Chinese ban was effective from 11 January, said the country's General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ).

Shipments already on the way to China and that arrive after 11 January will have to be tested for dioxin.

Oil mix-up

German Agriculture Minister Ilse Aigner wants to look at tightening regulations in order to prevent a repeat of the current situation.

The scare started after oils intended for bio-fuel had become mixed with oil destined for animal feed.

Some 4,700 German farms were banned from making deliveries after tests at the Harles und Jentzsch plant in the state of Schleswig-Holstein, which produces fats for use in industrial processes as well as to enrich animal feed.

Most of these farms have been since been given the all-clear.

Dioxins are toxins formed by industrial processes and waste burning.

They have been shown to contribute to higher cancer rates and to affect pregnant women.

Source: BBC
http://www.bbc.co.uk

China sees trade surplus narrow as imports rise

China's trade surplus shrank to an eight month low in December, official figures show.

Imports increased by 25.6% on the same month a year earlier, leaving China with a surplus of $13.1bn ($8.4bn).

Exports were up 17.9%, much slower than November's 34.9% rise.

Analysts said the data may give Beijing grounds to fend off US pressure for faster currency appreciation ahead of Chinese President Hu Jintao's visit to the United States next week.

"Imports are much stronger than we have expected, indicating that the domestic investment and internal demand are mainly pushing up domestic consumption," said Wang Han, an economist at advisory firm CEBM in Shanghai.

Figures showed that the surplus for 2010 as a whole had fallen for a second consecutive year, down 7% on 2009 levels to $183.1bn.

Many US politicians and economists accuse China of manipulating the value of the yuan in order to boost its net exports at the expense of its trading partners.

A bill is set to go before the Senate that would call for retaliatory trade sanctions against countries such as China that intervene to weaken their currencies.

China relaxed the yuan's fixed exchange rate against the dollar in June, but since then it has been allowed to appreciate by less than 3%.

Source: http://www.bbc.co.uk

China to lead Asian economic slowdown

NEW YORK, Jan 6 (Reuters) - China will lead an economic slowdown in Asia this year -- but that's good news for investors, as it should avoid bigger inflation problems in the region, fund managing company Amundi said on Thursday.

Markets are expected to be choppy in 2011 as Beijing adjusts policy to fight inflation, but a foreseeable end to its monetary tightening cycle later this year could boost the return profile of Greater China's equity market, Amundi said.

"Investors should welcome, not fear, a slowing Chinese economy in 2011," Ray Jovanovich, who helps manage more than 650 billion euros at the fund manager, said in a letter to investors.

Asia is on the opposite side of most developed economies such as the United States, where deflation remains the main threat, Jovanovich said.

"A gradually moderating economy (in Asia) is exactly the prescription warranted to arrest the harmful side effects associated with the current inflation threat. We view a slowing economy as a positive signal for China; along with the rest of the Asian region, and the world, for that matter," he said.

China and India have been raising interest rates to stop an inflation spiral which threatens to cause a spike in prices of raw materials and energy.

More anti-inflation measures are expected in 2011, both in terms of monetary and fiscal policies, along with a renewed push for administrative measures, the fund manager forecast.

Amundi, which combines the asset management business of French banks Credit Agricole and Societe Generale, maintains a neutral portfolio position in China and a "significant" overweight stance towards Hong Kong.

"Monetary conditions in Hong Kong's banking system continue to be significantly boosted by both the acceleration in Renminbi internationalization policies and QE2 from America," Jovanovich said.

"We anticipate double-digit monetary base and credit growth in the Hong Kong banking system in 2011, which would eventually lead to further re-rating of risk assets such as equity and property markets."

The firm downgraded its asset allocation to India to neutral from significant overweight on worries that lower GDP growth and earnings estimates for the country still have to be priced in by markets.

It is also "constructive" towards South Korea, despite tensions in the peninsula, as it sees the won as "fundamentally undervalued."

Market performance in 2011 should be driven by key investment themes such as domestic consumption, machinery and capital goods, along with tourism, Jovanovich said, pointing to sectors that would benefit from medium-term secular growth trends.

He also forecasts public housing and healthcare activities will rapidly gain prominence in China in 2011.

By Walter Brandimarte

Source: www.reuters.com

Asian Stocks Rise on Optimism for U.S. Economic Recovery; Honda Advances

Asian stocks rose, with the regional benchmark index advancing for the eighth day in nine, as a stronger dollar boosted earnings prospects for exporters and reports in the U.S. signaled a broadening of the economic recovery.

Honda Motor Co., Japan’s No. 2 automaker by sales that counts the U.S. as its biggest market, gained 1.3 percent in Tokyo. Hyundai Motor Co., South Korea’s biggest carmaker, rose 2.4 percent in Seoul. Canon Inc., a Japanese camera maker that generates about 80 percent of its revenue overseas, rose 1.2 percent after the dollar surged against the yen, boosting the outlook for export earnings. Mitsui & Co., which gets about 40 percent of gross profit from commodities, advanced 2.1 percent after crude oil and copper futures increased.

“There are mounting expectations about an economic recovery in the U.S.,” said Naoki Fujiwara, who helps oversee $6 billion in Tokyo at Shinkin Asset Management Co. “Investors have their eyes on the favorable factors. Excess liquidity is boosting demand for commodities.”

The MSCI Asia Pacific Index climbed 0.4 percent to 137.71 as of 11:38 a.m. in Tokyo. Five stocks advanced for every four that dropped on the gauge. The index rose 14 percent last year, extending a 34 percent increase in 2009, as positive global economic data and corporate profits outweighed concerns about Europe’s debt crisis and China’s steps to curb inflation.

Japan’s Nikkei 225 Stock Average increased 1.2 percent. Singapore’s Straits Times index gained 0.3 percent and Hong Kong’s Hang Seng Index was little changed. China’s Shanghai Composite Index dropped 0.7 percent and Australia’s S&P/ASX 200 Index slipped 0.4 percent.

U.S. Services, Jobs

Futures on the Standard & Poor’s 500 Index were little changed today. The index rose 0.5 percent in New York yesterday to its highest level since September 2008.

The U.S. Institute for Supply Management said yesterday that its non-factory index, which covers about 90 percent of the economy, rose to 57.1 in December, exceeding the median forecast of economists surveyed by Bloomberg News and the fastest expansion since May 2006. A reading higher than 50 signals growth. ADP Employer Services said yesterday that U.S. companies added 297,000 jobs last month, almost triple the median economist estimate.

Gauges of consumer discretionary stocks as well as industrial and information technology companies had the biggest increase among the 10 industry in the MSCI Asia Pacific Index.

Honda climbed 1.3 percent to 3,245 yen in Tokyo. Toyota Motor Corp., the world’s biggest carmaker, advanced 2.3 percent to 3,370 yen. Hyundai Motor gained 2.4 percent to 193,500 won in Seoul.

Auto Rally

Asian carmarkers also gained after the Federal Chamber of Automotive Industries in Australia reported sales of new vehicles increased 10 percent in 2010 to 1.036 million from the previous year.

Mazda Motor Corp., Japan’s fifth biggest automaker by sales, advanced 2.5 percent to 248 yen. The company sold 239,709 vehicles in China last year, an increase of 33 percent from 2009, according to a statement on its website.

Fuji Heavy Industries Ltd., owner of the Subaru auto brand, climbed 3.8 percent to 683 yen after Goldman Sachs Group Inc, increased its rating to “buy” from “neutral.”

Japanese exporters also increased after the dollar gained the most in three months against the yen yesterday in New York, advancing to as much as 83.38, the highest level since Dec. 23. A stronger dollar boosts the value of U.S. income at Japanese companies when revenue is repatriated.

Canon, the world’s biggest camera maker, gained 1.2 percent to 4,265 yen in Tokyo. Nintendo Co., the maker Wii gaming consoles, climbed 2 percent to 23,330 yen. Fanuc Corp., Japan’s largest maker of industrial robots, advanced 2.6 percent to 12,960 yen.

‘Business Confidence’

Nikon Corp., Japan’s second biggest camera maker by sales, increased 4.4 percent to 1,834 yen. The company expects operating profit from its precision equipment operations will reach 28 billion yen in fiscal year 2012, seven times the amount forecast for the current year, the Nikkei newspaper reported.

“Investors are taking business confidence as being on a recovery track because economic measures are good in general,” said Mitsushige Akino, who oversees about $450 million in Tokyo at Ichiyoshi Investment Management Co. “A global pickup in business sentiment is boosting actual demand for commodities.”

Mitsui & Co. gained 2.1 percent to 1,418 yen. Mitsubishi Corp., which gets about 40 percent of sales from commodities, increased 2.2 percent to 2,380 yen. Woodside Petroleum Ltd., Australia’s second-biggest oil producer, climbed 1.1 percent to A$42.83.

Crude oil for February delivery increased to $90.30 a barrel in New York yesterday. Copper futures for March delivery rose 0.9 percent to close at $4.408 a pound yesterday.

Shares on MSCI Asia Pacific Index were valued at 14.1 times estimated earnings on average at yesterday’s close, compared with 13.5 times for the S&P 500 and 11.1 times for the Stoxx 600.

Source: http://www.bloomberg.com

Asia to lead global economic recovery in 2011: HK banker

HONG KONG, Jan. 5, 2011 (Kyodo News International) -- Asia will likely see better economic recovery in 2011 as the United States and European countries continue to struggle, while the liberalization of China's currency will remain the topic of greatest concern, veteran Hong Kong banker Benjamin Hung said Wednesday.

Briefing the media on the upcoming Asian Financial (NYSE:DYP) Forum to be held here, Hung, the chief executive officer of Standard Chartered Bank (Hong Kong), predicted the global economy will recover on a ''steady but gradual'' basis, with Western economies growing below 2 percent and Asia showing a strong growth of 6-7 percent, powered by China.

''The road remains bumpy and the market will remain volatile, but I do think the world should hopefully be regaining more confidence and going through more gradual and steady pace of economic growth,'' Hung said.

The United States has been pressuring China to let the yuan appreciate significantly to offset trade imbalances between the countries. Beijing has insisted on a controlled currency rate rise to prevent negative impact on its export.

''The whole process of liberalization of renminbi (yuan) will probably be one of the biggest developments in the next decade. China is the second largest economic body in the world which is very connected with the world through trade, textiles, etc., but not connected with the world by its currency financially,'' Hung said.

The annual forum, to be held on Jan. 17-18, has invited speakers from financial sector and government officials of different countries including Japan.

Three dozen representatives from 25 Japanese companies mainly of venture capital and private equity firms will be attending the forum in a mission led by Japan's Ministry of Economy, Trade and Industry for the first time.

''Japanese investors are very conservative and are reluctant to invest their money in these challenging enterprises,'' said Minoru Suzuki, director general of the Japan External Trade Organization in Hong Kong.

Suzuki said the forum can help these small companies draw investment from Asian investors, in light of an anticipated economic slowdown in 2011 during which Japan's economic growth is forecast to drop from around 3 percent last year to 1.5 percent this year, as the rising currency exchange rate is hurting export.

Source: www.istockanalyst.com

Asia's unstable rise

CHINA - The current turmoil on the Korean peninsula demonstrates this vividly. An unresolved relic of the Cold War, Pyongyang's nuclear ambitions have been difficult to deal with despite the diplomatic efforts of the six-party talks.

But it isn't nuclear warheads that have created the current turmoil. A torpedo sank the South Korean Navy vessel Cheonan in March, and on November 20 artillery shells pummelled South Korean military and civilian installations on the disputed island of Yeongpyeong. Standard weapons are more than enough to create a new sense of uncertainty. Nothing done since March has rebuilt stability.

Never mind that South Korea is a major economy and hosted the recent G-20 summit, the first in Asia. Economic growth in the country, as in much of Asia, is built on a tenuous foundation of peace. Unable to manage the situation, Seoul has reinvigorated its old alliance with the US.

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Ties with China are inevitably affected. Like most Asians, South Koreans look to the Chinese economy to drive growth. It is indeed one of the few countries in Asia to enjoy a trade surplus with China. There was earlier talk about a free trade agreement with China, either bilaterally or including Japan as a third partner. Such economic diplomacy now looks less likely.

China is the only country believed to be able to influence Pyongyang. But what Beijing has done since March is judged by many in South Korea as being less than helpful.

This highlights a second question about the rise of Asia: the role and attitude of China. There is no single Asia. Much depends - perhaps too much - on this giant that is changing as it rises.

Economically, China is the hub for the region's future growth. Inter-dependence in trade and investment between South Korea, Japan, Asean and even Taiwan - especially after their Chinese free trade agreement - is real and growing. The picture in South Asia too is similar, with China now India's number one trade partner.

Politically, however, Beijing has been much less attractive in 2010. The Korean issue comes on top of controversies with Asean members in the South China Sea, as well as the dispute with Japan over the Senkaku islands. These steps were surprising as China has for over a decade sought to befriend and charm Asean neighbours. The current leaders in Tokyo also want better ties with Beijing.

Visiting India in December, for the first time in five years, Chinese Premier Wen signed off on business deals worth US$16 billion. But the underlying competition between the two Asian giants continues to simmer. There is strategic competition over sea power as well as distant points in the Himalayas and political influence as India vies for a seat on the UN Security Council, where China is the only current Asian permanent representative.

That the Chinese leader went on to visit Pakistan also did not escape notice. Many in New Delhi believe Beijing continues to support their old rival in order to preoccupy India. Even in economic relations, trade tensions underscore the increase in flows, and India has slapped tariffs on a range of Chinese imports, including in the telecoms sector.

The nature of China and its diplomacy is being tested, and how Beijing has acted and will act in the coming months will be judged as showing its character as it grows. Some already ascribe ambition and arrogance to China while others will wait and see. Perceptions will shape how other Asians react. How the Chinese leadership approaches the US-China Summit to be held in January will be looked at carefully, not only by Americans but by other Asians.

It is to Asia's credit that through the financial crisis and 2010, the region has continued to rise. But challenges in 2011 may be even tougher, not only in economics but the underlying politics. Growth will be tested, but even fundamental peace and stability will come under stress. Compared to the developed world, Asia may be the only region expected to show strong growth, but that does not mean Asia is ready to be alone.

Simon Tay is chairman of the Singapore Institute of International Affairs and author of "Asia Alone: The Dangerous Post-Crisis Divide From America."

Source: http://news.asiaone.com

Japanese factory output rises for first time in year

Japanese industrial production rose for the first time in six months in November, largely thanks to government assistance programmes.

Factory output was 1% up on October, with much of the lift coming from an increase in car production.

That has been underpinned by an official programme providing incentives to buyers of hybrid cars, such as Toyota's Prius.

Output of various electronics and machinery parts also lifted production.

The Ministry of Economy, Trade and Industry, which released the figures, said it expected factory production to continue rising - by 3.4% in December and 3.7% in January.

Separate data showed less positive news on the Japanese economy.

Consumer prices fell for the 21st month in a row in November, down by 0.5% on a year ago.

Consumer spending also remained weak, with household expenditure falling by 0.4% November, according to the Internal Affairs Ministry. The general expectation was for a 0.2% gain.

Last week, the government forecast economic growth for 2011 would be less than half the pace of 2010, at 1.5%, down from this year's 3.1%.

Source: BBC
www.bbc.co.uk

China raises benchmark interest rates

By Jamil Anderlini in Beijing

(FT) -- China's central bank raised benchmark interest rates on Saturday, the second increase in just over two months, as the government stepped up its battle against persistent inflation.

The People's Bank of China announced a 25 basis point rise in the one-year base lending and deposit rates, taking the lending rate to 5.81% and the deposit rate to 2.75%.

The Christmas Day rate hike came after the central bank raised rates on October 19 for the first time in nearly three years. Although Christmas is not a public holiday in China, the timing of the rate hike announcement -- late on Christmas Day and on a Saturday -- was an apparent attempt not to unsettle global and domestic markets.

Annual consumer price inflation hit a 28-month high of 5.1% in November, up from 4.4% in October, and with real interest rates deep in negative territory, most economists expect China to continue the tightening cycle in the coming months.

"This rate hike demonstrates the Chinese authorities' determination to keep inflation under control up front, or front-loaded tightening," said Wang Qing, China economist at Morgan Stanley.

"The stronger than originally expected outlook for the US economy after the extension of [the] Bush tax cuts should also help remove some concerns about the potential weakness in external demand and make Chinese authorities more likely to tighten earlier and more aggressively, in our view."

The PBoC has also increased the proportion of deposits that banks must hold in reserve with the central bank six times this year in a move aimed at reining in excess liquidity and tackling stubbornly high inflation.

Chinese officials have expressed their preference for such administrative measures because of fears that comparatively high rates could attract flows of "hot money" into the country, especially at a time of extraordinarily loose monetary conditions in still-struggling developed markets.

"We think it is increasingly clear that using quantitative measures -- such as reserve ratios -- to rein in liquidity and credit has not been enough, and that adjusting the price of credit -- that is, interest rates -- is needed to get price pressures under control. So today's move suggests Beijing is also coming around to this view," said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong. "We expect another 75 basis points of rate hikes in 2011."

The main driver of inflation in recent months has been the price of food, which rose 11.7% from a year earlier in November, but the government has claimed some victory in recent weeks in bringing down the soaring cost of vegetables. Officials appear confident in their ability to keep prices under control.

"The recent inflation is completely different from the periods of very high inflation China has encountered in the past," Liu Mingkang, chairman of the China Banking Regulatory Commission, said last week in Beijing. "There is overcapacity for most industrial goods in the Chinese market and it's impossible for upstream inflation to be transmitted downstream."

In early December Beijing said it was switching from its previous "moderately loose" monetary stance to a "prudent" monetary policy to focus efforts on avoiding economic overheating.

The benchmark Chinese stock market index has dropped more than 10 per cent since the middle of November on fears the government would introduce further tightening measures, including raising interest rates.

Source: CNN
http://edition.cnn.com

Japan agrees record 92.4 trillion yen draft budget

The Japanese government has approved a record level of spending of 92.4 trillion yen ($1.1tn; £711bn) for the next financial year.

The cabinet agreed the draft budget, which must still be approved by parliament before 31 March.

Japan's economy has suffered from deflation, a high yen that hurts exports, weak domestic demand and poor consumer confidence.

The budget is aimed at boosting the economy, but adds to public debt.

And some analysts have said the programme was unlikely to offer a big economic boost.
Reined in

Debt-servicing costs and social security spending making up about 55% of the budget.

Aid for local authorities accounts for another 18.2% of the budget. The remainder of the spending is split among defence, public works projects, education and technology.

The Democratic Party-led administration has promised to keep new borrowing at 44.3tn, in line with this year's level.

But Japan was forced to raise spending due to higher debt servicing costs.

Japan's public debt is expected to reach 891tn yen, or 184% GDP, by the end of March 2012, the highest among developed nations.

The government said tax revenues would be about 40.9tn yen in the next fiscal year, with another 7.2tn raised by raiding special reserves.

The government has already reined in spending programmes including handouts to fund childcare.

Source: BBC News

http://www.bbc.co.uk

How will China's economy perform in 2011?

By Jijo Jacob

As the global economy is entering arguably another tumultuous year, spotlight is sharply on the prospects, policies and risks of China's economy, which has all but sailed past Japan's as the world's second largest after the United States.

The following is a look into Chinese economy's prospects in 2011 and the nature and gravity of the challenges it faces.

GDP GROWTH

The fast-growing Asian giant's economy grew an average 10.6 percent in the first three quarters of 2010 though signals of a moderation in the pace of growth have risen of late. A Reuters poll has shown China's growth next year will be marginally weaker. Economists surveyed for the poll said the economy will slow to 8.9 percent in 2011. However, a poll in the previous quarter had shown that growth could be 9 percent next year.

The poll showed Chinese economy will bottom out in the first quarter of 2011, at which point the year-on-year pace of expansion could hit a low of 8.2 percent.

China's slowdown is not an unanticipated development. The government has been scaling back its fiscal stimulus program as well as tightening the extra-loose monetary policy this year as fears that an overheating could lead to asset bubbles and higher inflationary pressures.

The Chinese Academy of Social Sciences (CASS) said in its annual 'Blue Book' on the economy that growth could breach the 10 percent mark in 2011. It put 2010 growth at 9.9 percent.

However, analysts have said though a slowdown in GDP growth is inevitable next year, the economic scene will be more complicated than what statistics show. "The slowdown of China's economic expansion is not only associated with the growth base of last year, but it is the inevitable result of macroeconomic regulation and control initiated this year," according to said Xia Bin, director of the Financial Institute of the Development and Research Center of the State Council.

He told the People's Daily the direction of the macroeconomic regulation and control should firmly be unchanged and the transformation in the economic development mode should be further advanced.

INFLATION/REFLATION

While the global economy was largely paralyzed by the great meltdown of 2008 China managed to boom back into the mix of things by virtue of a massive 4 trillion-yuan stimulus spending and the adoption of loose monetary policies. But this led to a surge in inflation and fears of an asset bubble.

According to CASS, inflation will remain moderate next year, with the consumer price index (CPI) rising 3.3 percent. However, according to a Goldman Sachs research, inflation rate will surge to 4.3 percent next year.

The Goldman Sachs report says though it's certain that the People's Bank of China will raise interest rates there won't be steep hikes that could result in a deceleration of growth coupled with excessive exchange rate appreciation.

"With official interest rates near zero in major economies and quantitative easing in various disguises continuing at least in the G3, monetary policy looks set to remain super-expansionary and will support the ongoing reflation of the global economy, in our view. "

Wang, Qing, a China economist with Morgan Stanley, said year 2011 will be a year of reflation for the Chinese economy and that tackling inflation will be an overarching policy priority for the country, especially in the first half of 2011. CPI inflation is expected to rise in the first half of 2011 and peak at 5.5 percent year-on-year by mid year and then start to decelerate to the tune of 4 percent by the end of the year, he said.

"Specifically, the lagged effect of massive monetary expansion in 2009-10 is expected to continue to provide strong tailwinds for inflation in the near term, while the headwinds stemming from weak external demand are letting up. Beyond the near term, China's economic rebalancing that features a shift in growth drivers from tradable to non-tradable sectors also points to a higher future secular inflation rate."

On the other hand, if policy makers are focused on fighting inflation aggressively it will result in a thaw in growth, especially in the real estate sector which has been witnessing a bull run.

TRADE FRICTIONS AND REBALANCING

China's competitors and trade counterparts argue that the Asian giant should rebalance its economy to address the global trade imbalances. Critics have pointed out that China should shift gears from being an export-dependent economy and boost its domestic demand.

The Morgan Stanley report paints hope on this front. It says Chinese consumer spending will become the biggest contributor to GDP growth in 2011, accounting for more than half of the forecasted 9 percent growth.

"This ongoing process of rebalancing from export-led to domestic demand-led growth and vice versa has two important implications. First, it requires a shift of resources (capital and labour) from the external to the domestic goods-producing sectors or vice versa, which takes time and thus weighs on growth in the meantime."

A Reuters poll in October showed that China's trade surplus, a nearly constant source of friction with the United States and the European Union, could be gradually declining. According to a median forecast, the surplus could shrink to $180 billion this year and $174 billion in 2011 from $196 billion in 2009.

"The surplus peaked at $295.5 billion in 2008. If the forecasts come true, Beijing will be able to point to the decline as proof that its efforts to power domestic demand and smooth out global imbalances are gaining traction," the report said.

Whether China is on the right track to achieve rebalancing will be known in the coming year. So far there are concerns on areas like wage growth. Wages have still remained too weak to propel a rise in consumer spending. Also it remains to be seen if China will let its currency appreciate significantly to give more purchasing power to the people.

RATES

As a commodity boom, possible rise in labor costs as well as a highly liquid financial system threaten to drive inflation higher next year, the focus is on China's monetary tightening policies next year.
The Chinese Communist Party's politburo announced early this month the country will shift to prudent monetary policy in 2011. It was a marked defection from the professed “moderately loose” monetary policy followed by the government since late 2008.

China had reduced interest rates considerably through a series of moves between September and December 2008 in the wake of the global financial crisis. However, the government has said it will scale back the expansionary policies that propelled the bounce back of the economy after the recession.

It raised key rates in a surprise move in October. The People's Bank of China raised its one-year yuan lending rate to 5.56 percent from 5.31 percent, the first time it has raised interest rates in three years. The central bank also said one-year yuan deposit rate would rise to 2.5 percent from 2.25 percent.

China has also repeatedly told banks to keep away larger deposits as reserves, a move that will cripple banks' capacity to lend. This measure jells with Beijing's broader objective of mopping up stimulus and tightening policy in the long term.

TACKLING OVERHEATING

China has taken several drastic measures recently to keep the commodities boom in check and keep the markets well supplied and the focus will be on how far Beijing will go to clamp down on commodities boom without gravely affecting growth. Measures adopted recently included the State Reserves Bureau selling off stocks of aluminum, zinc and lead, and the government's sell-off of edible commodities like corn, wheat, soy, rapeseed oil, sugar and rice.

China discouraged fertilizer exports by imposing punitive tax rate on exports and asked coal miners to freeze annual prices for the next year. The governments' crackdown on the power consumption of companies in fact resulted in a diesel shortage in November as firms turned to diesel generators.

However, there is also a view that Chinese economy’s commodity-intensity will lessen largely in the coming years and that the commodity boom may not last forever and the prices could likely fall. Julian Jessop, an economist at Capital Economics has said China’s commodity demand in 2025 could be "half the level that a simple extrapolation of the recent trends would suggest" and that the prices of industrial commodities may already have risen to unsustainable levels.

Jessop says the commodity-intensity of China’s economy is likely to fall as the economy undergoes a rebalancing in the coming years. He says China’s GDP growth could slow in the next few years to between 8 percent and 10 percent, compared to the 10 percent and 14 percent recorded from 2003 to 2007 during the last commodity boom.

CURRENCY AND LIQUIDITY

The U.S. has time and again accused China of keeping its currency under valued and of engaging in exclusionary trade policies. Though China managed to stay the course despite repeated efforts by the U.S. and the western bloc to make it appreciate the currency, there is renewed speculation over China acting on the currency front in the next year.

It is argued also that, faced with inflationary pressures, Beijing might go for yuan appreciation earlier than expected. But it still remain to be seen how big an appreciation will be effected. China will also have to deal with the excessive liquidity unleashed on the market by the government’s fiscal measures.

LABOR COSTS AND DOMESTIC DEMAND

Export-dependent China frets a runaway rise in wages. However, a depressed wages scenario, on the other hand, is dampening the domestic demand which in turn makes the rebalancing difficult. It will be a challenge for China in the next year to nicely balance this 'rebalancing act'.

The CASS report says rising labor costs could hit the rapid growth of the economy. "The first challenge comes from the rapid rise of labor costs in the country," Liu Shijin, deputy director of the Development Research Center of the State Council said. "The competitiveness of Chinese companies will be threatened by rising labor costs unless they find a new source of growth, such as innovation."

At the same time there are many policy makers in China who believe that an expansion in domestic demand is the key to ensure the country’s economic stability over the long term. "It is critical to begin the research on long-term institutional reforms as soon as possible when implementing short-term policies," Xia Bin, director of the Financial Institute of the Development and Research Center of the State Council.

Source: www.ibtimes.com

Asia steering world economy in 2011

SHANGHAI, December 19 (AP): The prolonged weakness in the U.S. and Europe may be the least of Asia’s troubles in 2011, economists say, as the region fights potentially destabilizing inflationary pressures. Asia will lead global growth in 2011, with China, now the world’s second largest economy, steady at about 10 percent growth, the government-affiliated Chinese Academy of Social Sciences forecasts.

With a strong rebound in the U.S. or Europe just as unlikely as a relapse into a “double-dip” recession, Asia is easing its way out of stimulus programs launched during the financial crisis. But the U.S. Federal Reserve’s effort to nurture job creation through fresh “quantitative easing” has governments across the Pacific maneuvering to keep price pressures from spiraling out of control. “The inflation outlook is really critical at this point,” UBS economist Duncan Wooldridge said in a recent conference call, noting that excluding Japan, consumer price inflation in Asia has been averaging about 5 percent.

“From my perspective there’s really only one thing that matters at this point: inflation,” he said. China’s consumer price inflation surged to a 28-month high of 5.1 percent in November. The government raised interest rates in October for the first time since the financial crisis struck and has shifted to a “prudent” monetary policy for 2011 from one that was “relatively loose,” signaling its intent to tighten credit as it fights price hikes.

Focusing on the politically sensitive food prices that are said to account for up to three-quarters of the latest inflationary spike, the Chinese government ordered a crackdown on commodity speculation, price caps for edible oil and subsidies for the poor. It is already claiming some success in bringing prices for some vegetables and fruits lower. Meanwhile, the weather problems – like drought in south China and floods in Pakistan and Thailand – that have pushed food prices higher should moderate by midyear, according to most forecasts.

But inflation remains a threat, especially for emerging economies that are attracting large inflows of money from investors seeking higher returns than they can get from U.S. Treasurys and shares. The surging liquidity is adding to pressures on Asian economies to either raise interest rates or let currencies that already have gained substantially against the weak U.S. dollar appreciate further.
“Emerging economies can stop inflation if they are determined,” says Shanghai-based independent economist Andy Xie. But he figures that an effective strategy would require raising exchange rates by up to 50 percent and interest rates by 10 percent. “There is almost zero chance for them to pursue such a contractionary policy,” he says. Those options, while unpalatable, reflect the region’s relative strength compared with the U.S., EU and Japan, says a report by Macquarie Securities.

“Treading the fine line between growth undershoot and inflation overshoot is a challenge that is particular to Asia,” it says. Japan, now the world’s No. 3 economy after it was overtaken by China this year, faces no such dilemma. Though its economy gained momentum in the third quarter, that is fading as slowing overseas demand and the strong yen bite into exports, while deflation continues to stymie growth.

With recession-stricken Americans unable to resume the kind of freewheeling spending that powered growth for much of the past two decades, the recovery increasingly hinges on Asian resilience. “Asia is depending on demand in this part of the world,” says David Cohen, a regional economist for Action Economic in Singapore. “That’s where it’s going to have to come from.” So far, China’s rebound has largely been powered by massive bank lending in support of government stimulus, backed by steady, double-digit growth in consumer spending. The benefits spill across the region, from coal and iron ore miners in Australia and Indonesia, to semiconductor makers in South Korea and Taiwan.

As they launch a new five-year economic plan and prepare for a leadership transition in late 2011, China’s leaders have signaled their determination to keep growth at a steady pace with a recent announcement that they will stick to a “prudent” monetary policy for the coming year, says Ye Tan, a popular economic commentator in Shanghai. “In my view, they are sending the message that once the government curbs inflation, it will carry on with another round of investment to ensure it can meet its growth goals for 2011,” Ye says.

Source: The morung express
www.morungexpress.com

China raises bank reserve requirements

Beijing (FT) -- China has again raised the amount of reserves that commercial banks must keep with the central bank after the economy recorded another large trade surplus last month and exports and imports both grew strongly.

The central bank's move on Friday to lift reserve requirements for commercial banks by 50 basis points marked the sixth time this year that it has used this policy tool to drain liquidity from the financial system in an effort to slow the economy.

The latest tightening move came after trade figures heightened concerns that the economy could be at risk of overheating.

Exports grew by 34.9 per cent in November over the same month the year before, much more quickly than forecast and potentially a sign of increasing demand from developed economies. In October, exports rose 22.9 per cent.

Imports to China were also well ahead of forecasts, increasing by 37.7 per cent over the year before, compared with a rate of increase of 25.3 per cent in October.

The trade surplus was $22.9bn in November, down from the $27.15bn registered in October, but ahead of forecasts and still one of the biggest recorded.

The strong surge in exports and large surplus come amid continued international pressure for China to appreciate its currency more quickly, especially as the renminbi has actually been getting weaker against a basket of its main trading partners' currencies in recent weeks, economists said.

Brian Jackson at RBC Capital Markets in Hong Kong said: "It is increasingly difficult to argue that China's export sector cannot tolerate some currency appreciation, a move which would also help Beijing get price pressures under control.

"The strength of domestic demand also suggests that rate hikes are needed to keep China's economy on an even keel."

Last week, China's State Council formally changed the description of monetary policy from "moderately loose" to "prudent" over the next year. Interest rates have been increased once already and there had been widespread speculation that rates would be raised again on Friday. Inflation in October jumped to 4.4 per cent, well above the government's 3 per cent target.

However, some economists believe that the Chinese authorities have been too slow to tighten policy and control inflation, which could be made worse by the surprising strength in exports.

"Note that exceedingly strong exports growth amid an already overheated domestic economy is not good news as it adds to the overheating pressures which will require the government to take even more stringent measures to bring down inflation," said Yu Song and Helen Qiao at Goldman Sachs.

However, house price inflation, a major worry earlier in the year, continues to fall as a result of a flurry of government policies aimed at cooling the market. Prices rose 7.7 per cent in November in the 70 cities monitored by the government statistics bureau, down from 8.6 per cent in October.

Source: CNN
www.cnn.com

Japan's economic growth revised up

Japan's economy expanded faster than initially estimated between July and September thanks to higher corporate spending, official figures have shown.

The economy grew by an annualised rate of 4.5%, compared with the previous estimate of 3.9% announced last month.

Despite the upgrade, economists remain cautious about the economic outlook in Japan, which is suffering from a strong yen and falling prices.

Last month, the government passed a $61bn (£39bn) stimulus package.

This, the latest in a series of stimulus measures, is designed to boost the country's fragile economic recovery by creating jobs.

'Auto slump'

Economists attribute the relatively strong growth posted in the third quarter to one-off factors, such as sales of green cars before the end of government subsidies and smokers buying cigarettes before a tax rise.

Most expect growth to be weaker in the final three months of the year, partly due to reduced exports, which have fallen for the past eight months.

"Given the slump in Japan's auto output and a slowdown in developed economies and China, the economy will remain in a severe situation until the first half of next year," said Takeshi Minami at the Norinchukin Research Institute.

Hideki Matsumura at the Japan Research Institute echoed such sentiments: "This weak trend will continue. Recovery is likely to be delayed until the second half of the next fiscal year."

A drop in demand in the US, Europe and China has hit exports that are already under pressure from the high value of the yen, which makes exports more expensive to overseas customers.

Japan has also suffered 20 straight months of falling prices - known as deflation - which stifles economic growth by undermining consumer demand.

Can Japan profit from its national 'cool'?

(CNN) -- Japan's finances may not be in great shape, but when it comes to fashion, there still aren't many places more cool.

Consumers from Asia, Europe and the United States might not be buying as many Japanese cars and TVs, but they continue to be influenced by Japan's culture. That means that when global brands are looking for the hottest new fashions, eyes almost inevitably turn eastward.

"Most of the time, most global trends start in Tokyo," trendspotter Loic Bizel told CNN. A Tokyo-based fashion expert who consults for labels like Timberland, Lacoste and Sonia Rykiel, Bizel also takes foreign fashionistas on tours of Tokyo to scout for street style trends to replicate in their home markets.

"People really started to look at Japan as a lab about seven or eight years ago," he added. "Trends are picked up really quickly in the streets."

That's why, according to Bizel, brands like Topshop from the UK and Sweden's H&M come: "They know they have time to produce what they have spotted in Tokyo for next season and it will be a hit."

"It's easy for big brands to come to Japan, and compete, and send [designs] to their home market," according to Bizel, because, crucially, hardly any Japanese fashion labels sell abroad.

But, says the Japanese government, things are set to change. It is proposing to pump just over ¥19 billion ($237 million) into the creative sector in 2011 to see if it can make more money from Japan's national cool.

Mika Takagi is the Deputy Director of the Creative Industries Promotion Office -- aka the "Cool Japan" Office -- the government body charged with making Japan's cultural industries (anime, graphic design, film, fashion and more) start paying.

"Japan has a lot of unique culture ... [but] if you compare it with other money-making industries, the creative industries don't make much money," Takagi told CNN.

"We want to try to invest more in these cultural issues and try to brand Japanese products with the uniqueness of Japanese culture," she added.

The aim, by 2020, is to increase profits by $85 billion (¥6.9 trillion) -- to $698 billion (¥56.6 trillion). Revenues in 2007 amounted to $613 billion (¥49.7 trillion), according to Cool Japan. Japan's GDP in 2007 was $4.4 trillion.

The office's figures include already-established sectors like food and drink and tourism, and Takagi says there are no specific figures for fashion. They also don't provide any breakdown of how much money Japan makes from fashion exports, Takagi says, because "it is hard to define."

Some experts aren't so sure the Japanese government can turn cool into a commodity. One skeptic is Charles Spreckley, the Tokyo-based co-founder of consumer research and trends company Five by Fifty, with customers like Unilever and Coca-Cola.

"I am incredibly skeptical that a bunch of bureaucrats can succeed in turning the nebulous concept of Cool Japan into something that makes the country money," he told CNN.

Spreckley says that Japan's uniqueness is one of the reasons it seems so cool, but this special brand of creativity may be tough to translate to the global stage.

"Japan is so out on its own and it's still a huge economy -- a massive market, 120 million people -- so there's a lot going on here and cities like Tokyo are overflowing with stores selling fashion, graphic design, comics. It's a very intense place and it's one that's got its own unique style," Spreckley told CNN.

According to Spreckley, the most creative individuals work on a very small scale. He fears that trying to commercialize Japan's creative cottage industries could kill their cachet.

"Part of what makes Japan cool is this innocence they have in the way they do things," Spreckley said. "They do things very well here, with sincerity and lack of ego and I think the very act of commercializing it will make it inherently uncool."

There is little opportunity for entrepreneurs to break out because big, old-fashioned conglomerates dominate Japan's economy, according to Spreckley.

And then there are the cultural blocks. "(These individuals) are generally not very globalized ... They don't speak languages like (they do in) Korea and China," Spreckley told CNN.

"They don't know how to go overseas and sell themselves and communicate with potential buyers," he added.

Takagi agrees that while Japan's fashion trends are very popular in Hong Kong, China and Korea, Japanese clothing companies have struggled to enter the wider Asian market.

Takagi told CNN, "Japan has lots of fashion magazines that are sold in China and they are very popular. The clothes that are shown in the magazines are made by small and medium-sized companies. They have no knowledge or networks or capital to be able to enter Asian markets."

She says that Cool Japan will help companies like these with marketing abroad.

"Japan has a lot of unique culture which is very important to us. We have not utilized that very much until now because we could compete in (other) industries," she explained.

In fact, Japan's Ministry of Economy, Trade and Industry (METI) sees the cultural industries as a strategic sector that could drive the nation's future economic growth.

"I think there's a lot of potential in the global market that we have not acquired," Takagi said.

Source: CNN
www.cnn.com