Author Archives: jyyoo

(Revised) Japan’s increase in sales tax – right decision?

In my previous blog post Japanese economic growth – now time to stimulate export, I wrote about how Abenomics has not been successfully increasing the Japanese export. Furthermore, I was concerned about Japanese economic recovery, as Japan’s recovery is mainly driven from increase in domestic consumption. In April 1st 2014, Japan’s domestic sales tax rose from 5% to 8%, as announced at the beginning of Abenomics plan. Japan’s Prime minister Abe Shinzo’s aggressive monetary policy did help Japan to escape from its continuing deflation, yet I am worried if this rise in sales tax will go against Abe’s monetary policy.

According to the Wall Street Journal article Japan’s Sales-Tax Boost Will Test Abenomics, Japanese government’s decision to increase sales tax worries many economists. As it can be seen from the graph below, Japan have once increased its sales tax in 1997 from 3% to 5%. The result was disappointing, as Japan suffered from a decrease in consumption and continuing deflation and recession for more than 18 months. Bank of Japan forecasts that Japan’s Consumer Price Index will be at its steady rise of 1.3% for remainder of 2014 and then reach its target rate of 2.0% by 2015, while private economists forecast that Japan might go back to its long-time deflation, with rate lower than 1%.

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The article from Reuters Abe bets he can break Japan sales tax jinx with April 1 rise points out that the main reason for this increase in sales tax is to curb Japan’s massive public debt. From the FRED graph below, it is obvious that Japan’s public debt is increasing drastically. Jesper Kroll, head of equities research at JP Morgan insists that “2014 is not 1997”, saying the probability of success (in rising sales tax) is better than ever. He cited a tight labor market, increased household and small-business burrowing and a $53.44 billion extra budget enacted in last December will cushion the impact of the sales tax rise.

japandebt

However, I am still concerned about this tax rise. As I have already mentioned in my previous blog post Japanese economic growth – now time to stimulate export, Japan’s economic recovery in 2013 was driven from domestic consumption (not international trade) despite aggressive Abenomics. While Yen is still strong, Japan’s export is unlikely to boost in a huge amount in 2014 as well. Therefore, if Japan’s domestic consumption is reduced due to an increase in sales tax, then it is probable that Japan will be unable to maintain the fast rate of economic recovery from 2013. Therefore, I think it is extremely important for Japanese government to keep an eye on Japanese economy (especially its domestic consumption and CPI index) and execute necessary monetary and fiscal policies if increase in sales tax goes to an opposite direction to where Abenomics is heading.

South Korea’s export boost and its exchange rate

In my previous blog post South Korean Exchange Rate, I analyzed how South Korean exchange rate fluctuated over last few years and affected my “college life”. I decided to come to US when Korean Won-US dollar exchange rate was around 900Won per dollar in 2008, but decided to go back to Korea to fulfill military service for two years when exchange rate rose to over 1532.8 Won per dollar in early 2009. My parents had to send 77million Won instead of 45million Won per year to pay my tuition, and I thought it was a good time to fulfill military service in Korea and wait for won-dollar exchange rate to settle down.

Nonetheless, it was a good decision. The exchange rate settled down to around 1100 won per dollar by the time I got discharged from Korean army and returned to University of Michigan. As shown in the graph from FRED below, won-dollar exchange rate fall to 1035.4 won per dollar this April. It is the lowest since August 2008, yet IMF believes South Korea won is still undervalued. According to the Wall Street Journal Article IMF Says South Korea Won Undervalued, South Korea’s won currency could be up to 8% undervalued and urged authorities to refrain from intervening in currency markets.

exchange rate

In particular, US treasury this week called on South Korea to limit its interventions in foreign exchange markets, as it believes that South Korea currency is unfairly cheap, making US exports more costly by comparison. However, the main reason for United States’ trade deficit with Korea is due to its free trade agreement. According to the news article from New Hampshire Business Review The U.S. should think twice about yet another free trade deal, United States’ trade deficit with Korea has increased $8.7 billion or 59.6%, costing nearly 600,000 U.S jobs after the FTA was established. Furthermore, the graph below which shows value of total exported goods exported by Korea tells us that Korea’s export has no strong correlation; when Korean won was weakest (year 2009), the quantity of export is lower then what the quantity of export in year 2014, when Korean won is relatively stronger.

export value

 

Although it is true that weaker currency can help a country to boost its trade surplus, I do not think that Korea’s recent trade boost is due to its “weak” currency. From the two graphs we can see that Korea’s currency has been appreciating since year 2009, yet its export quantity has been increasing as well. I may be biased (as I am Korean), but I think it is bit harsh for IMF to tell Korea to stop intervening in its currency saying Korea’s export boost is due to its weak currency. Korean companies have been producing fine products, from electronics to cars, and I think this is the main reason for the boost in export; not weak currency.

Increase in price level of food crops.

Price level of food crops is a very important aspect of economy. People can consume less on other goods when price level rises, but when food crop rises it is hard to decrease its consumption – unlike other goods, food is a necessity. Economists are well aware of the importance of the price level of food. One example is Engel’s Law, named after statistician Ernst Engel. It is an observation in economics that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises meaning income elasticity of demand of food is between 0 and 1. Therefore, food price level is extremely important, for people with less income.

Recently, it has been reported that food prices are increasing globally. According to the article from Wall Street Journal El Niño Threatens Food Crop Production, food production could  be threatened by weather phenomenon as known as El Niño by mid-year. Weather forecast from United Nation’s World Metrological Organization showed that above-average water temperatures in the central and eastern Pacific could possibly lead to drought in West Africa (the world’s largest cocoa producing region), less rainfall to India during Monsoon season, and drier conditions for the cultivation crops such as sugar and cotton in Australia. The shortage in production due to weather will lead to an increase in the price level of food crops.

Similar phenomenon occurred in California, United States. According to the article from Wall Street Journal Attention Shoppers: Fruit and Vegetable Prices Are Rising, cost of fresh fruits and vegetables are most affected by due to a three-year drought in California. The article pointed out that price of lettuce could increase as much as 62cents to $2.44, avocado price rise 35 cents to $2.84 per pound. As it can be seen from the chart below, food crop price can increase in a range from 13% ~ 34%. However, economists expect that the increase in price level of food crop is only in short term, as foreign food crop can be imported when price level reaches a certain level.

The increase in food crop price level is an important news. As the increase in price level is driven from shortage of supply (not increase in demand), it hurts the economy even more. This cannot be solved easily, as demand for food crops will not decrease by much as food crops are commodities that cannot be easily replaced. I believe several methods can be implemented to stabilize the price level of food crops in long run; some possible measures could be investing on additional water resources (i.e. water dams) for use in farms in dry season, signing Free Trade Agreement with foreign countries to lower the cost of imported food crops, and making regulations to protect the environment to avoid these weather phenomena.

 

Advertising college by its employment rate

As graduation is fast approaching, University of Michigan is asking May graduates to fill out many surveys. For instance, College of Engineering specifically asks us to fill out a long survey that asks future plan (whether going to graduate school or getting a job), received job offers, annual salary, and other benefits. College of Engineering’s Engineering Career Resource Center then analyzes these surveys from graduates, and calculates starting salary for each department (i.e; mechanical engineering, aerospace engineering, electrical engineering, etc) to not only help students to seek for a better job but also to “advertise” the college to the public as well.

“Advertising” the school by graduate’s average salary and employment rate is becoming a trend for colleges these days. Furthermore, there are many articles that talk about cost and return of college education. The article from The Economist “Is college worth it?” is a good example. The article incorporates the data from PayScale, a research firm, which gathered data on the graduates of more than 900 universities and colleges, asking them what they studied and how much they earn now. Based on this, a chart is made (see below) that shows financial return of different colleges by considering how much the college education costs. As you can see, colleges with a strong program in engineering had relatively high returns while art schools had relatively low returns.

return

It makes sense that graduates from more prestigious schools have higher starting salary and employment rate, but is it a good way for college to advertise its school by these numbers? An article from Wall Street Journal Colleges Are Tested by Push to Prove Graduates’ Career Success points out that it is often hard for schools to prove graduates’ career success due to lack of response from its graduates. In the article, Sarah Flanagan, the vice president for government relations and policy at National Association of Independent Colleges and Universities even argue that “there is no proof in that the school you went to and what you majored in is the cause of your salary.”

As college tuition increases continuously each year, I understand that cost and return analysis of college education is an important topic to many people. However, I believe that it is hard to quantify the “success” solely by employment rate or starting salary. As shown from the article, colleges are having hard time getting feedback from graduates, and I personally believe that higher salary does not mean being more successful. “Success” is hard to quantify- for instance, I believe “satisfaction” is as important as wage. So, is it a good way to advertise college by its employment rate and starting salary? I believe it can be a powerful, yet dangerous method. Instead of focusing on its employment rate or starting salary, I think college should advertise by what kind of programs and opportunities they offer to students to let them prepare career after their education.

(Revised) Malaysia Central Bank’s Decision (2)

In ECON 411 –Monetary and Financial Theory class, we learned from Professor Kimball how effective negative real interest could be in order to stimulate the economy from the recession. By targeting long term inflation rate around 2 percent and setting nominal interest rate near zero, negative real interest rate can be achieved as shown by the Fisher Equation. US, Japan and many other countries used this monetary policy in order to stimulate the economy when financial crisis occurred in past years.

Wall Street Journal article (Rising Inflation in Malaysia Turns Up the Heat on Central Bank) points out Malaysia’s recent monetary policy and its outcome. Data which came out on Wednesday, February 19th showed that consumer price rose 3.4% in January from a year earlier. It is Malaysia’s fifth straight months of gains and fasted pace in two and half years. Malaysia’s economy did grow at a strong rate past few years, and now Malaysia’s central bank is planning to raise the interest rate from 3.00% to 3.25 % as a measure of bringing the price level down. According to Wall Street Journal article (Malaysia’s Central Bank Stands Pat Again), Malaysia have been keeping its nominal interest rate at 3.00% for last three years. Due to its relative low interest rate compared to its inflation, Malaysia could achieve a fast economic growth, maintaining GDP growth rate of 4.7% in 2013 when many other countries suffered from the turmoil.

Two graphs below show us Malaysia’s economy in a more detail. Malaysia’s unemployment rate has been decreasing steadily to 3.2% from 4.1% in 2009 while its GDP per capita increased from $5984 to $6764 in last four years. From those two graphs, we can tell that Malaysia experienced a fast recovery from its economic turmoil in 2009.

malaysiaunemploymentmalaysiagdp

The main reason for its fast recovery is Malaysia’s relatively low interest rate for last four years. In order to take a closer look at Malaysia’s monetary policy for past years, I plotted inflation rate, nominal interest rate and real interest rate in one graph. Inflation rate and nominal interest rate data are from World Bank, while real interest rate was calculated using the Fisher equation. It can be seen that negative real interest rate was achieved in year 2007-2009 and 2011, helping the Malaysia economy to recover in a fast pace with lowering unemployment rate and increasing GDP per capita. The real interest rate went down as low as negative 5% in September 2008, being a strong stimulus for recovery.

malaysia rate

Malaysian government started to slow down its government spending, which could decrease domestic demand. Central bank’s decision of increasing interest rate could also reduce domestic demand, as people will save more money instead of spending it in domestic market due to higher interest rate. However, economists forecast that Malaysia can still achieve strong GDP growth of 5.0% to 5.5% this year, thanks to its strong export.

Nonetheless, Malaysia’s stock market has been showing a strong positive upward trend since its low 850 index points in 2009 shown in graph below. Thanks to Malaysia’s monetary policy over past years Malaysia’s stock market has reached its highest of 1875.52 index points in 2014. This may worry some people with monetary policy with low interest rates- asset bubbles. Although its increasing rate is gradually slowing down, additional measure (such as increasing nominal interest rate) can help control the economy from over stimulating.

malaysia stock market

Malaysian central bank’s decision of increasing interest rate is a smart decision to hold inflation rate and curb dangers of overspending and control debt as well. When I read the articles and thought of Malaysia’s decision, I related this to US’s tapering of quantitative easing. US, although its unemployment rate is not meeting government’s goal fully, started to taper as US did achieve some economic recovery in recent years. “Tapering” is as important as “quantitative easing,” as economy could be over-stimulated and over-inflated and it could be very dangerous. Malaysia showed how effective “negative real interest rate” is, from its high GDP growth last year. If Malaysia can also show how they are able to control inflation and prevent “over-stimulating” the economy while keeping its economic growth strong just like economists have forecasted, it will be a good example of how negative real interest rate is a good, non-harmful stimulus for economic growth.

Brazil’s Dilemma- High Inflation, Low Growth.

When Brazil was selected to be a host country for World Cup 2014, many foreign investors invested in Brazil, expecting a high return. Brazil, one of emerging economies of BRICS, had a rapid economic growth of 6.1% in 2007, when Brazil was elected as host country for World Cup 2014. As World Cup 2014 is quickly approaching, many economists are forecasting Brazil’s economy. But, it is not as optimistic as Brazil’s soccer team winning the World Cup 2014 trophy.

According to the article from Bloomberg Businessweek Brazil Economists See Faster Inflation and Slower Growth in 2014, Brazilian economists forecasted that Brazil’s inflation rate will continue to rise while its economic growth is getting slower and slower. The economists forecasted that Brazil’s inflation rate will rise to 6.35% from 6.30% while growth rate will decrease from 1.69% to 1.63%. The main reason for inflation is Brazil’s drought which drove the food price up.

The two graphs below is obtained from Federal Reserve Economic Data website. After reading the article above, I thought it would be interesting to see how Brazil’s Consumer Price Index and GDP changed over the course of years. From the Consumer Price Index graph, it can be seen that price level has been rising constantly, with a higher rate beginning from July 2013.  The economic growth rate graph from FRED shows a similar trend that was mentioned in the article above. In 2007, Brazil’s growth rate was 6%, when it was selected to host World Cup 2014. From then, the economic growth rate decreased drastically, as low as -0.3% in 2009. In 2010, Brazil’s economic growth recorded a 7.5% high, due to larger spending from the middle class. However, from then Brazil’s economy has been suffering  since then, as growth rate has been in the 1~2% range.

brazil cpi BRAZIL Growth rate

 

Brazil’s central bank has been trying its best to control its high inflation rate. According to the Wall Street Journal article Brazil Central Bank Hints at End to Rate Increases, Brazil’s central bank raised its interest rate for ninth consecutive times, from 10.75% to 11%. This increase in interest rate is to deal with the inflation from supply shock of food crops due to draught.

However, I am worried that Brazilian Central Bank’s decision to increase its interest rate even more will deteriorate Brazil’s economic growth rate. Brazil’s interest rate of 11% sounds really high, and it cannot be a permanent solution for Brazil’s inflation as Brazil’s inflation is mainly based on the supply-shock of food crops. Brazil’s atmosphere is getting hotter and hotter for world’s expectation of its World Cup, yet Brazil’s economy will need more time to recover.

Looking into unemployment in US

Since Federal Reserve’s tapering took place in the beginning of 2014, I was concerned if it could maintain its desired unemployment rate of 6.5% and inflation rate of 2% in my previous blog post Federal Reserve’s decision – tapering. April has arrived (it is hard to believe that more than 1/4 of 2014 passed already!), and data shows that the US economy is in the process of recovery from its recession from 2010.

I plotted the unemployment rate from 2008 to 2014, using FRED : Federal Reserve Economic Data website. From this graph, I could see a high increase in unemployment rate from mid 2008 to 2010 (from 4.9% to 10%), when the international economy was in a turmoil due to worldwide recession. With efforts such as quantitative easing and other monetary/fiscal policies, unemployment rate has been decreasing steadily to 6.7% as of March 2014. From the graph, it could be observed that since the tapering by Federal Reserve started in 2014, unemployment rate has been steady at 6.7%, just above the Federal Reserve’s target of 6.5%. Therefore, one could say that Federal Reserve’s tapering in 2014 was a right decision, not overstimulating the economy yet still meeting its economic goals.

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However, regardless of this positive economic data there is a downside. Wall Street Journal article Five Years of Declining Unemployment Doing Little to Close Race Gaps points out the downside very well. According to the article, although the unemployment rate has been decreased steadily since October 2009, the unemployment rate gap among the race has not been decreasing much. The graph below shows this gap. Among various races, Asians and white people have relatively lower unemployment rate compared to Black or African American and Hispanic or Latino American. Furthermore, it can be seen that the gap between unemployment rate of Black or African American and White American got even bigger in 2014, compared to 2010 when unemployment rate peaked.

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As we all know, economic growth and decrease in inequality are two important economic goals. It is a good thing that the US economy is getting better, despite Federal Reserve’s decision of tapering in 2014. However, a way to decrease the gap of inequality is still vague to me. Maybe it might be beyond the scope of economists; we are all aware that Asians and White Americans has a higher ratio of college graduate degree, and I think this is the main reason for inequality among various races. I think it is important to create policies that can encourage them to get higher education- something that monetary policies cannot be easily achieved by neither Federal Reserve nor extensive monetary policies.

3D Printing – A new Industrial Revolution?

As a student majoring in mechanical engineering, I realized that some understanding in Economics can a big plus for applying engineering knowledge to the real world. Therefore, I decided to minor in Economics, taking ECON 411- Monetary and Financial Theory as well. This class have been very interesting to me, as I learned how monetary policy and government intervention can boost the economy.

Yet, I still think that the most direct cause for economic growth is the development in technology – where engineering takes place. One example of development in technology that led to huge economic boost is invention of steam engine in 18th century. The graph shown below, from OCCUPY LONDON – Blueprint for a new economy shows the world GDP per person, from year 1000 to 2000s. It can be seen from the graph that world GDP per person increased drastically after 18th century. The invention of steam engine increased the productivity of manufacturing and means of transportation, which led to an acute boost in economy.

It has been more than 200 years since the steam engine was invented. From then, many inventions and technological developments have been made, but none of them impacted the economy as drastically as steam engine have. I personally believe that this is mainly due to the fact that these inventions have not changed the “paradigm” of manufacturing. For instance, manufactures still manufacture using machines, labor, electricity and materials that have been used since the industrial revolution took place (of course, there have been innovations in machineries which led to a huge improvement in accuracy, precision and cost/time reduction)-until the invention of a new type of manufacturing, that might change the “paradigm” of manufacturing world – 3D printing.

3D printing is a process of making a three-dimensional solid object of any shape with use of a digital model made from computers. It incorporates additive process; multiple layers are laid down in different shapes to eventually manufacture a model. This can be a “paradigm shift” in world of manufacturing, as 3D printing can get rid of cutting and drilling which is a process of “removal of materials.”

The article General Electric on 3D printing: ‘We are on the verge of the next industrial revolution’ from ZD net suggests that 3D printing can lead to a next industrial revolution. According to the article, a 20 year old Indonesian student helped the company to manufacture a critical aircraft part that was 83 percent lighter and yet still met the safety and design criteria with saving considerable amount of budget, thanks to 3D printing. 3D printing can be used in any area, from automotive industry to medical fields, which is even more exciting and therefore attracted many investors worldwide.

So, will 3D printing lead us to a new industrial revolution? Not just yet. The Wall Street Journal article 3-D Printer Makers Get Reality Check says 3D printer manufactures’’ stock prices have fallen near 40% since January 2014, after a constant and rapid rise in 2013. Yet, this does not mean that 3D printing is inadequate for changing current manufacturing process. Engineers and researchers are still experimenting ways to incorporate 3D printing into real life, and in near future I believe that 3D printing will eventually lead us to a new world of manufacturing, with considerably higher productivity and less cost.

Japan’s increase in sales tax – right decision?

In my previous blog post Japanese economic growth – now time to stimulate export, I wrote about how Abenomics has not been successfully increasing the Japanese export. Furthermore, I was concerned about Japanese economic recovery, as Japan’s recovery is mainly driven from increase in domestic consumption. In April 1st 2014, Japan’s domestic sales tax rose from 5% to 8%, as forecasted in October 2013. Japan’s Prime minister Abe Shinzo’s aggressive monetary policy did help Japan to escape from its continuing deflation, and I am worried if this rise in sales tax will go against Abe’s monetary policy.

According to the Wall Street Journal article Japan’s Sales-Tax Boost Will Test Abenomics, Japanese government’s decision to increase sales tax worries many economists. As it can be seen from the graph below, Japan have once increased its sales tax in 1997 from 3% to 5%. The result was disappointing, as Japan suffered from a decrease in consumption and continuing deflation and recession for more than 18 months. Bank of Japan forecasts that Japan’s Consumer Price Index will be at its steady rise of 1.3% for remainder of 2014 and then reach its target rate of 2.0% by 2015, while private economists forecast that Japan might go back to its long-time deflation, with rate lower than 1%.

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The article from Reuters Abe bets he can break Japan sales tax jinx with April 1 rise points out that the main reason for this increase in sales tax is to curb Japan’s massive public debt. Jesper Kroll, head of equities research at JP Morgan insists that “2014 is not 1997”, saying the probability of success (in rising sales tax) is better than ever. He cited a tight labor market, increased household and small-business burrowing and a $53.44 billion extra budget enacted in last December will cushion the impact of the sales tax rise.

However, I am still concerned about this tax rise. As I have already mentioned in my previous blog post Japanese economic growth – now time to stimulate export, Japan’s economic recovery in 2013 was driven from domestic consumption (not international trade) despite aggressive Abenomics. While Yen is still strong, Japan’s export is unlikely to boost in a huge amount in 2014 as well. Therefore, if Japan’s domestic consumption is reduced due to an increase in sales tax, then it is probable that Japan will be unable to maintain the fast rate of economic recovery from 2013. Therefore, I think it is extremely important for Japanese government to keep an eye on Japanese economy (especially its domestic consumption and CPI index) and execute necessary monetary and fiscal policies if increase in sales tax goes to an opposite direction to where Abenomics is heading.

World Cup 2014 in Brazil – Positive or Negative?

March Madness was pretty exciting. Last night, we had a disappointing loss against Kentucky but we are all proud of being part of Michigan! Now March Madness is over for us, what should we wait for? I am personally waiting for 2014 Brazilian World Cup. I did mention about Brazilian World Cup in my previous blog post What Is Common Among BRICS?, pointing out that large, fast-growing economies (Brazil, Russia, India, China and South Africa) are being host countries for large sport events such as Olympics and World Cup. I also pointed out being a host of prestigious sport event not only signifies country’s economic accomplishments but also it will bring many economic benefits to the country.

However, according to the Wall Street Journal article World Cup Won’t Be a Game Changer for Brazil  this might not be true. This article lists both positives and negatives on Brazil’s economy due to World Cup. The main positives are economic benefits due to increased number of tourists; Brazil’s airline company “Gol Linhas Aereas Inteligentes” can be happy by increased number of passengers, car rental company “Localiza Rent a Car” will serve more tourists. Of course, beer cannot be missed when watching soccer. So Brazilian beer companies such as Anheuser-Busch InBev will benefit from World Cup.

There are also some negative impacts that Moody’s Investors Service worry about. First, negative externalities such as crowding and traffic can possibly result in more difficulty for transportation and thus decrease consumption. Furthermore, reduced workdays and reduction of business activity during World Cup period is a minus for the economy. And, it is worrisome that World Cup might not have a “long term” positive effect on Brazil’s economy as World Cup lasts only for a month. Moody’s also predicted that economic stimulus from World Cup is around $11.1 billion, which is insignificant compared to Brazil’s magnitude of economy, which is $2.2 trillion.

The article from Telegraph World Cup 2014: the boos from Brazil are also concerned about World Cup in Brazil. The article points out that preparation for Brazilian World Cup have fallen so far behind the schedule, where two of the World Cup stadiums are unlikely to be finished until mid-May and many transportation projects have been delayed or cancelled. Thus, if Brazil is unable to host 2014 World Cup successfully, it can hurt Brazil’s national image to other countries as well.

When Brazil was selected as host country for 2014 World Cup in 2007, Brazil’s economy expanded by 6.1%, thanks to capital flowing into the country from many foreign investors. Surely, hosting World Cup can bring positive effect in its economy. If Brazil can manage to host World Cup successfully, I think there will be more positives compared to negatives in economy. Therefore, instead of thinking long-term effect of World Cup, Brazil should focus on preparation for World Cup as there is only limited time left.