it is clear that there have been some structural changes in the balance of domestic and foreign production. Increased petroleum and LPG demand due to the nuclear-plant shutdowns explains only a fraction of the deterioration in the trade balance. At a higher frequency, industrial production rose in January with significant increases across a range of industries.



Recent survey data are mixed. The Shoko-Chukin survey of small and medium enterprises moved up in February to its highest level since 1990. In contrast, the Composite PMI as well as consumer confidence declined. Views on employment have held up, but income and livelihood measures have weakened since spring 2013, perhaps reflecting angst over the balance between prospective wage increases and inflation, including the upcoming consumption tax hike. The Economy Watchers survey diverged with the current conditions index holding up but the future conditions index softening.


The latest consumer price data were disappointing. Western core prices declined -0.1% on a seasonally-adjusted basis in January across the country and were flat in February in Tokyo. Base effects may support gains in the year-on-year increase over the next couple months, but progress is expected to plateau without a further acceleration in the underlying trend. In that regard, the authorities are hopeful that, as the momentum from energy-cost increases and the sharp depreciation in the yen falls, an increase in inflation expectations as well as wage and margin increases from tightening labour markets and a

narrowing output gap are able to take up the baton. However timing is particularly tricky. Some important information on wages will be available in mid-March when large companies are expected to announce their reactions to union wage demands. The authorities are banking on some increase in base wages (as opposed to bonus payments). Such an increase would be the first in a long time and would go a long way to establishing a higher rate of inflation expectations and national confidence in Abenomics more generally. Increases among large corporations would also put pressure on small and medium-sized corporations. Not to be ignored is the 8% wage increases scheduled for Government workers, as the wage cut they took a few years ago to help pay for earthquake reconstruction is unwound.





In February, the key themes were the Renminbi (“RMB”) depreciation late in the month and the continuation of a cyclical slowdown. The market has now reached consensus that the currency depreciation was a deliberate policy move, with a twofold motivation: the


People’s Bank of China (“PBoC”) intention (i) to show that the RMB can move in both directions and thus reduce speculative positioning; and (ii) to close the gap between spot and fixing rates while preparing to widen the RMB fluctuation band. The latest currency movement followed a 3% appreciation in 2013, which attracted capital inflows betting on a RMB appreciation. As a consequence of the PBoC’s intervention, the one week


SHIBOR rate collapsed from mid-4% to 1.7% and was still low at 2.1% as at 3 March.


The policymakers’ focus is still most likely on the onshore CNY market, rather than on


CNH structured products. The impact of this depreciation on the behaviour of the onshore corporate sector is not known yet, while the media says that the SAFE has required banks to estimate this impact.


Recently published statistics in January and February on activity in China have been disappointing. Business surveys – namely the HSBC and the official PMI – indicated a further slowdown from the cyclical peak recorded in the third quarter of 2013. In particular, the HSBC Composite PMI, encompassing both manufacturing and services, fell back below the 50 threshold, from 50.8 to 49.8. Industrial production, fixed asset investments and retail sales have all showed a meaningful slowdown, largely undershooting market expectations. After a largely seasonal rebound in January, both money and credit aggregates showed a continuation of a moderate deceleration trend on a 3m/3m seasonally-adjusted metric in February.



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