Asia's economies in general are continuing to grow stably, supported by expanding external and domestic demand. However, this stable growth faces the dual threat of inflationary pressure and the effects of Japan's Tohoku earthquake.
Real GDP growth rates for the January-March period of 2011, compared with the same period the previous year, were 9.7 percent for China, 8.3 percent for Singapore, 6.6 percent for Taiwan, 6.5 percent for Indonesia and 4.2 percent for South Korea.
In addition to expanding exports in the wake of the global economic recovery, growth is being supported by domestic demand in the form of private-sector consumption and fixed capital formation.
However, future economic performance is being threatened by increased inflationary pressure and the effects of Japan's Tohoku earthquake.
In the wake of economic recovery and soaring prices of crude oil and food prices, many countries are experiencing increased inflationary pressure.
Vietnam has devalued its currency several times since 2010, and its consumer price index rose 17.5 percent in April, compared with the same month the previous year.
However, recent consumer price index increase rates have been 1.3 percent in Taiwan and 3.0 percent in Malaysia, proving that inflation is being held to within a certain range.
This is because in contrast with the previous inflationary period of early 2008, with the exception of Vietnam, Asian currencies have strengthened against the dollar.
Asian countries have been successively raising their policy interest rates, with the aim of restraining inflation.
In May, India implemented its ninth interest rate hike since the currency crisis, and Vietnam raised its policy interest rate from 7 percent to 12 percent in March, followed by a further raise to 13 percent in April.
China also switched its stance to allow a degree of currency appreciation to restrain import commodity price rises.
Similar activity has been witnessed in South Korea, with the won breaking the watershed of 1,100 won to the dollar in April.
With the exception of a few countries, interest rate levels are still quite low and raising interest rates may be said to have a limited effect on the real economy, but the effects are beginning to show.
In India, for example, automobile sales fell to the 10 percent range in April from more than 20 percent until March.
More stable climatic conditions have allowed food prices to begin to settle, and it is expected that commodity prices will begin to stabilize gradually. Nevertheless, future trends need to be watched carefully.
The negative effects of Japan's Tohoku earthquake on Asia's economies are likely to be (1) disruption of commodity supplies and a reduction in exports due to decreased consumption, (2) reduced numbers of tourists, (3) reduced imports of completed goods and (4) reduced production as a result of interruptions in supply routes.
Conversely, positive effects will include (1) increased procurement of goods from Asia as domestic Japanese supply is interrupted, (2) a shift from Japanese products to Asian products and (3) an acceleration of the shift of production from Japan to bases in Asia.
Taiwan's dollar-based exports to Japan in March were minus 2.5 percent, compared with the same month the previous year, and recovered to a 15.5 percent increase in April, while South Korea's exports surged 52.8 percent in March and 63.0 percent in April.
This increase was due to the increased procurement by Japanese companies of energy, such as petroleum products and LNG, and daily necessities, such as bottled mineral water, "ramen" or batteries.
According to the Department of Forestry and Fisheries Foodstuffs, April exports of bottled mineral water to Japan totaled $12.36 million in value, well over the $3.96 million figure for March.
In contrast, the value of imports from Japan fell to a single-digit growth in March and April. Similar trends have been seen in Taiwan, where the growth in value of imports from Japan was only 2.4 percent in April.
According to Japanese dollar-based trade statistics, the value of March imports from Asia, mainly mineral fuels and organic compounds, increased 17.3 percent, while exports to Asia remained flat, which bears out the aforementioned trends in South Korea and Taiwan.
Particular note should be paid to the 23.7 percent contraction in automobile exports and the 7.1 percent contraction in semiconductor exports.
A significant decline in imports of Japanese critical parts and components and raw materials will very probably have a serious impact on automobile and IT-related production.
In fact, because Japanese automobile manufacturers operating in Asian countries rely on Japan for critical parts and components, many companies were forced to cut production in April.
As a result, automobile sales in Indonesia in that month were down by 7.3 percent, having maintained a double-digit growth until March.
It is feared that similar trends will appear in other Southeast Asian countries where Japanese companies have a high market share.
In contrast to Southeast Asian countries, the automotive market in South Korea is dominated by the Hyundai--Kia group. The impact has been limited, with the exception of Renault--Samsung, which relies on Japan for critical parts and components, and South Korean automobile sales grew 3.0 percent in April.
In the future, attention will need to be paid to the impact of interruptions in supply routes on production of semiconductors, smartphones and tablet terminals.
As global demand grows, the impact of any protracted disruption of the supply chain may well grow in seriousness.
* * *
Hidehiko Mukoyama is a senior economist at the economics department of the Japan Research Institute.
This report was published in the June 2011 edition of Asia Monthly, an English-language publication of the institute, and was edited by The Asahi Shimbun. The original report is available at (http://www.jri.co.jp/MediaLibrary/file/english/periodical/asia/2011/06/contents.pdf).
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