US Capital Goods Winter Thaws in July

There was enough in July’s capital goods data to remove most of the clouds which have hung over the investment cycle for the last six months. In July capital goods (nondef ex-air) orders jumped 2.2% mom, whilst shipments rose 0.6% and inventories fell 0.1% mom. The orders recovery was broadly-spread: autos rose 4% mom, computer/electronics rose 2% mom, machinery rose 1.5% and electrical equipment rose 1.3%.

The result is that the book/bill ratio recovered back to 1 for the first time since January, and the inventory/shipment ratio fell to 1.73x, also the lowest since January. Although this does not entirely remove all threats from the capital goods cycle, it does suggest the immediate pressures have been relieved.

In particular, inventories of capital goods have been kept essentially flat since September 2014, and with the inventory/shipment ratio now a full standard deviation lower than the post-2010 trend, any significant recovery in end-demand stands to be amplified by a rush to re-stock supply channels.

Still, for the capital goods sector, 2014-15 was a long long winter, and even July’s results are not stellar. In particular the book/bill ratio is still a full standard deviation below the post-2010 average. More, although orders rose a revised 1.4% mom in June and a further 2.2% in July, it still leaves the dollar total down 3.3% yoy and 6.6% below the 2010-2014 growth rate.  Similarly, although shipments rose 0.9% mom in June and 0.6% in July, in dollar terms they were up only 0.5% yoy in July and are 5.3% below the 2010-2014 trend.

China and Commodities - The End of the Beginning

I suspect the market is wrong about China, and wrong about its likely appetite for industrial commodities in the coming year - most likely the bottom has already been and gone.

To start with two things which should be obvious: the Caixin manufacturing PMI for August, which apparently managed to panic markets when it fell by 1.7pts to 47.1, is produced by Markit.  China’s industrial data is insufficiently consistent to allow the tests, but where one can measure - Europe, UK and the US - there not the slightest scintilla of meaningful correlation between movements in Markit’s PMIs and movements in industrial output. I do not doubt these indexes power to move markets, but their information content is right up there with astrology: they are not even wrong.

The second thing which I think is obvious is that China’s willingness to devalue the Rmb is a correction of a quite serious monetary policy mistake made last year, and was a necessary precondition to re-liquefying the economy. There are clear signs that PBOC is now grasping the opportunity, adding 150bn yuan in open market interventions this week, the largest since Chinese New Year’s temporary 205bn yuan injection, and compared with the average weekly rise of just 6bn yuan during the last three months.  On top of that, the week has seen PBOC extend 110bn yuan in medium-term loans to 14 financial institutions, and also pump $48bn into China Development Bank and US$45bn into China Exim Bank.

China has finally granted itself the conditions under which it can reflate the economy, and it looks like the central bank is finally making an attempt.  If it succeeds, then the track record suggests that eased monetary conditions will be able to restore momentum in both the industrial sector and in domestic demand.

If so, this is the end of the beginning of China’s cycle, rather than the beginning of the end.

In which case, the current panic in commodity markets looks misplaced, since Chinese demand for industrial commodities is more likely to stabilize and/or rise during the coming year than to disappear.  In fact, that trajectory may already be emerging in the relevant data, such as  imports and inventories. 

The place to start is with the volume of China’s imports of industrial commodities. For those commodities which are no longer growing, imports topped out early in 2014, since when they have been either stagnant or falling. But by July, that peak is beginning to pass out of the base of comparison, with the result that yoy falls are beginning to moderate and will continue to do so, even if the recent signs of modest growth disappear.  In July, imports of four out of the six major industrial commodities showed a yoy rise in volume terms.  

1. Crude Oil: up 29.3% yoy, and up 10.4% ytd
2. Refined products: up 28.5% in July, and up 0.9% ytd
3. Iron ore: up 4.3% yoy in July, and down 0.1% ytd 
4. Copper: up 2.9% yoy in July, and down 9.4% ytd
5. Coal:  down 7.7% yoy in July, and down 34.1% ytd
6. Steel Products: down 13.9% yoy and down 8.9% ytd

We can also get some clues from Australia’s trade patterns: during June exports to China rose 3.4% yoy, although in the year to June exports to China were down 17.7% ytd. Now, looking at commodities: in A$ value terms: 

1. Iron ore down 10.9% yoy in June and down 32.1% ytd
2. Coal: up 13.7% yoy in June and up 1.7% ytd
3. Copper: down 21.4% yoy in June and down 24.2% ytd

The message is similar: although the market is soft, the later data suggests things are moderating, not getting worse.

There’s more to this moderation than simply a base of comparison effect. In addition, the inadvertent tightening of monetary conditions during 2H14 and early 2015 squeezed working capital hard enough to make China’s companies in turn squeeze their supply chains (hence the toll on Northeast Asian suppliers) and cut inventory holdings. There are a variety of measures of China’s inventories, but most agree that commodities inventories have fallen, quite sharply. Of the three separate measures of iron ore inventories, two find them down 26.8% yoy in July, and one finds them down 29.5%. Rebar inventories are down 3.4% yoy, and hot rolled coil inventories are down 8.2%. Coal inventories at China’s ports are also down 10.9%.

It is more difficult to construct wider inventory totals, but producer goods seem to have been falling steadily and consistently since 2008. That fall has moderated significantly over the last year, but still, by June, inventories of producer goods were down 7.5% yoy.  It is even more difficult to reconstruct an inventory series for durable goods generally, but my attempt suggests inventories of durable goods peaked in September 2014, have fallen 18% since then and were down 0.3%yoy in June.

This combination of falling import demand and falling inventory holdings of industrial commodities is consistent with what one would expect after a prolonged period of unusual monetary discipline. What would be consistent with a relaxation of that discipline would be, at the least, a willingness to stabilize inventory holdings, which with even steady underlying domestic demand, would result in a resumption of rising demand for industrial commodities. 

Which is perhaps what is also signalled by freight rates. The Baltic Dry index ended July at 1,131, up 50% yoy, and slightly more than double the Feb 2015 low.  Since the end of July, it has dropped to 1,014: the average price since 2011 is 1128, and the current price is 0.3SDs below that average.  Interpretation? The index was anticipating some pick-up in demand, and still is, although it now has slight doubts. Perhaps it too places its faith in Markit’s PMIs.

China Post-Dollar Policy - Coordination or Frustration?

With faultless timing, the BIS’s Financial Stability Board published its once-every-five-years peer review of China, assessing the authorities’ administrative ability to foresee, recognize and react in a timely manner to financial instability. Its message? That whilst great strides had been made, there are still a plethora of regulatory agencies with mandates sufficiently loosely drawn that their efforts sometime overlap and nullify each other.

Or, as they put it: ‘Enhancing inter-agency coordination and developing an integrated risk assessment framework will promote a common understanding of objectives and risks, which will in turn facilitate joint policy actions and public communication.’

Whilst the FSB was focussing on the agencies with a claim to oversee various parts of China’s proliferating financial sector, they could have extended their review to highlight the way the different agendas of the Ministry of Finance and PBOC have hampered effective monetary policy development in the run-up to the stockmarket collapse and subsequent yuan devaluation.

The tension between the two arises because government has 3.6tr yuan deposits with the central bank, amounting to 11% of its total assets, or, excluding fx reserves,  about a third of the implied domestic assets of PBOC. By raising or lowering those deposits, the Finance Ministry can affect private sector liquidity: when it lowers its deposits, it pumps money into the private sector; when it raises deposits, it takes money out of the private sector.

Over the last year, the average monthly movement of these deposits (addition or subtraction) has come to 373bn yuan.

During the same time period, the average monthly addition/subtraction to liquidity made by PBOC has been 85bn yuan. But open market activities are not the sum total of PBOC’s interactions with the domestic economy. We can estimate those by looking at the change in PBOC’s total assets, minus the change in the fx reserves kept on that balance sheet.  Currently, these implied domestic assets amount to 11.28tr yuan, and they increased by 2.71tr yuan, or by 32%, in the year to July, with the average monthly addition/subtraction coming to 418bn yuan.

As we can see, the Finance Ministry has a swing factor averaging 373bn yuan a month, and PBOC has a total swing factor of 418bn yuan.  Those are big numbers, and if deployed in a consistent and coherent way, they could have a serious impact on domestic liquidity.  But they are also so similar in size that they each separately could frustrate and cancel out each other’s policy intentions.

So what’s actually happening?  The following chart shows the 6m momentum change vs in government deposits and PBOC’s implied domestic assets, expressed in SDs vs historic seasonal trends.

And what it captures is that the default position over the last year has been for PBOC and Ministry of Finance actions to pretty much cancel each other out.  During the second half of 2014, as the dollar began to rise and China’s foreign exchange reserves began to fall, PBOC responded by rapidly expanding their domestic assets. This was a reasonable response to the tightening of conditions implied by the forced-march rise of the Rmb. But the impact was negated by the rise in government deposits made by the Finance Ministry - what PBOC put in, the Finance Ministry took out. 

Early this year, when it was clear that the economy was in worse shape than anticipated, the Finance Ministry abruptly changed its tactics, running down its deposits in PBOC, with the effect of pumping liquidity into the domestic economy.  Unfortunately, just at that time PBOC also changed its policy, cutting back sharply on the growth of domestic assets: 72% of the rise in domestic assets made in the year to July was made during between July 2014 and Jan 2015.  Result? Both policy initiatives were cancelled out once again. 

The hope is that, with monetary policy no longer constrained by the need to shadow the dollar, both PBOC and Finance Ministry can agree on coordinating a mutual approach to fiscal and monetary policy which can be sufficiently accommodating to make a positive impact on the economy. The data for July - the latest available - hints that something like this may yet emerge.

China Devalues - More Consequences

The government's reasons for launching the reform will decide the yuan's exchange rate in the future. If it's economic, then depreciation will continue because the dollar is expected to become stronger. If it's political, depreciation will not last.

- Xu Gao, chief economist of Everbright Securities

A lot hangs on that observation: a modest devaluation and/or sustained depreciation could help China’s economy a lot. A chaotic devaluation triggering capital flight and undermining the stability of the deposit base would be disastrous.

Whilst markets fret about the potential negative consequences of China’s devaluation, it is easy to forget that it does at least go some way towards correcting a major  policy mistake - the unwillingness to ease monetary policy in the latter part of 2014 to offset the tightening impact of keeping the Rmb effectively tied to the soaring dollar. July’s stockmarket collapse pointed very strongly to the need for a more dramatic about-turn in monetary policy than had previously been tolerated, and August’s devaluation, if nothing else, achieves that.

What is more, by releasing the de facto dollar peg, China in theory gains the freedom finally to operate a monetary policy which serves the cyclical needs of the domestic economy. And although China’s has a more positive inflationary dynamic than consensus is prepared to admit, there is no doubt that more accommodative monetary conditions stand the best chance of improving the purely cyclical economic dynamics.

So far this year, PBOC edged only half-heartedly towards loosening policy, which began to bear similarly modest fruit in May, June and July’s monetary data. In particular, July’s ‘surprisingly good’ money and credit data  - M2 up 13.3% yoy, new bank lending of Rmb 1.48tr - need substantial qualification The attempt to prop up the stockmarket inflated both bank lending and M2 growth whilst simultaneously diverting credit away from the ‘real economy’. (See this for explanation).  And the tepid loosening seen in May, June and July gets a substantial boost by from August’s devaluation.

Historically, where changes in China’s monetary conditions have led, domestic demand and industrial momentum have usually followed soon. Whilst July’s industrial momentum was weak to an extent which offset June’s relative strength, and July’s domestic demand data was just plain weak, in both cases,  the 6m momentum trendlines, although in negative territory, are inflecting up. It is a fair bet that this modest upward inflection will be maintained into August and probably beyond.

And in addition, prior to the devaluation we were already looking at a modestly rising CPI (and thus falling real interest rates).  Unless accompanied by destabilizing capital flight, the devaluation raises the likely inflation outlook, rather than depressing it into a possibly deflationary scenario.  (Nb, this is not the view of consensus, which is looking for inflation of 1.5% in 3Q, 1.8% in 4Q and a fairly steady 2% in 2016. Thus the 1.6% yoy rise in July’s CPI was not expected.

Even before the impact of Rmb devaluation is taken into account, those CPI forecasts look too low to me: I’d be looking at 1.8%-1.9% in 3Q15, 2.3%-2.6% in 4Q15, rising to 2.9%-3.4% in 1Q16 and 3%-3.7% in 2Q16.

But the improvement in China's monetary conditions will also have an impact on global monetary conditions. Indeed, it will accelerate an upward inflection point which had already arrived in June.

My monetary conditions indicator track what I believe to be the four key things one needs to know about an economy’s money: how much of it there is;  what happening to its domestic price;  what’s happening to its international prices; and what’s happening to its time-value. For my global monetary conditions indicator, I weight for the US, Eurozone, China and Japan according to 5yr dollar GDPs average.  The key thing to know is that conditions have been tightening since 2Q14, reaching their nadir in 2Q15, since when they have been in tentative recovery.  That recovery gathered pace in June and July, and China’s Rmb depreciation will almost certainly accelerate that recovery significantly in August.  More, during the early part of this year, monetary conditions were deteriorating in the US, China and even Japan, and easing only in the Eurozone.  By August, my estimate is that they will be improving in China, in the US and in Japan, whilst deteriorating slightly in the Eurozone.  Overall, however, the upward inflection point has already arrived.

China Devalues - Some Consequences

What Happened: People's Bank of China devalued the Rmb, setting the rate 1.9% lower on August 11, and a further 1.1% the next day - the biggest fall for the Rmb since the 33% devaluation in the first week of 1994, and seemingly an abandonment of prioritising early inclusion in the SDR over the needs of the domestic economy.

Why It Matters:  This is an important development both for China (its economy and politics), for the rest of Asia, and for the world economy.  Let's take them separately. For China, the decision to devalue marks the abandonment of two linked policy goals. First, and most obviously, it is an acknowledgement that the economic sacrifice made in demonstrating sufficient stability for the Rmb to be included in the SDR at an early date, is proving too burdensome.  Or, to be blunt, it acknowledges the error of allowing the Rmb to be dragged up with the dollar last year, without an aggressive easing in other areas of monetary policy.

Second, and less obviously, it marks the end of the carefully assembled illusion that sufficient foreign reserves and a sufficiently conservative set of banking policies could allow China to escape indefinitely from the monetary policy trilemma (the one which makes a fixed currency, open capital account and independent monetary policy an unstable triad).  Both of these mean that a serious policy re-think is now inescapable.

Politically for China, the stockmarket's fall followed by the predictable devaluation of the Rmb demonstrates two things: first, it tells the Party that it cannot control the Market; second, it tells the Chinese people that the Party cannot control the Market.  Given that the Party treasures control above all else, this represents a genuine political crisis.  So in short, this is a moment of profound challenge and, ultimately change, for China's political economy.

For Northeast Asia, the problem is very simple: China accounts for just over 70% of Northeast Asia's combined exports. If China is devaluing in order to maintain its export position (a subsidiary aim, with the principal aim being to raise utilization rates in an economy which has been driven by the growth of capital stock), then export prices will be cut for every other Northeast Asian trading partner and competitor. The deflation which so far has been largely confined to commodity markets, will spread more rapidly to Asian manufactures, starting now.  Within Northeast Asia, Japan is the most obviously vulnerable, having tried for two and a half years to ginger up its economy via devaluation. China has just trumped that strategy.

For the rest of the world, there is the uncomfortable fact that in dollar terms, during the five years to 2014, China accounted for 54% of the total growth in GDP for the G7 and BRICs combined.  Or put it another way, between 2010 and 2014, China's dollar GDP grew 71.5%, whilst the rest of the G7 and BRICs expanded just 9.8%.  Depending on how far China ends up devaluing, those numbers are going to change, and quite possibly dramatically.

And finally, and again obviously, China's devaluation is likely to trigger a whole new round of Asian-sourced deflation in the traded goods sector. Bond markets have made their initial reaction, western monetary policymakers will be re-casting their sums.

What Happens Next?   
We shall see. At present, Chinese sources are glossing the devaluation merely as an extension of China liberalizing its economy. Whilst one can't rule out completely that the end-result may yet be that, it defies belief that this is the motivation. Rather, for the reasons given above, this is a moment of profound challenge for China's policymakers, and how the various tensions, problems and opportunities will play out is, for now, anybody's guess.

China Devalues - The Trilemma Bites Both China and Japan

The announcement today of a sharp devaluation of the Rmb is a capitulation to strategic necessity which a) had already been quietly seen on the OANDA fx site since July 31st, though not, curiously on Bloomberg and b) was the inevitable outcome of the failure of the Xi Jingping Put.

To repeat: 
"The logic of the situation is that the damage inflicted on the financial system will force a clarity of policy which finally over-rides the deep desire to ignore the monetary policy trilemma.  In short, monetary policy can become truly expansionary, in which case there is a sacrifice to be made either of the short-term stability of the Rmb, or the phased dismantling of capital controls and other structures of financial repression.  The alternative is that the damage to the financial system is unrelieved by monetary policy, but policies to open the capital account and sustain the stability of the Rmb are maintained. Almost certainly that will now entail a hard landing. 

"In short, the choices have suddenly got both hard and urgent."

There are immediate consequences to think about.

For China,  there are two fundamental questions:
1. The Communist Party has discovered that it cannot control the market.  Given the unrivalled importance that maintaining control has in the Party's list of priorities, what does that mean for the future of the market in China?
2. The Chinese people have discovered that the Party cannot control the market. What does that mean for the economic choices to be made by China's households and companies?

For the rest of Asia, there is one very obvious question: what happens now to Japanese policy. Those of you who subscribe to my  Shocks & Surprises Global Weekly Summary will have read on its front page this week:

"In Asia, Bank of Japan’s monetary policy board meeting produced no new initiatives, but commentary from the bank’s governor which bordered on the complacent. In fact, Japan’s momentum indicators for domestic demand and the industrial sector are now flagging in a way not seen since the election of PM Abe. If one of the outcomes of China’s stockmarket collapse is a depreciation of the Rmb, Bank of Japan could yet discover new vulnerabilities in the Japanese economy."

To be plain, about 71% of Northeast Asia's exports come from China, and given the weakness of Western demand,  a 1.9% devaluation in the Rmb will quickly result in a 1.9% fall in the dollar price of China's export prices, which will inexorably be followed by matching falls elsewhere in Asia's export prices. Any Asian country which has been relying on devaluing its way back to competitiveness with China will feel the pressure. So there's more policy initiatives to come - and not leas from the Bank of Japan.

China's July Money Data - Rescue Funding

China’s July monetary data gives a coherent, if slightly complicated, picture of the attempt to staunch the financial bleeding from the stockmarket’s fall.  In total, it describes a rapid emergency financial re-intermediation by the banking system, whilst at the same time shows the financial system in total withdrawing funding from the real economy.  The hope must be that July’s data shows merely Part 1 of the rescue, with the crucial bit of Part 2, as yet unseen, being the banking system being willing to restore funding to the ‘real economy.’

The key data is the discrepancy between the Rmb1.48tr in new bank lending made in July - 1.7SDs above historic seasonal trends, and the strongest since June 2009 - and the miserable Rmb589bn in new bank lending recorded in the monthly aggregate financing series. Since the point of the aggregate financing data is to track financing made to the ‘real economy’, we are left to conclude that the difference between the two measures of banks lending - 891bn yuan of it - represents bank lending to non-bank financial institutions. The rescue funds, in other words.

In the short term, the good news is that the money lent to rescue financial institutions has been recirculated right back to the banks, with deposits rising 2.17tr yuan during July.  The less-good news for now is that:

• the banks are not lending that back into the ‘real economy’. Not only was lending to the real economy down at just 589bn yuan in July, the lowest since October 2014, but in addition, banks withdraw a net 331bn yuan of bankers’ acceptances during the same month. The net effect must be a sharp squeeze on corporate working capital. 
• the second bit of bad news is that the rise in deposits is accompanied by a sharp fall in liquidity preference (M1/M2) to a new record low as speculative and transactional demand for money is dulled by financial and economic uncertainty. 

China's Reserves - Hong Kong's Part in Their Downfall

Between the end of August 2014 and the end of June 2015 China’s foreign exchange reserves fell by US$275bn.  Where did the money go?  Probably more than half of it was accounted for loans being repaid to Hong Kong’s banking system: latest data shows that Hong Kong’s net lending to China fell by US$91bn between September 2014 and April 2015.   The huge inflow of Hong Kong bank lending, which saw loans to China rise from a low of US$122bn in September 2012 to a high of US$342bn in March 2014, went sharply into reverse just as the US dollar began to strengthen in the second half of 2014.

Part of the reason for this withdrawal is doubtless a change in perception of risk as the dollar strengthened.  But heightened risk aversion is not the only story: Hong Kong’s own liquidity situation has been sufficiently compromised that retrieving capital from the mainland was almost certainly a commercial necessity.

The reason is that Hong Kong is no longer generating the private sector savings surpluses which historically  have funded the build-up of net foreign assets in Hong Kong’s banking system.  Whilst a savings surplus results in the private sector piling cashflow into the banking system, which by definition can only be invested in government debt or foreign assets.  By contrast, a savings deficit results in cash flow from the banking system back to the private sector, with the banks able to generate the cash only by selling government or foreign assets. 

In 4Q14, Hong Kong generated a private sector savings deficit of HK$56.4bn, equivalent to 9.2% of GDP, and this was followed by a HK$47bn deficit in 1Q15, equivalent to 8.2% of GDP. Now, Hong Kong’s private sector savings position is highly seasonal, with large deficits usually seen in 4Q, usually recovering to an offsetting surplus in 3Q.  However, the deficits of 4Q14 and 1Q15 were big enough to leave the 12m position as a modest deficit of 1.5% of GDP.    

The trade and government budget deficit/surplus for April-June are now in, so we can see the extent to which the underlying savings situation is developing.  Hong Kong’s reported a June budget deficit of HK$11.3bn, bringing the fiscal balance for 2Q  to a deficit of HK$15.92n, equivalent to an estimated 2.8% of GDP. Meanwhile, with June’s trade balance showing a deficit of HK$45.8bn, the 2Q deficit came to a deficit of HK$115.4bn, which implies a 2Q current account balance of approximately HK$8.4bn.  

Taken together, this suggests that Hong Kong produced a private sector savings surplus of HK$24.4bn, equivalent to 4.4% of GDP. This represents something of a recovery, as it compares with a 2% surplus in 2Q14, and a 8.2% deficit in 1Q15. However, on a 12m basis, the SAR is still running on a modest private sector savings deficit (equivalent to about 0.9% of GDP). Whilst this is hardly disastrous for Hong Kong itself, and implies little in the way of currency pressure or interest rate premiums to the dollar, it does mean that the now ‘normal’ conditions for Hong Kong is that it no longer produces a savings surplus that can  be re-invested in the mainland. Rather, Hong Kong’s underlying savings balances require that it sells down a modest portion of its accumulated foreign assets, which effectively means repatriated capital from the mainland. Hong Kong, in other words, is no longer a net source of capital for China in its own right, but rather is one of the factors generating capital outflow from China

Story of the Day - US Factory Orders & Japan Cash Earnings

Two things stood out from the day’s data:

1. The 1.8% mom rise in US June factory orders
2. The 2.4% yoy fall in June's cash earnings for Japanese workers

US June Factory Orders The 1.8% mom rise in June’s US factory orders allowed some slight improvement to the underlying ratios which influence short-term industrial dynamics, but without really making inroads on the underlying inventory and book/bill problems. With shipments up just 0.5% mom, the book to bill ratio rose 1.3% mom to the best since March - but even so, it remains 2.3% lower than in June 2014, and slightly below a 10yr average which includes, of course, the Great Recession. Meanwhile, inventories rose 0.6% mom (with no change in unfilled orders) whilst shipments rose 0.5%, so there was no improvement in the  inventory/shipment ratio, which returned to the highest since February, and is 1.1SDs above the 10yr average. Neither of these ratios are so bad they demand an urgent re-thinking of economic policy, but equally, whilst they remain unaddressed, they compromise short-term industrial prospects in the US.

Japan June Labour Cash Earnings  The 2.4% yoy fall in June’s labour cash earnings (for companies with more than 5 employees) and the 3.3% yoy fall in average earnings for all employees, makes quite clear that Japanese employers are not in the business of passing on competitive benefits of devaluation to their employees. For the wider measure, June’s payment fell 1.9SDs below what one normally expects in June. And June is an important month, because it is one of the two large bonus months of the year: last year, June accounted for 11.6% of total annual earnings, with only December being more important (representing 14.5% of earnings).  

With increasingly little in the way of monetary policy dynamics to offer immediate extra support, it’s difficult to be optimistic about the short-term trajectory of domestic demand. And that policy lacuna will become more important if the brunt of China’s stockmarket failure is borne by a sharp weakening of the Rmb (which seems a logical expectation).  At that point, Japan’s policymakers will be faced with the possibility that two and a half year’s worth of sharp competitive devaluation against its biggest Asian trading partner/competitor have not brought the benefits to Japan’s domestic economy which they could have expected.