Will China’s economic struggles and Japan’s yen rebound redefine Asian Markets in 2024?

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19th February 2024 – (Tokyo) As China grapples with stabilising its real estate market and enhancing income growth, its economic progress remains below expectations.

In the previous year of 2023, China’s economy witnessed a growth of 5.2%, a slight improvement from the 3% increase in 2022. However, this rate falls short of the pre-pandemic growth rates of 6% or higher, disappointing many investors. Absent significant policy changes, the year 2024 is expected to follow a similar trend.

December’s monthly data, which serves as a key feature of macroeconomics analysis, was released recently, showed some positive developments. Investment growth, which had been slowing for eight consecutive months, stabilized in November and saw a modest increase in December. This aligns with a slight easing in monetary conditions since November. The growth in total outstanding debt and equity finance climbed to 9.5% year-over-year in December, marking its fastest rate since May. Despite these improvements, the broader economic landscape remains concerning.

Official data revealed that real growth in urban disposable income was a mere 4.8% last year. Excluding the years 2020 and 2022, this was the lowest rate since at least 2002, and almost a full point below the quarterly average from 2016 to 2019. Consumer confidence continues to struggle, with minimal growth in consumer lending, and a persistent decline in house prices.

Financial easing may assist local governments and highly leveraged non-bank financial entities in refinancing debts and avoiding a major financial crisis. However, there’s little indication of a resurgence in strong growth or a turnaround in the vital real estate sector.

The government’s monetary policies should not be underestimated, as they may eventually positively impact the property market. Short-term borrowing rates and yields on Chinese government bonds, which had spiked alarmingly in late fall, have since decreased.

What measures has the People’s Bank of China taken to inject liquidity into the banking system?

The People’s Bank of China significantly increased its liquidity injections through specialized lending facilities. In November, the Bank injected a record 800 billion yuan (approximately $111 billion) into the banking system via its key medium-term lending facility. An additional 350 billion yuan was infused through the “pledged supplementary lending facility.”

The latter is significant, recalling the use of this facility following the 2015 real estate downturn, where it aided households and property developers in what was termed “slum redevelopment.” The current situation, however, may unfold differently, given Beijing’s long-standing campaign against housing speculation. Yet, an increase in PSL lending might indicate a stronger commitment to supporting the real estate sector.

Currently, China’s property market remains troubled. Goldman Sachs reports that weighted average property prices fell 2.4% in December on a seasonally adjusted, annualized basis – a decline twice as fast as in November. After brief improvements in autumn, new residential floor-space sales and property investment experienced accelerated declines in December year-over-year.

The labour market is also unstable. While employment prospects in the construction sector showed improvement, the manufacturing and services sectors experienced a downturn, as per the official survey.

Outside of real estate, investment appears to be stabilising, which is a positive sign. However, until the property market, service sector employment, and income growth stabilise, China’s economic expansion is likely to remain sluggish compared to past standards.

Japan’s Yen Set for a Potential Rebound in 2024

After enduring rate hikes globally, Japan’s yen shows signs of recovery. The Japanese yen, which has been underperforming among major currencies over the past few years, shows promise for improvement in 2024.

Since the end of 2021, the yen has depreciated by approximately 20% against the dollar, lagging behind other key currencies. The Bank of Japan maintained ultra-low interest rates while most global counterparts raised their rates. This disparity in yields drove the yen downward.

Although inflation has risen in Japan, similar to global trends, it remains comparatively low. Japan’s core inflation rate was recorded at 2.5% year-over-year in November, down from 4.2% at the start of 2023. Despite exceeding the Bank of Japan’s 2% target, the central bank has been cautious in raising interest rates, wary of economic repercussions.

The Bank of Japan might tighten its monetary policy if inflation consistently exceeds its target. Minor adjustments have already been made to its yield-curve control policy, aimed at maintaining low long-term bond yields. Since mid-November, the yen has appreciated by about 7% against the dollar, partly due to market expectations of a potential shift in Japan’s negative interest-rate policy in 2024.

One major factor supporting the yen in 2024 could be the Federal Reserve’s policy direction. With the Fed’s rate-increasing cycle likely at its end, and potential rate cuts on the horizon, the interest rate gap between Japan and the U.S. has narrowed significantly. This narrowing is attributed to falling U.S. bond yields, while Japanese bond yields have also decreased during the same period.

Japan’s strategic decision to maintain low-interest rates while other major central banks increased theirs may now yield positive results for the yen.

As you head into 2024, the economic landscapes of China and Japan present unique challenges and opportunities. China, grappling with a sluggish property market and subdued income growth, shows signs of modest recovery but remains hindered by various structural issues. The nation’s economic performance, although slightly better than in 2022, continues to trail behind its historical growth rates. The real estate sector, consumer confidence, and overall financial stability remain key areas of concern, despite some governmental measures to mitigate these challenges.

Japan, on the other hand, is witnessing a potential turnaround for its currency, the yen. After a period of significant underperformance compared to other major currencies, the yen is poised for a rebound, supported by global economic shifts and internal monetary policy decisions. The Bank of Japan’s cautious stance on interest rates, amidst a global trend of rate hikes, could now be paying dividends, positioning the yen for a stronger performance in 2024.