Region – Back to the Future: East Asia and Trump 2.0

Paul Cavey -

Why Back to the Future? Because that great film was released in 1985, the same year as the Plaza Accord, the currency realigning agreement that set off the big equity and property market bubbles in Japan and Taiwan. Inevitably, those bubbles popped a few years later, ushering in Japan’s multi-decade malaise. Japan is only just now emerging from that funk. That makes inflation an issue for the BOJ and CBC in Taiwan, just as China's economic challenges mean debt and deflation remain hot topics in the region still. However, while there are certainly similarities between China’s domestic difficulties today and Japan's post-1990s experience, in exports, China looks much more like post-bubble Taiwan, with a cheap currency and manufacturing strength. That in turn is feeding into global imbalances and talk of Plaza II, a theme which engulfs all the economies of the region. Indeed, if you want the clearest illustration of why it’s Back to the Future, just look at Taiwan’s trade surplus with the US, which was at over 10% of GDP in 1985, then fell, but is rapidly rising back to double-digit levels now.

These are all issues I’ve been working on the last couple of years, so it was nice to have the chance to discuss them on this podcast:

And as a reminder, here are some of the longer pieces that lay out this theme.

1990s bubbles and after

Japan v Taiwan, property v exports

Region – lessons from Japan
Earlier, we looked at the role of demographics in Japan’s post-80s malaise. Today we study corporates, with Taiwan as a counterpoint. We conclude, again, that Japan’s experience is more unique than generic. Even so, the impact of bubbles bursting – as in China’s construction now – is long-lasting.
East Asia EconPaul Cavey

Monetary policy

The role of the exchange rate

China – CNY: be careful what you wish for
Rather than thinking a weaker USD will be a catalyst for a stronger Chinese cycle, we worry more that a stronger CNY means even more downside risk, being another reason to conclude that the muddle through of the last 18M is running out of road.
East Asia EconPaul Cavey

From the bottom to the top: Taiwan and Japan today

The current economic set-up in the region

Region – Asia’s two distinct dynamics
If the US-led global trend is a sort of reversion to mean, then Asia has two very differentiated dynamics. On the one hand, there’s Japan and Taiwan, which look like breaking structurally to the upside. On the other, there’s China, which is more sluggish than at any time in the last 30 years.
East Asia EconPaul Cavey

Plaza II

What might a new Plaza look like?

Region – Plaza II
Beijing will be very wary of all the talk of a Plaza II agreement. Plaza I is widely seen as a successful effort to stop Japan’s economic rise. That imbalances have nonetheless persisted suggests US macro policy has a role to play, but why would US promises to get fiscal under control be credible?
East Asia EconPaul Cavey

Taiwan's USD100bn challenge

The exchange rate consequences of Taiwan's huge external surpluses:

Taiwan – how to dispose of USD100bn?
There’s rarely much interest in Taiwan macro. But 2025 could be different: with post-2020 domestic economic lift-off, and the return of Trump, the circumstances that have kept the TWD undervalued for 20 years might be changing. This is a detailed chart pack looking at the issues involved.
East Asia EconPaul Cavey