FINANCIAL AND ECONOMIC SITUATION IN THE REGION AMID DECLINING INFLATION AND RISING DEFLATIONARY PRESSURES

E. Ya. ARAPOVA

Candidate of Economic Sciences

MGIMO (U) of the Russian Foreign Ministry

Keywords: East Asia, monetary policy, fiscal policy, inflation, demand, economic growth

In June 2015, the Bank of Japan announced that it would maintain its economic policy aimed at stimulating domestic consumption and adopt a package of measures aimed at easing monetary policy in October 2015. Low inflation, and in some years - the growth of deflationary pressure, for many years is a characteristic feature of the country's economy. However, in recent years, this trend has spread to other East Asian countries, which encourages them to develop a set of economic policies aimed at stimulating domestic demand and overcoming structural imbalances in national economies.

In the context of declining world trade growth, declining export revenues and a positive trade balance in some East Asian countries, and in some cases, the accumulation of deficits, while maintaining the same level of capacity utilization and in some cases insufficiently rapid growth in domestic demand and a high rate of savings of the population, a number of countries in this region faced a drop in inflation indicators and an increase in deflationary pressure.

Although relatively low inflation rates may help raise real incomes, their sharp decline in recent years indicates the accumulation of internal imbalances in the economies of East Asian countries and the excess of supply growth over demand growth.

FALLING INFLATION

The rate of decline in inflation in the developing countries of the East Asian region in recent years has been significantly higher than its decline in the Asia-Pacific region (APR) and the world as a whole (see chart).

The inflation rate in the group of East and North-East Asian countries was significantly lower than in the Asia-Pacific region as a whole. There, the relatively low values of inflation indicators in developing Asia, as well as Japan, are overlaid by the population's propensity to increase consumption and, accordingly, higher inflation rates. In turn, low inflation rates over the last period were largely the result of deflation-

Chart. Inflation rate in the Asian region and in the world in 2005-2016 (%)

Источник: Making Growth More Inclusive for Sustainable Development. Economic and Social Survey of Asia and the Pacific 2015 // UNESCAP. P. 48.

The publication was prepared within the framework of the RGNF-supported project N 15 - 07 - 00026 "East Asian regionalism in the context of a model of economic growth diversification".

Table 1

Inflation in East Asia, %

* Preliminary data.

Source: Making Growth More Inclusive..

high blood pressure in Japan. Although by 2014, the gap between the average inflation values in the group of East and North-East Asian countries, including Japan, had narrowed to a minimum. The average indicators for the South-East Asian group were comparable to the global average and were significantly higher than in the North - East Asian countries over the entire ten-year period (2005-2014).

According to experts of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), in 2014 there was a steady downward trend in inflation in a number of countries in the region, and by the end of 2015, the average inflation rate in the group of developing countries of the Asia-Pacific region is expected to decrease from 3.9% (in 2014) to 3.3% ¹.

Almost all East Asian countries have experienced a decline in price growth in recent years. The only exception was Indonesia (see Table). 1), which was characterized by a relatively more protectionist foreign trade policy and a decrease not so much in exports as in imports. In addition, this country is an energy exporter, and the fall in world oil prices had a relatively smaller impact on the inflation rate here than in countries that import energy resources, and the abolition of fuel subsidies for the population provoked a short-term increase in prices, which also affected the overall statistics.

THE SITUATION IS DIFFERENT IN DIFFERENT COUNTRIES

The ASEAN least developed countries, Laos, Myanmar and Viet Nam, had relatively higher inflation rates. However, these countries, with the exception of Vietnam, have also experienced a decline in inflation in recent years.

Singapore's inflation rate has fallen sharply, falling from 14.8% in 2010 to 1.9% in 2012. According to the UN, there was some market recovery in 2013, and the inflation rate rose to 2.4% as a result. However, in the coming years, experts predict an increase in the downward trend.

The situation is relatively more favorable today in Malaysia and the Philippines. According to forecasts of a number of international organizations, in the near future the average annual inflation rate in these countries will average about 3% and 4%, respectively. Inflation here has been declining in recent years, largely due to the fall in food prices. According to UN forecasts, by the end of 2015, the inflation rate in the Philippines will be 3%, but at the beginning of 2015, the country showed a steady downward trend. In May 2015, the consumer price index was 1.6% year-on-year, a decrease of 0.6 percentage points compared to April 2015, when inflation was 2.2% year-on-year. The inflation rate, excluding prices for certain types of food and energy products, was 2.2%, compared to 2.5% in April ^{2015 and 3.1% in April 2014.2}

In Malaysia, as a result of the abolition of fuel subsidies

a slight increase in prices is expected, which will allow the country's budget to save about $3.4 billion, which is later planned to be allocated for the implementation of infrastructure projects.³ In April 2015, the consumer price index slightly exceeded the level of April 2014, which was mainly due to higher prices for alcohol and tobacco products, restaurant and hotel services, as well as for certain types ^of food4. This situation can be considered optimal in terms of its impact on both economic growth and household incomes. It does not allow excessive depreciation of these incomes, and the economy does not slide into stagnation.

Thus, the regulation of inflation in the Philippines and Malaysia is the result of balanced economic policies implemented by governments and monetary policy regulators.

Now let's talk about the two largest states in Northeast Asia. The most dramatic drop in inflation occurred in China: from 10.4% in 2010 to 2.6% in 2013 and ²% in 2014.5 This can be explained not so much by the insufficient demand of the population and households for goods and products, but by the discrepancy between the consumption of excess production capacity ⁶, which, against the background of reduced export opportunities, leads to an excess of supply over demand. China's inflation rate rose 1.5% in April 2015, while remaining below the 1.6% forecast by ^Bloomberg7.

Japan experienced deflation of 0.5% in 2011, and although the situation stabilized somewhat in 2012, the inflation rate did not exceed 0.4% as of 2013. This country is the only one in the East Asian region where average wages in almost all industries remain unchanged from year to year. As a result, there are virtually no sources to boost domestic demand, given the Japanese propensity to save. However, according to the calculations of the national statistical services, the inflation rate in 2014 is estimated to be It was 1.5%, and UN experts predict that in 2016 Japan will reach a two percent inflation rate.

FISCAL STIMULATION OF DEMAND

After the global financial and economic crisis of 2008-2009, most East Asian countries began to adjust their state income policies in order to stimulate domestic demand for goods and products. The current structural reforms affect both fiscal and monetary policies.

Some countries actively use fiscal policy tools to stimulate consumption. The fundamental elements of economic policy in most East Asian countries are the gradual reduction of energy subsidies, the expansion of the tax incentive system, as well as an increase in public spending on infrastructure development and social needs, including education, health and social protection of the population.

In particular, in Thailand, the corporate income tax was reduced, additional tax incentives were introduced, the tax on the purchase of the first vehicle was abolished, and the program for subsidizing agricultural producers was expanded.

To boost economic growth, in March 2014, the Government of Brunei unveiled a "Strategy to increase the production of refined Oil and Gas products through the introduction of new technologies". The country has a policy of active investment and support for non-energy sectors of the economy - agricultural processing, aircraft manufacturing, banking, telecommunications and tourism industries.

Social protection spending is relatively high - at 3% of GDP - in Malaysia, Singapore, and Vietnam. Thailand adopted a fiscal stimulus package ⁱⁿ October 2014.8 The funds received as a result of these measures are mainly directed to improving infrastructure: improving the quality of roads, building schools, hospitals, and administrative buildings. A large-scale investment program in public transport is being implemented. Part of the funds is spent on supporting agricultural producers, in particular rice farms.

As a result of these measures, a number of East Asian States, in particular the Republic of Korea and Singapore, have seen a significant reduction in public budget surpluses in recent years. Meanwhile, Japan, China, and Indonesia recorded rising budget surpluses (see Table 2).

From the point of view of the ratio of the state budget balance and the level of the external state-

Table 2

East Asian State budget balance (% of GDP)

* Forecast data.

Source: IMF. World Economic Outlook Statistical Database. April, October, 2015.

The Republic of Korea and the Philippines have the most favorable situation in terms of debt, with low levels of debt (less than 50% of GDP) accompanied by a small government budget surplus.

Singapore's large public debt surplus (more than 4% of GDP) is projected by IMF experts to shrink significantly in the coming years due to the high level of public debt. At the same time, in Japan, the most significant negative balance of the state budget among the countries studied is accompanied by a public debt of 246% of GDP, which is several times higher than the average level of public debt of other countries in the region.

WHAT DOES THE LEVEL OF CONSUMPTION DEPEND ON?

The level of consumption in East Asian countries is influenced not only by economic policies implemented by States, but also by external factors. In particular, the decline in world oil prices could have a positive impact on the scale of consumption in the countries of this region by increasing the purchasing power of the population. However, a drop in global oil prices would most likely have affected consumption less than expected, due to a number of factors, including the strengthening of the national currency in Japan, the excessively high propensity of the population to save in the Republic of Korea, etc. ⁹

The largest state in East Asia that has officially declared a policy of stimulating domestic consumption in recent years has become the PRC. Measures taken by the Government of the country are limited to "stimulating innovation and increasing labor productivity, curbing irrational investment and increasing household income and consumption" ¹⁰. The package of reforms aimed at reorienting the country's economic system includes liberalizing the household registration system; inter-budget reform; financial liberalization; and opening up the country's service sector to competition.¹¹ In addition, since 2009, China has been actively internationalizing the yuan: in 2009, a Pilot Program of RMB Settlement of Cross-Boarder Trade Transactions was adopted.

The package of reforms announced in November 2013 aims to increase competition in the banking services market and, as a result, accelerate the pace of interest rate liberalization. Among the important tasks is to increase the convertibility of the Chinese yuan, which is designed to help reduce its dependence on the negative impact of external "shocks" and increase the stability of the national financial system. The package of reforms involves simplifying the procedure for approving capital investments abroad, expanding the access of private investors to participate in state-owned projects.

Table 3

Dynamics of changes in international reserves of East Asian States, 2003-2014 ($ billion)

Source: World Bank International Reserves Database.

investment projects. The Government of the People's Republic of China has set a goal to help reduce the gap in the living standards of rural and urban populations. Tax incentive mechanisms are being implemented: as a pilot step in the implementation of the XII Five - year Plan (2011-2015) in Shanghai, the business activity tax was replaced with a value-added tax in the areas of transport, leasing and services ¹².

Large-scale infrastructure projects implemented by China are also intended to help achieve the strategic goal of diversifying the sources of economic growth in favor of expanding domestic consumption and investment. These include the "New Silk Road Belt"¹³, "Maritime Silk Road of the XXI Century" projects, as well as the idea of creating an Asian Infrastructure Investment Bank. In April 2014, the Government of the People's Republic of China adopted the next package

economic reforms aimed at maintaining high rates of economic growth. These include additional spending on the development of railway communication, improving the housing conditions of households with relatively low incomes, as well as easing the tax burden on small and medium-sized businesses. In addition, the Government has taken steps to lift restrictions on real estate transactions and reduce payments on mortgage loans for the purchase of housing in ^the secondary market14.

Tax incentive instruments are actively used by the Governments of Japan and the Republic of Korea. In these countries, in particular, special attention is paid to the provision of additional tax incentives and tax holidays to companies that prioritize increasing the salaries of their employees. At the same time, the South Korean government announced its intention to levy higher taxes on corporate funds held as reserves in order to increase employee salaries and pay dividends to shareholders.¹⁵

It should be noted that against the background of the recent decline in the growth rates of world trade and export revenues, as well as as a result of the expansion of public spending, there is a tendency to reduce the volume of so-called international reserves in some ASEAN countries (see Table 3).

In 2013 and 2014, international reserves in Malaysia, the Philippines, and Thailand showed negative growth, with the rate of decline increasing in the first two countries. In 2014, there was a decrease in the volume of gold and foreign exchange reserves in Singapore. In Indonesia, by contrast, a sharp drop in 2013 was followed by an increase in reserves in 2014, driven by an increase in export earnings. A slight reduction in reserves has been observed over the past 3 years in Japan. In China, the Republic of Korea and Brunei, the growth rate of reserves decreased markedly. And in the relatively less developed ASEAN countries-Vietnam and Cambodia-the dynamics of gold and foreign exchange reserves growth in 2014 turned out to be more favorable.

MONETARY STIMULUS FOR CONSUMPTION

The Central Bank of Japan announced in October 2014 that it will continue its policy of easing monetary policy in order to increase the money supply in circulation, on average, from 60 - 70 trillion yen to 80 trillion yen (approximately $500 - 584 billion). up to $667 billion) annually ¹⁶. In June 2015, the same bank announced that it would maintain its policy of stimulating domestic consumption by easing monetary policy and adopting a package of other measures. For many years, the country has been focused on the export of high-tech goods, which ensured the stability of the Japanese currency. Recently, the implementation of large-scale monetary stimulus programs and the expansion of government spending have led to a depreciation of the yen against the world's leading currencies, and this may push up prices in the domestic market17.

In the Republic of Korea, after reducing the inflation rate to 1.3%, with a forecast of 2%, a number of measures were taken to stimulate consumption, increase prices and reduce deflationary expectations. Bank interest rates were adjusted downwards twice in 2014 and once in 2015, with the benchmark interest rate reaching a historic low of 1.75%this ^year18. Despite the easing of monetary policy and the reduction of nominal base interest rates, real rates in commercial banks remained very high, which could not sufficiently stimulate the expansion of domestic demand and contribute to price growth.

The People's Bank of China, seeking to increase the money supply in circulation, has twice resorted to reducing key interest rates since ^the end of 2014.19 In November 2014, the bank reduced interest rates on annual loans to 5.6% (by 0.4 percentage points) and on annual deposits to 2.75% (by 0.25 percentage points (hereinafter-pp)).²⁰. At the beginning of March 2015, the corresponding indicators were reduced by another 0.25 percentage points , to 5.35% and 2.5%, respectively. In addition, in February 2015, the rate of mandatory reserve requirements was reduced by 0.5 percentage points (from 20% to 19.5%) ^.21

In Thailand, in March 2015, the initial interest rate (the minimum rate required by an investor when investing in non-treasury securities) was reduced by 25 percentage points to 1.75% ²².

In February 2015 Indonesia reduced the discount rate by 25 percentage points to 7.5%²³. In Singapore, monetary leverage also weakened in January 2015. Unlike other Asian countries, which are more likely to use interest rates as the main way to influence domestic demand

As well as managing inflation, the monetary authorities of Singapore prefer to influence the exchange rate of the national currency and take measures to reduce the rate of appreciation of the Singapore dollar against the world's leading reserve currencies.

According to experts, the rate of appreciation of the Singapore dollar over the past year has decreased from 2% (on an annualized basis in relation to the leading reserve currencies) to 0.5 - 1.5%. As a result, the national statistical office of Singapore predicts that the inflation rate in 2015 may range from 0.5% to 1.5% ²⁴. In March 2015 Thailand also lowered the discount rate by 25 percentage points to 1.75% ²⁵.

Easing monetary policy and making it easier for households to access bank credit facilities also have negative consequences in the form of accumulation of domestic household debt and increased speculation in the real estate market. As a result, some ASEAN countries, aware of the potential threats of a sharp increase in consumption, are beginning to take temporary measures in response to reduce the excitement in the real estate markets.

Some East Asian countries are balancing measures aimed at stimulating domestic demand as the main potential source of income and trying to insure themselves as much as possible against the risks of rising "bad debts" in the banking system, unjustified boom in real estate markets and excessive price increases. As a result, monetary policy easing is usually followed by tightening, and interest rate cuts are followed by short-term increases.

This happens mainly in countries that have experienced a relatively smaller drop in the rate of inflation. In particular, in Malaysia, Indonesia and the Philippines, since mid-2014, some tightening of monetary policy has been undertaken to reduce inflationary pressures on the economy and inflation expectations. Malaysia raised its one-day interest rates by 25 percentage points in July 2014, the Philippines also raised rates on certain types of transactions by 25 percentage points in July and September 2014, and the inflation target for January 2015 was adjusted to 3% -4%²⁶.

Indonesia also tightened its monetary policy in 2013 to combat inflation in the face of the depreciation of the Indonesian rupiah. And in November 2014, the key rate of ²⁷ was raised by 25 percentage points. In addition, in September 2014, the key rate was raised by 50 percentage points to 4%, which was preceded by an increase in the reserve requirements norm28.

Almost all East Asian countries have experienced a decline in price growth in recent years. To address the challenges associated with the transition to new models of economic growth, the States of this region are developing reform packages that affect both fiscal and monetary policies.

Public policy measures aimed at stimulating demand mainly include expanding the money supply in circulation by easing monetary policy, as well as increasing household incomes by expanding public spending on social benefits and creating additional incentive mechanisms for companies whose priority is to increase employee wages. Measures are also being taken to develop the banking sector and encourage competition in the banking services market (mainly through monetary easing), as well as to increase public spending and implement large-scale infrastructure projects using state budgets.

-------------------------

¹ Making Growth More Inclusive for Sustainable Development. Economic and Social Survey of Asia and the Pacific 2015 // UNESCAP. P. VIII.

² Philippines CPI Inflation Eases for Third Month, Slower than Estimated // Asian Economic News. 06.04.2015 - http://www.rttnews.com/2508262/philippines-cpi-inflation-eases-for-third-month-slower-than -estimated.aspx

³ Making Growth More Inclusive.., p. 9.

⁴ Malaysia's March inflation seen picking up to 0.9% year-on-year // The Malaysian Insider. 20.02.2015 -http://www.themalaysianinsider.com/business/article/malaysias-march-inflation-seen-picking -up-to-0.9-year-on-year

^{Arapova E. Ya} 5 The syndrome of the" Great Depression " in Chinese? // INF portal. 09.04.2015. (Arapova E.Ya. 2015. Sindrom "Velikoy Depressii" po-kitaisky? // Portal RCIA (in Russian)

^{Magnus G.} 6 Causes and consequences of China's contagious case of deflation // Financial Times. 24.12.2014 -http://www.ft.eom/cms/s/0/4e01133c-8a14 - 11e4 - 9271 - 00144feabdc0.html#axzz3VQwUZRyM

⁷ China consumer inflation rises 1,5% in April // Channel NewsAsia. 09.05.2015 - http://www.channelnewsasia.com/news/business/china-consumer-inflation/1835896.html

⁸ Adjusting to a Changing World. East Asia and Pacific Economic Update // World Bank. April 2015. P. 10 - 11.

⁹ Ibidem.

^{Dollar D.} 10 Sino Shift // Finance & Development. IMF. June 2014. P. 11.

¹¹ Ibidem.

^{Arapova E. Ya} 12 Vostochnaya Aziya: diversifikatsiya istochnikov ekonomicheskogo rosta [East Asia: Diversification of sources of Economic Growth]. 2014. N 3 - 4. С. 62 - 74. (Arapova E.Ya. 2014. Vostochnaya Aziya: diversifikatsiya istochnikov economicheskogo rosta // ATR: Economika, Politika, Pravo. N 3 - 4. P. 62 - 74) (in Russian)

¹³ For more information, see: Ostrovsky A.V. Chinese project "Economic belt of the Silk Road" / / Asia and Africa Today. 2016, N 2. (Ostrovsky A.V. 2016. Kitaiskiy proekt "Ekonomicheskiy poyas Shelkovogo puti // Aziya i Afrika segodnya. N 2) (in Russian)

¹⁴ Making Growth More Inclusive.., p. 49.

¹⁵ S.Korea Reveals $40bn Stimulus Package as Growth Slows // Financial Times. 24.07.2014 - http://www.ft.com/intl/cms/s/0/0ba29458 - 1303 - 11e4 - 925a-00144feabdc0.html

¹⁶ Making Growth More Inclusive.., p. 51.

¹⁷ BOJ set for more easing in October as inflation still low: Reuters poll // UK Reuters. 15.06.2015 - http://uk.reuters.com/article/2015/06/15/us-economy-poll-japan-idUKKBN0OVlRB20150615

¹⁸ Making Growth More Inclusive.., p. 52.

^{Arapova E. Ya} . 19 Decree. op.

²⁰ China cuts interest rates to ease deflation worries // China Daily. 28.02.2015 - http://www.chinadaily.com.cn/business/2015 - 02/28/content_19680921.htmb

²¹ Ibidem.

²² Ibid.

²³ Making Growth More Inclusive.., p. 7.

²⁴ Singapore loosens monetary policy // Financial Times. 28.01.2015 - http://www.ft.com/intl/cms/s/0/5e51c880-a69d-lle4 - 89e5 - 00144feab7de.html#axzz3gYvzC2vz

²⁵ Making Growth More Inclusive.., p. 7.

²⁶ Adjusting to a Changing World.., p. 12.

²⁷ Ibidem.

²⁸ Ibid., p. 87.

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