DOES anyone still care about the BRICS? Brazil, Russia, India, China and South Africa concluded their tenth official summit in Johannesburg on July 26th. The widespread perception is that the group has failed to live up to the hype the acronym helped to generate. But that is only half true.
The combined GDP of the original quartet (which did not include South Africa) is actually far bigger in dollar terms than Goldman Sachs envisaged when they first projected BRIC growth in 2003 (after Jim O’Neill, their former head of economic research, coined the acronym two years earlier). China’s rapid expansion has more than made up for tribulations elsewhere. And thanks to the evolution of the BRICs’ exchange rates and prices, their dollar growth has been more impressive than their performance measured in their own currencies. “The relative and absolute position of the BRICS, with the exception of Russia, is close to what I envisioned in 2001,” Mr O’Neill said in a recent interview.
Something else that has grown like Topsy is the bloc’s agenda. The first official summit in 2009, held in Yekaterinburg, Russia, yielded a short declaration containing 15 identifiable commitments, according to the BRICS Information Centre at the University of Toronto. Eight years later, when the leaders met in Xiamen, China, the declaration stretched to 71 numbered paragraphs stuffed with 125 discrete promises. The statement just released in Johannesburg is even baggier: 102 paragraphs containing an as yet uncounted number of pledges. They cover everything from settling trade disputes and securing Syria to making more movies together.
Are any of these commitments kept? It’s easy to assume they are barely read, let alone fulfilled. But they are not quite that empty, according to the BRICS Information Centre’s analysis. Before each summit, it checks whether members have lived up to the main promises they made the year before. I’ve added up their scores for seven summits, from 2011, when South Africa joined the official group, to 2017. They show a surprisingly high rate of compliance: 77% on average. China keeps its word the most; South Africa the least (partly because it has contributed little to the group’s various commitments to Iraq and Afghanistan). The BRICS’ overall rate of compliance is very similar to that of the G7 over the same period. And that was before this year’s tetchy G7 standoff in Charlevoix, Canada (a meeting that was dubbed the G6+1 summit by some critics of American unilateralism). Acronymy is better than acrimony.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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