JAPAN: Japan pledges to beat deflation

New premier Naoto Kan wants to cut Japan's debt levels

Page last updated at 20:30 GMT, Friday, 18 June 2010 21:30 UK

Japan's new government has pledged to slash corporation tax and beat deflation to achieve stable economic growth of 2% a year.

It said it aims to defeat deflation by April 2011, but revealed few details on how it would achieve this.

The government also said it would cut corporate tax from 40% to nearer 25%.

Earlier this week, Japan's central bank announced plans for up to 3 trillion yen (£22bn; $33bn) in loans to spur economic growth.

The plans mark the first time Japan has set a time frame for tackling deflation, which has plagued the economy for much of the last two decades.

JAPAN IN FIGURES

• Government debt: 200% of GDP
• Government deficit: 8% of GDP
• External surplus: 2.5-3.5% of GDP
• GDP growth: 3%
• Inflation: -1.5%
• 30-year bond yield: 2%

Source: Daiwa

Persistent deflation has hampered economic growth, with consumers opting to hold off on making major purchases, expecting prices to fall even further.

However, the ambition of the new government was met with scepticism by some analysts.

"The growth targets don't sound like anything new to me, just wishful thinking," said Junko Nishioka at RBS Securities.

Japan's growth averaged just 1.3% a year before the recession brought on by the financial crisis.

Like many other developed economies, Japan is also suffering from high levels of sovereign debt.

Its plans for cutting borrowing levels are due to be announced next week.

New Prime Minister Kaoto Kan has made cutting the country's deficit his priority.

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RUSSIA: Let Russia Join the WTO

Epsilon/Getty Images

JUNE 18, 2010

BY ANDERS ÅSLUND, C. FRED BERGSTEN

Here's how the White House can earn an easy win next week.

On June 24, U.S. President Barack Obama will welcome his counterpart, Dmitry Medvedev, to the White House. If there's one thing that the two presidents must accomplish, on an issue that has fallen off most observers' radar screens amid all the nuclear diplomacy and talk of "resetting" relations between Washington and Moscow, it's Russia's accession to the World Trade Organization (WTO) -- a potential game changer for the country's economy and foreign policy.

After hitting a low with the Russia-Georgia war in August 2008, U.S.-Russia relations have rapidly improved. Two milestones are the strategic nuclear arms reduction treaty that was signed in April and the new U.N. Security Council resolution on stricter sanctions against Iran. The next step is to improve economic cooperation.

The WTO currently has 153 members, accounting for 96 percent of world trade. Russia, which accounts for 2 percent of global commerce, is the biggest country outside the organization. Having applied in 1993, it has waited for membership longer than any other country, though the United States has recognized Russia as a market economy since 2002 -- a status it does not accord to WTO member China.

It's true that Russia needs the WTO less than many other countries, since it largely exports commodities that enjoy free-market access in any case. Yet Russia's potential gains from WTO accession have been assessed at 3.3 percent of GDP a year, a major jump for the economy. The main benefits would arise from freer trade of services and foreign direct investment.

Russia has never been closer to WTO accession. The remaining hurdles are modest: sanitary rules for U.S. exports of chicken and pork, limits on future agricultural subsidies, rules for encryption, regulation of state-owned enterprises, and export tariffs for lumber. By and large, these issues can be settled bilaterally with the United States. If any query remains after the Obama-Medvedev summit, it can be concluded at the G8 and G20 summits in Toronto that follow on June 26-27. Russia is the only member of the G8 or G20 outside the WTO.

The real obstacle is the lack of mutual trust. Russian trade negotiators fear that the Americans will raise new concerns after they think they have settled all the outstanding issues. A year ago, American negotiators were thrown off balance by Prime Minister Vladimir Putin's assertion that Russia's customs union with Belarus and Kazakhstan had priority over its WTO accession, but Russia has now made clear that WTO entry comes first and should proceed on its own. Therefore, Russia's accession needs to be decided politically by the presidents, and the outstanding technicalities could then be sorted out in a few months.

Russia stands at a crossroads after the global financial crisis. The Kremlin is still shocked by Russia losing 8 percent of its GDP last year, more than any other G-20 nation, despite having the third-largest international currency reserves in the world. The economy is now recovering quickly, but Moscow faces the choice of opting for modernization and economic liberalization that would allow its well-educated labor force to thrive, or remaining a slow-growing and corrupt petrostate living on oil rents. (Russia's main gains from WTO accession will not be from enhanced market access, although Russian steel and chemicals exports will benefit. Instead, the greatest economic benefits are anticipated on the domestic market for services and greater attraction of foreign direct investment -- leading to improved competition at home.)

Medvedev speaks persistently about the need for modernization and control of corruption, which reached new heights when Putin was president. An invitation by Obama to integrate Russia fully into the world economy would be a noteworthy manifestation of improved relations. It would also mark the first significant trade policy achievement of the administration.

The United States still maintains the Jackson-Vanik Amendment, adopted in 1974 denying favorable trade status to Russia, citing its restrictions on the free emigration of Jews from the Soviet Union. The law, a relic of the Cold War, has no practical effect but is a serious irritant in relations between the two countries. And as a practical matter, if Jackson-Vanik remains in force, Russia would simply not apply WTO rules to the United States, perpetuating trade discrimination against American companies. Hence the amendment should be scrapped immediately after Russia joins.

Now is the right time for Obama and Medvedev to resolve the last obstacles on the way to Russian entry to the WTO. The resulting encouragement of Russia's modernization is very much in the interest of both countries. Russia urgently needs to modernize, and the United States, bogged down in Afghanistan and facing the prospect of a nuclear-armed Iran, needs Russian cooperation more than ever.

C. Fred Bergsten is director and Anders Åslund a senior fellow of the Peterson Institute of International Economics.

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THE KOREAS: Children's balloons 'spark South Korea military alert'

A resident thought the balloons were parachutes

Page last updated at 07:19 GMT, Friday, 18 June 2010 08:19 UK

Balloons released by schoolchildren sparked a major security alert in South Korea, reports say, amid heightened tensions with North Korea.

A resident of Ansan, near Seoul, reported seeing 40-50 objects resembling parachutes falling on a mountainside.

The military and police mobilised a special joint task force.

Upon investigation, the objects turned out to be helium balloons released by a local school.

Tensions between North and South Korea have been running high since the sinking of a South Korean warship earlier this year. Seoul said the ship was torpedoed by Northern forces.

In another incident earlier this month, an alert was raised after an explosion was heard on Yeonpyeong island, near the sea border with North Korea, and a diving suit was found on a shoreline, the JoongAng newspaper reported.

A joint military and police investigation found that the diving suit was abandoned by a fisherman and that the explosion had been caused by a South Korean mine, the paper said.

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HONG KONG: Polls Say Hong Kong Chief Loses Debate

June 18, 2010, 3:21 AM EDT

By Mark Lee and Frederik Balfour

June 18 (Bloomberg) -- Hong Kong Chief Executive Donald Tsang lost a televised debate with barrister and opposition leader Audrey Eu on plans to change the city’s electoral system, polls showed.

Tsang said the proposal to change the way Hong Kong elects lawmakers and the chief executive in 2012 would move the city along the path to full democracy, and accused Eu’s side of trying to stall the plan. “We’d rather stand still than take a step backward,” Eu replied.

Seventy-one percent of respondents in two university surveys said Eu won the debate, the South China Morning Post and Standard newspapers said. Forty-five percent of people polled by University of Hong Kong said they were “more opposed” to the government’s proposals after the debate, while 20 percent said they were more supportive, said the Post, which co-sponsored one survey. No margin of error was given.

Eu’s pro-democracy group argues the central government in Beijing’s package doesn’t go far enough to deliver democracy and is stacked in favor of business groups dominating the so-called functional constituencies that make up half the 60 seats in the Legislative Council. Tsang says opposition demands should be addressed after the plan goes through.

“It’s obvious Audrey was the better performer,” said Joseph Cheng, professor of political science at the City University of Hong Kong.

Still, the debate probably won’t make the government deliver changes to the proposal demanded by pro- democracy groups, he said.

Public Protest

“For a harmonious society you need a fair system,” Eu said during a speech at the Foreign Correspondents Club in Hong Kong today. “But functional constituencies are causing problems, they are the obstacle,” she said, describing them as an “anchor” weighing Hong Kong people down.

“The anchor is put there not by the Hong Kong people but by the central authorities with a string of broken promises as well as by people with vested interests.”

The debate is also unlikely to have won over any of the 23 legislators who vowed to block the proposals, and may have been aimed more at salvaging Tsang’s reputation with the central government in Beijing, Alan Leong, a lawmaker in Eu’s party said before the debate. The package needs a two-thirds majority to pass, unless China makes concessions.

LegCo is to vote June 23 on the proposal, which would see the number of lawmakers increased by 10. Five would be directly elected and five would represent functional constituencies. The number of Beijing appointees who elect the chief executive would be increased from 800 to 1,200.

Tung Chee-hwa

Tsang’s predecessor Tung Chee-hwa stepped down from his post in 2005, more than two years early, after a botched attempt to push through separate China-sponsored constitutional changes sparked street protests and a deadly virus harmed tourism.

Tsng’s own popularity has been slipping amid the wrangle over elections, polls show.

On June 4, about 113,000 people attended a candlelight vigil to mark the 21st anniversary of China’s crackdown on pro- democracy demonstrators in Tiananmen Square, the largest number since 1989 according to police estimates.

Several hundred people gathered in a park near yesterday’s debate, cheering for Eu and booing Tsang. Police had set up a visible security presence around nearby streets as a precaution.

Chinese President Hu Jintao in December told Tsang to “handle constitutional development issues properly to ensure social harmony.” Premier Wen Jiabao urged him to resolve “deep-rooted contradictions in Hong Kong.”

Two Systems

One of those contradictions is the “one country, two systems” formula struck when Britain handed the territory back to China in 1997. While Hong Kong has multiple political parties and more civil liberties than in mainland China, the timetable for greater democracy was set by the National People’s Congress Standing Committee in Beijing.

Eu is calling for universal suffrage in 2012, five years earlier than China’s plans for letting the public vote for the chief executive and eight years before planned direct elections of all LegCo members.

--With assistance from Marco Lui and Ben Richardson in Hong Kong. Editors: Ben Richardson, Dirk Beveridge

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