Dissecting Outlook Uncertainty In Asia
Whilst much attention is currently placed on uncertainty in the US and Europe it’s important to keep abreast of developments elsewhere. In Asia, uncertainty is increasing as political tensions grow and look set to continue to do so. Now, the potential for an extreme shift in US policy following Trump’s election is adding a new dimension to this uncertainty.
Chinese Political Uncertainty
In China, the room for political uncertainty is typically quite limited given the one-party rule, however, the twice a decade Communist Party Congress is approaching later next year and a significant change in leadership is on the cards. Around five of the seven members of the Political Standing Committee are due for retirement ad around half, or more of the 376 members of the Central Committee are also expected to be relied.
The world’s second largest economy continues to struggle with the dilemma of reforming its economy in the name of sustainability and longer term growth versus simply sustaining growth in the short term.
Japanese Monetary Policy Uncertainty
In Japan, political uncertainty is virtually a non-issue with the Abe administration in a solid position. However, the issue there lies with monetary policy. After abandoning short-term interest rate changes as their monetary policy target in 2013, the BOJ once again shifted their focus in September and are now targeting yield curve control aiming to maintain the 10Y JGB at 0%. The bank also declared that they would continue to purchase JGBs at around the existing pace of 80tn a year. However, given that the JGB is not a monopolist in the market, a price target and a purchase target are incompatible as a pair of goals.
Furthermore, should global long-term rates continue to rise then upward pressure on JGB yields is likely to increase also. In this situation, the BOJ would likely find itself needing to either significantly increase the rate of JGB purchases or raise the yield target. However, this would effectively market the start of a tightening of monetary policy though not brought about through an improvement in economic conditions. As such it is unclear how policymakers in Japan would deal with such a situation.
Korean Nuclear Tensions Escalate
Korean tensions have escalated recently, as North Korea have escalated their efforts to build a nuclear ballistic missile with US security experts judging that the country is now close to achieving its goal. Alongside these inter-Korean tensions, a political scandal in South Korea has now evolved into a full-blown political crisis. President Park consulted a long-time friend with no political mandate on important political initiatives. Consequently, allegations of influence peddling soon followed the meeting.
President Park’s reaction to the allegations was to propose a reshuffling of the cabinet. The President’s approval ratings have fallen to around 5%, a level not previously seen in Korean politics. Despite widespread protests, however, President Park has refused to resign.
Taiwanese Political Uncertainty Grows Following Leadership Shift
Tensions between Taiwan and the mainland have increased following the change in Taiwan’s leadership in May. The new leading party; The Democratic Party is significantly more focused on maintaining Taiwan’s status quo.
Consequently, there has been an intensification of cross straits tensions although yet no significant flash points have developed. However, progress on important bilateral agreement such as the Trade in Services Agreement have stalled, and there seems little prospect of resolving the standoff.
Death of Thailand’s Kind Increases Political Uncertainty
The political landscape has for some time been tense, even before the military coup In 2014. The core of the issue has been an increasing polarisation between urban and rural populations. The death of King Bhumibol in October has raised new questions about the cohesion of both Thailand’s society and political system. Even though the King’s political role was highly limited, he was still a person of considerable authority who could effectively mediate in conflicts. His son is not perceived to have the authority or moral integrity and as such represents a source of political uncertainty.
Trump Election Poses Threat To The Region
The election of Trump as US President has greatly increased uncertainty in the region. The extent to which Trump will pursue the isolationist policies he proposed during his campaign remains unclear. Trump voiced many opinions over during his campaign including Japan and South Korea not adequately sharing in the cost of US military deployments which could see US military presence in the region reduced unless addressed. Trump even suggested that Japan and South Korea should pursue independent nuclear capability. Whilst this event is unlikely to materialise, merely mentioning such situations amplifies uncertainty.
The presence of US military in Asia has been a key factor in promoting peace and stability in the region for decades. President Obama’s “pivot to Asia” was a key element of US foreign policy over the last eight years and was initially a reaction to the rising geopolitical and economic importance of Asia globally. Any reversal of the “pivot to Asia” would clearly create a power vacuum which China would likely seek to fill.
Markets will be watching the development of Trump’s Presidency closely to see if he pursues the extreme policies he proposed, if so, risk sentiment and domestic economies in the region are likely to be impacted negatively creating global volatility.