Tuesday, April 19, 2016

Japan exports, imports fall; Intel to cut 12,000 jobs; The problem with negative interest rates

1 Japan exports, imports fall (San Francisco Chronicle) Japan's exports fell for a sixth straight month in March, sapped by weak shipments of machinery and chemicals, though a sharper decline in imports helped push the trade surplus to its highest level in more than five years.

Customs data showed exports fell 6.8 percent from a year earlier to 6.46 trillion yen ($59.2 billion) while imports sank 14.9 percent to 5.7 trillion yen ($52.2 billion). "The resulting balance of 754 billion yen ($6.9 billion) was the highest since October 2010.

Imports of coal, oil, food and machinery dropped. The change was exaggerated by a recent 10 percent surge in the yen's value against the US dollar, to about 109 yen. That makes import costs lower in yen terms. Japan also is importing more, lower cost food items from China, while reducing imports of US-produced soybeans, meats and grains.

Slack global demand and the slowdown in China, Japan's second-biggest export market after the US, have dragged on exports, slowing the recovery. The slower growth in China has also hit other Asian markets, hurting Japan's exports to other countries in the region. Recent improvements in the global outlook will likely lift exports in coming months, economists say.

2 Intel to cut 12,000 jobs (BBC) US tech giant Intel is shedding 12,000 jobs as it seeks to cut reliance on the declining personal computer market. The maker of computer chips will take a $1.2bn charge to cover restructuring costs. The job cuts, about 11% of Intel's workforce, will be made over the next 12 months.

Intel said it wants to "accelerate evolution from a PC company to one that powers the cloud and billions of smart, connected computing devices". The world's largest computer chipmaker also lowered its revenue forecast for the year. The California-based company has been focusing on its higher-margin data centre business as it looks to reduce its dependence on the slowing PC market.

Global personal computer shipments fell 11.5% in the first quarter, research firm IDC said. The cuts were "not a surprise," said NPD analyst Stephen Baker. "For everybody who has made their bed in old tech, trying to lie in it is pretty uncomfortable right now."

3 The problem with negative interest rates (Joseph Stiglitz in The Guardian) An underlying problem that has plagued the global economy is lack of global aggregate demand. It should have been apparent that most central banks’ pre-crisis models were badly wrong. They continued to use the old discredited models, perhaps slightly modified. In these models, the interest rate is the key policy tool, to be dialed up and down to ensure good economic performance. If a positive interest rate doesn’t suffice, then a negative interest rate should do the trick.

It hasn’t. In many economies – including Europe and the US – real (inflation-adjusted) interest rates have been negative, sometimes as much as -2%. And yet, as real interest rates have fallen, business investment has stagnated.

Clearly, the idea that large corporations precisely calculate the interest rate at which they are willing to undertake investment is absurd. More realistically, large corporations are sitting on hundreds of billions of dollars – indeed, trillions if aggregated across the advanced economies – because they already have too much capacity. Why build more simply because the interest rate has moved down a little?

The small and medium-size enterprises (SMEs) that are willing to borrow couldn’t get access to credit before the ECB went negative, and they can’t now. Simply put, most firms – and especially SMEs – can’t borrow easily at the T-bill rate. They don’t borrow on capital markets. They borrow from banks. And there is a large difference (spread) between the interest rates the banks set and the T-bill rate.

It may come as a shock to non-economists, but banks play no role in the standard economic model that monetary policymakers have used for the last couple of decades. Of course, if there were no banks, there would be no central banks, either.

A decrease in the real interest rate will make little or no difference. Negative interest rates hurt banks’ balance sheets, with the “wealth effect” on banks overwhelming the small increase in incentives to lend. Unless policymakers are careful, lending rates could increase and credit availability decline.

There are three further problems. First, low interest rates encourage firms to invest in more capital-intensive technologies, resulting in demand for labour falling in the longer term, even as unemployment declines in the short term. Second, older people who depend on interest income, hurt further, cut their consumption. Third, the search for yield implies that many investors will shift their portfolios toward riskier assets, exposing the economy to greater financial instability.

What central banks should be doing is focusing on the flow of credit, which means restoring and maintaining local banks’ ability and willingness to lend to SMEs. Instead, throughout the world, central banks have focused on the systemically significant banks, the financial institutions whose excessive risk taking and abusive practices caused the 2008 crisis.

Of course, even in the best of circumstances, monetary policy’s ability to restore a slumping economy to full employment may be limited. But relying on the wrong model prevents central bankers from contributing what they can – and may even make a bad situation worse.

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