Unbalance

I do not think interest rate increases are likely to have a major impact on constraining inflation. I know this sounds heretical, but in order to argue that raising rates will reduce price pressure, we have to explain the transmission mechanism. In the US, raising interest rates tends to reduce household wealth (which is mostly in the form of stocks, bonds and real estate) and raise the cost of consumer financing. Both of those things put downward pressure on household demand and so on inflation. But it doesn’t work this way in China. There is almost no consumer financing, and since most Chinese savings are in the form of bank deposits, raising rates actually makes Chinese households feel richer, not poorer. So how exactly is raising rates going to reduce inflationary pressure – might it not actually increase it? … In real terms [interest rates] have declined pretty strongly over the past several months … And of course this process of lower real rates has worsened the domestic imbalance because an even lower cost of capital is both increasing the extent of capital misallocation in China and increasing the necessary transfers from the household sector (who are, of course, net savers) to keep this investment viable.
 

Based on what we know at this time, we conclude that the earthquake and tsunami will act as a sharp drag on Japanese GDP growth in the near-term, but bring a boost medium-term as consumer durables are replaced and reconstruction work begins. At this stage, our expectation is that we will have to revise our 2011 [Japan] GDP growth forecast of 2% up, and not down. Japan’s most important trading partners (Australia, China) will see both the most important near-term drag, and the largest medium-term benefit … Turning to the nuclear element of the crisis, we see no silver lining. This is the main source of uncertainty and also the element most likely to cause permanent damage both directly in terms of power supply and indirectly in terms of both business and consumer confidence. As the world searches for sustainable, secure, clean and affordable energy, nuclear energy has seen a revival. The IEA projects that nuclear energy’s share of world energy will jump from around 6% today to 8% by 2035, and thus play an important role in filling the 36% jump in global energy demand seen over the next 35 years. At this stage it is too soon to evaluate how the earthquake may impact the use of nuclear power. This is, however, the potentially most lasting effect.