Full Report - Subregional Office for East and North-East Asia - escap

MACROECONOMIC PERFORMANCE AND POLICY CHALLENGES AT THE SUBREGIONAL LEVEL CHAPTER 2
first time since 2008, as the one-year lending rate
declined by a quarter of a percentage point to 6.3%.
A month later, the rate was cut further to 6%. The
People’s Bank of China also reduced the reserve
requirement ratio twice and reaffirmed its commitment
to widen the use of the yuan currency in crossborder
trade and investment and to gradually push
ahead with capital account convertibility.
In June 2012,
China cut borrowing costs
for the first time since 2008
Japan’s monetary policy was by far the most
aggressive, with the Government pursuing a dual
goal of beating deflation and weakening the strong
yen through monetary easing. In the meantime,
the Bank of Japan reaffirmed its commitment to
encourage the uncollateralized overnight call rate
to remain in a range from 0 to 0.1%. The Bank
of Korea lowered the base rate by 50 basis points
to 2.75% in two steps, in July and October 2012.
In Mongolia, on the other hand, the policy rate on
the central bank’s bills was increased twice by 50
points, in March and April 2012, to 13.75%. The
draft monetary policy for 2013 that Mongolbank
introduced in October 2012 is aimed at keeping
inflation below 8% by the end of 2013. The Monetary
Policy Council was also established to ensure
financial stability, with a total of 12 members, 4 of
whom are from outside Mongolbank. For the first
time since late 2009, the Hong Kong Monetary
Authority stepped into the market to defend the
currency’s peg to the United States dollar, as the
Hong Kong dollar touched the stronger end of the
7.75-7.85 trading band.
Adequate fiscal space in most economies
provides the flexibility to consider
stimulus
Fiscal policy is also being used to revitalize
subregional economies. Since mid-April 2012, through
different policy announcements, the Government of
China implemented a series of supportive measures
to stabilize the country’s growth momentum. However,
the stimulus was smaller in size, had a
shorter timespan, put less emphasis on credit and
relied less on local government funding than that
of 2009. As was the case with the post-Lehman
Brothers stimulus package, the Chinese package
relied heavily on infrastructure spending. A difference
this time around was the greater focus of the new
package on energy-saving and innovation. In addition
to expansionary fiscal and monetary policies, the
approach has also entailed forms of regulatory
forbearance to encourage bank lending, although
the new schedule is still fully consistent with the
implementation of the capital adequacy reforms of
the Basel Committee on Banking Supervision.
In Japan, the quest to pull the country out of
its deflationary trend continued. In July 2012, the
Government released the draft of its “Comprehensive
Strategy for the Rebirth of Japan”, a medium- to
long-term growth strategy that would be in effect
through fiscal year 2020. Under the strategy, 38
policies in 11 fields are outlined that are aimed at
creating a new market centred on the environment,
which would be worth more than ¥50 trillion and
would create 1.4 million jobs. The Cabinet also
compiled a report on measures to stimulate demand
by retrofitting buildings and renovating dilapidated
infrastructure, including by promoting private finance
initiatives. In August 2012, the Diet, Japan’s
legislature, passed long-debated social security
and tax reform legislation, including an agreement
to double the consumption tax rate to 10% by
2015. Two supplementary stimulus packages of
limited size, earmarked for health-care, agricultural
and public works projects, were announced in the
fourth quarter of 2012. They will be funded by
the fiscal reserve fund, without incurring any new
debt issuance. Subsequently in January 2013, the
Government announced an additional and sizeable
stimulus package to lift the economy out of another
bout of recession. The new stimulus package will
be allocated towards post-disaster reconstruction
and social security, as well as measures to promote
private investment and revitalize industries.
75