Preface 4
Sustainability of AxJ’s Export-dependent Model Questioned 5
Outlook For Exports, the Key Anchor to the Growth Cycle, Looks Challenging 6
AxJ's External Demand Depends on Credit-driven Consumption Growth Led By the US 8
Challenging Times Ahead for AxJ’s Export Machine as the US Consumer Deleverages 9
If Exports are Likely to be Weak, What About Domestic Demand? A Large Part of Fixed Investments in AxJ – Also Influenced
by External Demand 11
Weak Exports Reflected in Manufacturing Capex Cycle Too 12
AxJ's Manufacturing Capex: Trough May Not Be As Deep As in the Asian Crisis But Recovery Could Lack Vigour 13
Time to Reshape the Export Growth Model 14
The Current Savings – Investments Imbalance is Unsustainable 15
Boosting Domestic Demand Gains Maximum Importance Now 16
Initial Measures From Policy Makers Will Only Provide Cyclical Boost To Domestic Demand 18
Cyclical Boost to Domestic Demand: Through Government Spending 19
Key Fiscal Measures in AxJ 20
Cyclical Boost to Domestic Demand: Loose Monetary Policy 21
Loose Monetary and Fiscal Policy: Supporting Private Consumption and Residential Investments 22
Sustainable Rise in Domestic Demand is Key 23
Sustainable Boost to Domestic Demand is Critical 24
Domestic Demand Reflation is a Process, Not a Push Button Event 25
Structural Challenges to Increasing Domestic Demand in AxJ 27
I. Rise in Savings Since Early 2000s: Largely in Corporate Balance Sheets Not Households 28
II. Social Security Support Still Lacking 29
III. Low Public Health Care Spending: Most Countries in Region Face This Challenge 30
IV. Education Spending: Higher Costs for Quality Secondary and Tertiary Level Education 31
V. Low Household Wealth in Emerging Asia 32
VI. Financial Liberalization: Household Debt to GDP Still Low in Emerging Asia 33
VII. Will AxJ's Policy Makers Allow Currency Appreciation For Rebalancing? 34
VIII. Weak Investment Environment in Some Countries 35
Japan Experience in 1980s to Boost Domestic Demand – Some Lessons: Mind the Side Effect on Asset Prices 36
Restructuring Export Growth Model Not Easy: Learning From Japan’s Experience 37
Loose Monetary Policy Did Support Revival in Domestic Demand in the Mid-1980s 38
Attempts to Bolster Growth (Domestic Demand) Led to Asset Bubble in the Late 1980s 39
Has Japan Really Rebalanced in the Past Two Decades Since the Asset Bubble Burst? 40
Aggressive Policy Response Will Be Key; Policy Makers Taking First Steps in the Right Direction 41
Policy Makers Have Taken A Few Steps 42
Bottom Line: The Road to Rebalancing Will Be Long and Bumpy 43