Global Economic Research July 30, 2010

Oscar Sánchez
1 (416) 862-3174
oscar_sanchez@scotiacapital.com

• Japanese exports slow in second quarter while consumer spending prospects improved
• South Korea’s industrial output continues to pump ahead
• India recognizes need for more frequent monetary policy revisions after fourth rate increase
• Reserve Bank of New Zealand raises cash rate
• Taiwan’s manufacturing sector still expanding
• Sharp correction in Singaporean manufacturing

Japanese exports slow in second quarter while consumer spending prospects improved

Japanese exports slowed during the three months through June. Shipment volumes contracted slightly
(-0.1% q/q seasonally adjusted) in the second quarter after having expanded at an extraordinary 12%
q/q rate in the previous two quarters. Up to this point exports had been the key economic driver; how-
ever, yen-strength vis-à-vis the euro seems to be withdrawing the wings from Japan’s export sector.
The currency has appreciated by 18.5% year-to-date against the euro driving down the relative cost of
capital intensive manufacturing products coming out of Northern Europe. In tandem with the slowdown
in exports, Japanese industrial output decreased 1.5% m/m in June, after a 0.1% gain the previous
month. The fall in Japan’s production contrasts with reports from several companies that indicated im-
proved projections. Sony Co. and Panasonic Co., the world’s largest consumer-electronics makers, and
Honda Motor Co., the second-largest Japanese automobile maker, raised earnings forecasts after pub-
lication of second quarter results, signaling an enhanced profit outlook. Japanese vehicle output
reached 860 thousand units in June, 26% higher than the year earlier level, with all automakers in-
creasing monthly output. Year to date volumes reached 4.8 million in June. The downward correction in
exports and industrial output contrasted with an improved picture of the Japanese consumer as real
household spending rose 2.8% m/m in June after a 0.7% pickup in May; this is consistent with the pre-
viously reported 3.2% yearly rise in retail sales –the sixth consecutive rise– and a 0.1% q/q increase in
bank loan’s outstanding to individuals during the three months to June. An enhanced consumer spend-
ing picture comes on top of improving employment numbers which showed labour participation rates
rising again in June. Although the unemployment rate increased to 5.3% in the month, it still lies below
the 5.6% peak reached in July of 2009.

South Korea’s industrial output continues to pump ahead

South Korea’s industrial production rose for the 5th straight month in June. Manufacturing output in-
creased 1.4% m/m after a 2.7% May pickup. The country’s industrial output has displayed resilience
from global risks climbing 5% q/q in seasonally adjusted figures during the second quarter. Companies
like Samsung Electronics and Hyundai Motor Co. reported record earnings on the back of an economy
which grew 1.5% q/q in the second quarter. Merchandise exports have played a prominent role in the
recovery with overseas shipments continuing to rise at an over 30% yearly rate. Economic activity
gains have spilled to the job market as unemployment fell to 3.5% in June, from a 10-year 4.8% high in
January. The outlook for inflation has recently turned as consumer prices rose 2.7% y/y in May break-
ing the downward trend prevalent since the start of the year. The uptrend prompted the Bank of Korea
to raise the interest rate this month to 2.25%; in the same instance the central bank revised the coun-
try’s growth forecast for 2010 to 5.9%.

India recognizes need for more frequent monetary policy revisions after fourth rate increase

The Reserve Bank of India (RBI) is still in monetary tightening mode as it tries to manage expectations
to prevent inflation from running astray. The central bank announced this week a fourth round of inter-
est rate increases raising the repo and reverse repo rates by 25 basis points (bps) and 50 bps to 5.75%
and 4.5% respectively; so far in 2010 the benchmarks have been raised by 100 and 125 bps, respec-

Asia/Oceania Weekly Outlook is available on www.scotiabank.com and Bloomberg at SCOE

Global Economic Research
tively. As two of the tightening decisions have been
made inter-meeting, the RBI also recognized the need
to release monetary policy statements more often (every
six weeks, as opposed to once a quarter). India’s
closely watched wholesale price index jumped at a
10.5% y/y rate in June, up from a 10.1% in May. Fuel
cost increases decreed in late June have reignited pres-
sures notwithstanding the downward trend prevalent in
the food price group. In an implicit recognition of the
effect of the elimination of fuel subsidies on inflationary
trends, the central bank revised its forecast for inflation
to 6% from the original 5.5% for FY2011 (ending in
March).
Economic growth prospects are still encouraging, as the
RBI also boosted its expectation of GDP growth to 8.5%
GDP, up from the original 8%. Governor Duvvuri Sub-
barao recognized however that “capacity constraints are
visible in several sectors and demand-side inflationary
pressures need to be contained”. Domestic spending
gains have been providing a strong growth foundation,
with up trending price pressures in nonfood manufactur-
ing a testament of the healthy economic pulse. Food
price pressures are expected to continue to ease as a
result of an improved weather forecast for this year’s
monsoon season. Such a scenario would imply that
consumer spending, a laggard in the recovery, could
pickup in coming months complementing domestic de-
mand gains which have so far been propelled mainly by
investment. We continue to expect the Indian economy
to expand at an 8% rate in 2010 and 7% in 2011.
Reserve Bank of New Zealand raises cash rate
The Reserve bank of New Zealand decided to increase
the official cash rate for a second consecutive time by a
quarter point to 3%. Central bank governor Allan Bollard
stressed his expectation to gradually continue to remove
monetary stimulus. He pointed to the continuation of a
fragile world economic recovery with trading partner
growth turning out stronger than predicted leaving com-
modity prices at high levels. Led by a fall in dairy prod-
ucts and aluminum, the country’s export prices eased in
June from the previous month’s record high. Governor
Bollard suggested that the pace and extent of future
cash rate increases is likely to be more moderate. Infla-
tionary pressures remain contained, as the headline CPI
rose just 0.3% q/q in the three months through June and
is up 1.8% on a yearly basis. Although domestic de-
mand remains subdued, non-tradable price growth ac-
celerated once more in the second quarter. Retail sales
excluding motor vehicles and fuel declined for a second
consecutive month in May, with credit card spending
July 30, 2010
continuing to display gains through June supporting the
view that the household situation is not deteriorating.
The country’s unemployment rate fell for the first time in
over two years during the first quarter to 6%. Adding to
signs of growing labour demand, 13% of companies
surveyed last month said they expected to hire more
workers in the next six months, the highest reading
since February 2005.
Taiwan’s manufacturing sector still expanding
Taiwan’s industrial production rose for a 10th straight
month in June underpinned by persistent increases in
manufacturing output. Production of electronic parts and
computer equipment remained on an upward trend
through June grapping up double-digit quarterly gains.
Export orders have so far proved immune to slower mo-
mentum in Chinese economic growth and the loss in
competitiveness in the European market. In fact, June
shipment orders topped expectations once again as ex-
ternal demand for Taiwan’s electronic products grows
in advance of the start of the school year in September.
Chinese demand for computer chips and televisions
helped to stoke an over 13% expansion in the island’s
economy in the first quarter, the fastest pace in more
than three decades. The so-far prevalent strength in
exports and production has led to continuous gains in
labour market indicators, with the jobless rate falling for
nine straight months. The seasonally adjusted unem-
ployment rate reached 5.2% in June.
Sharp correction in Singaporean manufacturing
Industrial production data inked a 23.4% monthly de-
cline (seasonally adjusted) in June, with the yearly
growth rate slowing from 26.1% from 58.4% in May. The
vast part of the downward correction is explained by a
fall in the volatile pharmaceutical industry, whose output
recorded spectacular gains in previous months. Exclud-
ing this sector, production fell 1.8% on the month, which
followed a 0.1% contraction during May. There is there-
fore little doubt that manufacturing output ex-
pharmaceuticals has peaked, however, it did so above
pre global crisis levels. This prescribes the possibility of
persistent strength ahead particularly given current con-
ditions in similar export oriented south-east Asian mar-
kets like Taiwan and South Korea (please refer to previ-
ous note). Singapore recorded spectacular output gains
in the first and second quarter of 2010, at 11.5% q/q and
6.5% (not annualized) respectively.
2
 Global Economic Research July 30, 2010

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head

1 (416) 862-3876
pablo_breard@scotiacapital.com

Tuuli McCully
1 (416) 863-2859
tuuli_mccully@scotiacapital.com

Estela Ramírez
1 (416) 862-3199
estela_ramirez@scotiacapital.com

Oscar Sánchez
1 (416) 862-3174
oscar_sanchez@scotiacapital.com

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
sources believed reliable, neither the information nor the forecast shall
be taken as a representation for which The Bank of Nova Scotia or
Scotia Capital Inc. or any of their employees incur any responsibility.