PP 7767/09/2010(025354)

Economic Highlights
Global
ïMARKET DATELINE

26 August 2010

1 Japan May Intervene To Curb The Sharp Rise In Yen

2 US New Home Sales Fell In July And Durable Goods New

Orders Rebounded Mom In July

3 Japan’s Exports Slowed Down In July

4 Thailand Raised Its Key Policy Rate For The second

Time To 1.75%

Tracking The World Economy...

Today’s Highlight

Japan May Intervene To Curb The Sharp Rise In Yen

Japan’s policymakers hinted on 25 August that they may intervene in the currency market for the first time in more than
six years to curb the surging yen and ease the already loose monetary policy. The sense of crisis is growing in Japan
after the US dollar, which was at as high as 95 yen in early May, sank to an intraday low of 83.58 yen on 24 August,
nearing its 1995 record low of 79.75 yen, before rebounding slightly. Japan policymakers fear the strong yen could hurt
the country’s export-reliant recovery and worsen deflation. Although currency intervention could help, the results had
not been satisfactory in the past especially if it is not a concerted effort by the major central banks in the world.

It is an irony that investors still prefer to buy the yen even though Japan’s economic fundamentals are not looking as
good as its counterparts such as the US or the Euroland. The most prominent among the reasons why investors prefer
to buy yen is that while it may not be the best investment in the world, it beats the alternatives, offering a relative safe
haven in a treacherous global economy. This might have prompted China to buy more Japanese bonds this year in a
move to diversify its huge foreign exchange reserves. Besides, its interest rates are already near zero, measures to
be introduced by policymakers, if any, are unlikely to cause a sharp plunge in the currency. Also, some yen buyers
argued that much of the government’s debt, equivalent to 200% of GDP, is in the “safe” hands of major Japanese banks
and corporations. The low, single-digit percentage of foreign holdings leads some to believe that the market is insulated
from a potential flight of foreign capital that could spark a run on the yen. By contrast, nearly half of the US Treasuries
are held by foreign investors. In addition, Japan has been able to generate a massive trade surplus over the years.
The repatriation of export proceeds by Japanese exporters will create a natural demand for the yen.

The US Economy

New Home Sales Fell In July

◆ US new home sales fell by 12.4% mom to at an annual pace of 276,000 units in July, after a brief rebound
to +12.1% in June and compared with -32.1% in May. The drop in new home sales to the lowest level on record
was yet another signal indicated that buyers have stayed away following the expiry of the government’s tax
incentive in April. Yoy, new home sales fell by a larger magnitude of 34.1% in July, compared with -21.1% in June.
This was the third consecutive month of decline, after turning around in March-April, pointing to a renewed weakness
in the housing. As a result, developers cut prices, which resulted in median prices of new homes falling by 6.0%

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 26 August 2010

mom in July, after a decline of 4.7% in June. Yoy, median prices of new homes fell by 4.8% in July, after easing
to +1.1% in June, pointing to a weakness in new home prices. Meanwhile, the supply of new homes for sales rose
to 9.1 months of stocks in July, from 8.0 months of stocks in June and compared with 9.2 months of stocks in May.

Durable Goods New Orders Rebounded Mom In July

◆ US durable goods new orders, items meant to last at least three years, rebounded to increase by 0.3%
mom in July, from -0.1% in June. This was the first increase in three months, boosted mainly by a surge in orders
for non-defence aircraft (which is lumpy and often volatile). Excluding transportation, durable goods new
orders contracted by 3.8% mom in July, after slowing down to +0.2% in June, suggesting that manufacturing
activities are likely to weaken in the months ahead. This was attributed to declines in new orders for
fabricated metals, machinery and electrical equipment, while new orders for computers & electronic products fell
by a larger magnitude during the month. These were, however, mitigated by a pick-up in new orders for primary
metals & vehicles and auto parts. Similarly, new orders for capital goods, excluding defence goods and aircraft,
contracted by 8.0% mom in July, after easing to +3.6% in June, suggesting that businesses have turned
cautious in spending. Yoy, total new orders for durable goods slowed down to 8.6% in July, the slowest increase
thus far this year and from +17.2% in June. New orders for capital goods, excluding defence goods and aircraft
also weakened to 11.1% yoy in July, from +18.9% in May. This was the third straight month of easing, suggesting
that business spending is losing momentum.

Asian Economies

Japan’s Exports Slowed Down In July

◆ Japan’s exports slowed down to 23.5% yoy in July, from +27.7% in June and a high of +45.3% in February.
This was the fifth straight month of slower growth and the slowest pace in seven months, as global demand for
Japan’s exports weakened. The slowdown was due to a slower increase in exports to Asia, which softened to 23.8%
yoy in July, the sixth straight month of slowing down and from +31.6% in June. Within the region, exports to China,
Japan’s biggest market, however, bounced back to 22.7% yoy in July, from +22.0% in June. Exports to the US
and Europe, which grew at a faster pace of 25.9% and 13.3% yoy respectively in July, compared with the
corresponding rates of +21.1% and +9.0% in June, also provided some cushion. Similarly, imports weakened to
15.7% yoy in July, from +26.1% in June and +33.6% in May, indicating that domestic demand is easing. As a
whole, a surge in yen to a 15-year high lately will likely worsen Japan’s exports, as global demand for its products
slows. Indeed, Japan’s currency has climbed against all of its 16 major counterparts in the past month on concern
that the global recovery will falter boosted demand for the yen as a refuge. Policymakers in Japan have failed
to formulate a response to the market volatility, with the Prime Minister only asking ministers to come up with fresh
proposals to support the economy after the economy slowed down to an annualised rate of just 0.4% in the 2Q,
the weakest pace in three quarters.

Thailand Raised Its Key Policy Rate For The second Time To 1.75%

◆ The Bank of Thailand increased the one-day bond repurchase rate by 25 basis points to 1.75% on 25
August, after its first increase in almost two years on 14 July. It signaled that it may boost interest rates
further after the economy overcame political unrest to grow more than estimated in the 2Q. Thailand’s economy
grew by 9.1% yoy in the 2Q, albeit at a slower pace, compared with +12.0% in the 1Q. Growth, however, came
in better than consensus forecast of +8.0%, as consumer spending and exports expanded at a faster pace despite
the political unrest in April and May. Going forward, the Bank of Thailand said that exports may ease in 2H 2010
amid signs of cooling demand in the global economy. Nevertheless, the economy is projected to expand by as
much as 7.5% this year, the strongest pace since 1995. Meanwhile, Thailand’s inflation accelerated to 3.4% yoy
in July, after climbing 3.3% in June. Core inflation, which excludes fresh food and fuel items, quickened to 1.2%
yoy in July. The central bank’s target is to keep the core-price gains at between 0.5% and 3%. “Inflationary
pressure remains low at present, but is expected to rise in 2011 in line with economic expansion and rising costs
of production”, the central bank said.

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