Capital flows into US fall short of deficit, Japan turns to domestic demand

Brad Setser discusses capital flows into the US.

Strange trade numbers, strange TIC numbers
The trade deficit fell in March. So did the capital flows needed to sustain ongoing trade deficits. Net inflows of $45.7 billion a month are not enough to sustain even $55 billion monthly trade deficits, let alone $60 billion monthly deficits. I guess there was a reason why the euro was sort of strong in mid-March...

As long as the renminbi remains pegged to the US dollar, China at least will continue to be a source of capital.

The yen, though, may resume its strength against the US dollar after the Japanese government reported today that Japan's economy grew 1.3 percent in the January-March quarter, the fastest pace in a year. Strong domestic consumption and capital spending more than made up for slackening export growth. Private-sector consumption rose 1.2 percent while capital spending rose 2.0 percent in the quarter.

Improving employment and moderating deflation mean that Japan may yet be able to sustain economic growth through domestic demand despite weakening exports. Things appear less rosy elsewhere in Asia.

Singapore's Ministry of Trade and Industry today reported that the Singapore economy shrank by an annualised 5.5 percent in the first three months of this year, slightly smaller than the advance estimate of a 5.8 percent fall. The poor performance was due to weakness in manufacturing, which grew by 3.1 percent year-on-year in the first quarter, decelerating from 14.1 percent in the fourth quarter of 2004.

Meanwhile, South Korea's National Statistical Office reported today that the country's seasonally adjusted unemployment rate rose to 3.6 per cent in April, matching the highest rate since August 2004, and up from 3.5 per cent the previous month.

Japan's performance in the first quarter of 2005, however, will no doubt give countries like Singapore and South Korea some hope.