8
causing worldwide market reverberations. Only recently, has there been consistent signs of
improvement. Of positive note, on November 11
th
the Japanese government proposed a
$172 billion stimulus package to spur private spending, nurture entrepreneurs and encourage
job creation. The Economic Planning Agency (EPA) chief Taichi Sakaiya said "the package
could boost Japan's gross domestic product by 2.5% over the next 12 months". The Japanese
economy has shown signs of a modest recovery from the country's worst recession since
World War II but private demand is still weak. This is Japan's second stimulus package this
year. Should Japan's economy continue to improve over the next year this will help the other
Asian economies as well as the US exporters.
On November 16
th
, 1999 the China signed an historic trade agreement that will further open
the market of 1.2 billion people to foreign competition. This agreement lays the groundwork
for China to be admitted to the World Trade Organization.
China will be required to grant access to foreign companies and tariffs will be cut dramatically.
U.S. banks will be able to enter the retail banking market where the Chinese savings rate is
estimated at 40%. This will end the monopoly on state owned banks. Telecommunications
companies such at AT&T will be able to buy into large stakes of Chinese companies. The
issue of dumping has been reasonably addressed.
This will open up huge opportunities for foreign trade. However, due to the unanticipated,
quick and large downturn in the U.S. economy this may have a strong ripple effect abroad.
The issue of the continued large U.S. trade deficit looms. The new administration is focusing
on more exports rather than restricting imports. The current account deficit soared to 113.8
billion in July/September period up from $105 billion during the prior period. The negative
scenario is that the deficit becomes so large that foreigners pull their money out of U.S.
financial markets, the dollar plummets and interest rates rise ending the current U.S.
expansion. A weaker dollar is a big help to exports but there are potential negative
ramifications. As long as the U.S. economy doesn't go into a recession, then this situation can
be positively worked through.
FEDERAL RESERVE SYSTEM "The Fed" ACTIONS AND POTENTIAL MOVES
On November 16
th
, 1999 the FED raised the federal funds rate by 25 basis points to 5.5%
which was fairly widely expected. This took back the three FED reductions when the Asian
crisis hit last year. The apparent FED policy was at that point has a neutral bias. This is for
a number of reasons - the Year 2000 and its potential unknown problems, the economy is
slowing down on its own and inflation is low.
However during the latter part of 1999 and early 2000 the FED saw inflation as a threat and
thus continued raising interest rates. There were signs of economic slowdown. At the last
FED meeting in December 2000, they announced a policy change from inflation protection
to one of recession protection. The market expected a rate reduction at that meeting. It did
not happen. Given current economic circumstances it seems inevitable that a rate reduction
