Taiwan and World Economy Jack Wu Department of Public Finance National Chengchi University jackwu@nccu.edu.tw

Taiwan’s major economic partners China USA EU Japan

Current Taiwan’s Economic Crises No Pay Holiday and Rising Unemployment Rate Slow wage growth and out-migration of white collar Difficulty in industrial upgrading

World Economy USA economy is impacted by QE policy, as well as fiscal crisis Euro zone was impacted by European bond crisis Japan is affected by Abenomics

What is QE? Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money in order to inject a pre-determined quantity of money into the economy.

What are Conventional Monetary Policies? Open Market Operation: Buy or sell short-term government bonds Reduce or increase Discount Rate Reduce or increase bank reserve requirement

Problem faced by Conventional Monetary Policy When short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates.

QE as an alternative way Quantitative easing is used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thereby lowering longer-term interest rates These financial assets include US treasury securities, mortgage-backed securities, and federal agency securities.

QE1~QE4 by FOMC QE1 QE2 QE3 QE4 period March~October 2009 November 2010~June 2011 September 2012 December 2012 US Treasuries 299.9 Billion 772.7 Billion 45 Billion /month Federal Agency debt 105.7 Billion -32.6 Billion Mortgage-backed Securities 707.5 Billion -147.5 Billion 40 Billion/per month 40 Billion Total outright holdings 1113.1 Billion 592.7 Billion

Impacts of QE Policy on USA Raises Monetary Base Lower Interest Rate Increase inflation rate Beneficial to housing market and stock market Increases the capital outflow US dollar depreciates

What is Fiscal Cliff? The fiscal cliff is a term referring to the effect of a number of laws which (if unchanged) could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013. The budget deficit is expected to be reduced by roughly half in 2013. That sharp reduction is the cliff. It will reduce federal spending by $103 billion and increase tax revenues by $399 billion.

The Laws Leading to Fiscal Cliff Tax increases due to the expiration of the Bush tax cuts (2010) and its extended acts Spending cuts under the Budget Control Act of 2011, among others. The Budget Control Act of 2011 was enacted due to the failure of the 111th Congress to pass a Federal Budget and therefore as a compromise to resolve a dispute concerning the public debt ceiling.

Extended Acts of Bush Tax Cut Dec. 2010: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. The Act extended the Bush tax cuts for additional two years. (e.g. patch the exemption to Alternative Minimum Tax; reduce the social security payroll tax by 2%) Beginning of 2012: Middle Class Tax Relief, and Job Creation Act. The Act extended the Bush tax cuts for an additional year.

Content of Budget Control Act The Budget Control Act included an immediate increase in the debt ceiling. It also provided for automatic spending cuts to begin on January 2, 2013 if the government fails to decrease the deficit by $1.2 trillion over ten years. The US government appears on the path to hit the $16.394 trillion federal borrowing limit sometime in January 2013.

Debt Ceiling

Impacts of Fiscal Cliff on USA The Congressional Budget Office (CBO) estimates the sudden reduction will probably lead to a recession (-0.5% GDP growth rate) in early 2013 with the pace of economic activity picking up after 2013.

What is European Sovereign Debt Crisis? Euro Zone Crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties.

Causes the globalization of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; the 2007–2012 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 2008–2012 global recession; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders

PIGS Portugal Italy (Ireland) Greece Spain

Examples Ireland's banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts. Iceland's banking system grew enormously, creating debts to global investors. In Greece, the government increased its commitments to public workers in the form of extremely generous wage and pension benefits, with the former doubling in real terms over 10 years

Public Debt

Debt Ratio

Bond Interest Rate

Bank Crisis German Bank French Bank British Bank Italy Bank European Bank Greece 34 57 14 4 136 Italy 162 393 66 784 Portugal 37 27 24 195 Spain 182 141 107 30 632 Ireland 118 135 378

Impact of Euro Zone Crisis on Euro Zone Debt Ratio GDP growth Unemployment Greece 143 -4.5% 12.6% (12%) Italy 119 1.3% 8.4% (10.9%) Belgium 97 2.2% 8.3%(8.5%) Ireland 96 -1% 13.7%(5.6%) Portugal 93 11% (4.5%) Germany 83 3.6% 7.1% (8.2%) France 82 1.5% 9.7% (10.4%) Spain 60 -0.1% 20.1% (12.5%)

Impact of Euro Zone Crisis on Euro Zone 2010 2011 2012 2013 G20 2.9 1.5 2.2 USA 3.0 1.7 1.8 2.5 Euro 1.6 0.3 Japan 4.0 -0.5 2.1 China 10.4 9.3 8.6 9.5

Abenomics Abenomics refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan. Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms.

Contents of Abenomics Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act. Fiscal spending will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.

Impacts of Abenomics on Japan Abenomics had immediate effects on various financial markets in Japan. By February 2013, the Abenomics policy led to a dramatic weakening of the Japanese yen and a 22% rise in the TOPIX stock market index. The unemployment rate in Japan fell from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, continuing a past trend.

Impacts of Abenomics on Japan 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28 percent expected to see a pay raise, and nearly 70% were considering cutting back spending following the increase in the consumption tax. Abenomics worsened Japan's trade deficit in 2013 as the weaker yen increased the cost of imports, including food, oil and other natural resources upon which Japan is highly reliant. However, the Abe government viewed this as a temporary setback, as the weaker yen would eventually increase export volumes.

Impact of QE Policy on Taiwan Buy federal securities from Taiwan: US dollar depreciates and New Taiwanese Dollars appreciates => Taiwan’s export is hurt. US capital outflows to Taiwan => NTD appreciation, Inflation, stock bubble, real estate bubble If QE policy raises the US GDP growth rate, then Taiwan’s export is beneficial. Impact of QE policy on Taiwan via China

Impact of Fiscal Cliff on Taiwan A recession in USA due to fiscal cliff would lower Taiwan’s export. The tax increase would increase the US capital outflow to Taiwan => NTD appreciation, Inflation, stock bubble, real estate bubble Taiwan reduces the holding of US government bonds Impact of fiscal cliff on Taiwan via China

Impact of Euro Zone Crisis on Taiwan Little impact on banking sector A recession in Euro zone has a negative impact on Taiwan’s export Capital shifts from Euro zone to Taiwan => NTD appreciation, inflation, stock bubble, real estate bubble. Impact of Euro zone crisis on Taiwan via China

Impact of Abenomics on Taiwan Depreciation of Japanese Yen negatively impacts Taiwan’s export. However, depreciation of Japanese Yen helps Taiwan’s import from Japan.