As most economies grapple with stubbornly elevated inflation globally, China recently reported a drop in its consumer price index (CPI). Its July CPI inflation fell by 0.3% year-on-year, thereby bringing its economy into deflation.

This triggered worries of another deflation crisis like Japan’s in the 90’s that may have rippling effects to the global economy.

Drivers of China’s deflation

China’s recent negative inflation growth was driven primarily by decreasing transportation and food costs, which account for 14.5% and 20% respectively of its Consumer Price Index (CPI). Easing energy commodities (and access to Russian oil) have translated to lower transportation costs while a recovery from African swine fever resulted in an oversupply of inventory in the world’s largest producer and consumer of pork.

It would be premature to call this trend deflationary since core CPI, which excludes volatile energy and food prices, still grew by 0.8%. But it cannot be denied that China’s recovery since the end of its lockdown has been disappointing.

It can be recalled how global investors were ecstatic when the Chinese Communist Party (CCP) announced the end of its Zero-COVID policy in December 2022. The world’s manufacturing hub back in operations meant more efficient supply chains, which would help reduce costs, especially in countries that were still dealing with elevated supply-side inflation.

Consumer spending was also expected to explode as Chinese citizens were finally free to leave their homes and travel. However, the country started to realize the consequences of its prolonged lockdown.

Multinational corporations already started to diversify their manufacturing plants in other Asian countries such as India and Vietnam, leading to declining Chinese exports and jobs. Exports fell by 14.50% year-on-year in July versus -12.40% the previous month. While unemployment decreased to 5.30% from its 6.20% high in 2022, an alarming 1 in 5 young adults (16 to 24 years old) in urban areas remains unemployed.

Private sector investment spending also remains depressed. New bank loans and aggregate financing, a broader measure of credit, were only at CNY 345.9 billion and CNY 528.2 billion respectively from a staggering CNY 3.05 trillion and CNY 4.22 trillion the previous month. The lack of demand for real estate threatens China’s property sector, whose companies have started to default on their bond payables.

To make matters worse, the US President Joe Biden advocated to limit investment into China’s technology sector, citing national security issues.

Japan: The Bubble Economy

China’s problems today were compared to those of neighboring Japan in the early 1990s. Labeled the “Japanese Economic Miracle,” the country quickly recovered from its loss in the Second World War to become a technological and industrial powerhouse. Japanese electronics and automobiles were high quality yet inexpensive, so much so that the United States, which accounted for 40% of Japan’s exports, was quickly incurring a trade deficit.

In 1985, the Plaza Accord was signed – an agreement that would allow foreign exchange intervention to devalue the US dollar and help reduce the US’ growing trade deficit. The USD/JPY exchange rate fell from a high of 200 to the 128-level by 1987. With the stronger yen threatening to make Japanese exports less competitive, the government and central bank cooperated to boost public spending and ease monetary policy to drive up domestic demand. From 1986 to 1987, the Bank of Japan (BOJ) cut its policy rate by 200 basis points (bps), from 5.50% to 2.50%.

Easy access to cheap capital resulted in a growing asset bubble that saw Japanese corporations and individuals alike speculating on real estate and the stock market. From January 1985 to December 1989, the Nikkei 225 Index grew by almost 237%. By this time, Japanese corporations were profiting more from trading and positive revaluations while their core businesses started to lose to foreign competitors. Increasing asset prices allowed borrowers to assign larger amounts of collateral which led to an unending cycle of even greater borrowing and spending.

Japan’s inflation jumped to 2.4% year-on-year by April 1989 from a full-year average of just 0.68% in 1988. In response, the BOJ started a series of rate hikes totaling 350 bps that brought its policy rate to 6% by August 1990.

The shift to monetary tightening caused the asset bubble to burst, with property and stock prices falling in the years that followed. Declining asset prices resulted in growing debt ratios and unattractive balance sheets, further exacerbating the sell off. The Nikkei 225 Index dropped 63% from December 1989 to August 1992.

Chart 1. Nikkei 225 Index vs. Japan Consumer Price Index (CPI) year-on-year 1985-1995

The crisis eradicated as much as USD 2 trillion in value and left the Japanese in debt. Households prioritized saving which forced businesses to slash prices on goods and services to generate sales. This resulted in consistent disinflation which turned into deflation when the consumer price index (CPI) entered negative territory in 1995. Wages remained stagnant and businesses were forced to lay off workers, with the unemployment rate hitting a high of 12%.

The 1990s is known in Japan as “The Lost Decade” but the country struggled with bouts of deflation and disinflation well into the 2010s. It took the supply chain disruptions of the COVID-19 pandemic for businesses to start raising prices and profit margins, without alienating consumers. This has translated to renewed optimism in the Nikkei 225, but the index remains 20% below its 1989 high.

China and Japan: Not quite the same

People are quick to compare China to Japan because of the latter’s decades of experience with deflation. Aside from being geographical neighbors, both countries were the manufacturing hubs of their time and attracted significant amounts of foreign investment.

They both went on building sprees and severely overestimated the demand for real estate. Like the Nikkei 225, the China Securities Index (CSI) 300 was also on the rise and even managed to peak in February 2021 amid the pandemic but has since sold off due to loss of investor confidence, especially in the country’s inflated property sector and contentious technology sector.

But that is where the similarities seem to end.

Chart 2. China Securities Index (CSI) 300 vs. China Consumer Price Index (CPI) year-on-year 2018-2023

China’s problems today were not the result of loose monetary policy like what happened to Japan. Its economy did not overheat but rather, the country’s restrictive lockdown engineered a self-induced slowdown. To stimulate the economy, the People’s Bank of China (PBOC) has already cut its 1-year medium term lending facility rate from 2.75% to 2.50%. Chinese officials have recently announced plans for further monetary easing and fiscal support, which are the most appropriate actions they can take to avoid a recession. More government support was also promised for the struggling property sector to prevent more defaults.

Only time will tell if the Chinese government’s policies would help the world’s second largest economy truly recover from its post-pandemic woes. Compared to other nation’s governments, the CCP has been known for taking immediate and decisive actions with little internal resistance.

Once one of the fastest growing economies in the 21st Century, China will have to learn the hard way how to get out of a slowdown so that it does not get compared to its neighbor. As long as the country can reclaim once more its competitive advantage as the world’s top manufacturing hub and pull its property sector together, it should be able to conquer the threat of deflation.

EARL ANDREW “EA” AGUIRRE is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a master’s in business administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

The month of July would turn out to be a repeat of June, starting with initial US dollar weakness followed by month-end recovery that helped the currency recoup some of its losses. The June non-farm payrolls (NFP) report underperformed for the first time since March 2022, posting 185,000 new jobs vs. 225,000 forecast.

The US Federal Reserve also released dovish statements that it was nearing the end of its tightening cycle and the US dollar sell-off intensified after June inflation came out at 3%. Relief would come for the US dollar after the United Kingdom (UK) and Eurozone posted their own lower inflation figures, and the US gross domestic product (GDP) for the 2nd quarter of 2023 grew by 2.4% vs. 1.8% forecast, adding to the possibility that the US economy can still stomach more rate hikes.

Since succeeding Felipe Medalla on July 3, 2023 as governor of the Bangko Sentral ng Pilipinas (BSP), Eli emphasized the agency’s inflation-targeting role, described it as “structurally hawkish.”

It was also a demanding time for him as he took charge of BSP while local inflation remains well above target and borrowing costs already at a near 16-year high. This was a clear challenge for the new BSP chief to bring inflation back within the central bank’s 2-4% target range.

‘Raise rates if necessary’

Since taking the helm, Remolona maintained a hawkish stance regarding the BSP’s monetary policy direction. Although local inflation sharply moderated in recent months, he continued to emphasize that the BSP stands “ready to raise [rates] if necessary,” as supply side pressures and second-round effects still posed upside risks to prices.

The BSP chief has cited elevated rice prices out of Vietnam and Thailand, El Niño, the recent typhoons, and wage and transport hikes as some of the current risks to inflation—the same factors that have prompted the upward revisions in the BSP’s inflation forecasts in the recent MB Meeting.

Remolona also echoed the BSP’s view that local inflation will likely go back to within target by the fourth quarter of the year (and then likely reach below 2% in early 2024). He consistently affirmed that it would be a bigger mistake to reverse a premature easing, thereby making the case for a “prudent pause” for three consecutive meetings.

Battle vs inflation isn’t over

A notable change in the BSP’s rhetoric however, is how the current chief has cautioned against declaring that the battle against inflation has been won—contrary to previous pronouncements that the BSP “has done enough”.

Guidance on future interest rate decisions has also shifted from centering on the timing of rate cuts—counting months that inflation would likely be within target—to softening expectations that a pivot is forthcoming. Reiterating that it is “too early” to talk about cuts, Remolona also underscores that the BSP is “structurally hawkish”.

More recently, he also noted that the Philippine economy can tolerate a policy rate of as much as 6.8%, a level that will not impede growth, albeit 50 bps higher than the current level. We attribute this change in tone to a pick-up in inflation expectations given the aforementioned risks. As already emphasized by Remolona on different occasions, the BSP has maintained a hawkish bias for its primary mandate of promoting price stability through inflation targeting. This means that the BSP will tend to keep rates higher for longer, for its main purpose of moderating inflation back to target. This is in contrast with the US Federal Reserve, whose dual mandate includes maximum employment, apart from stable inflation.

When Metrobank compared the lengths of the Fed’s and the BSP’s most recent tightening cycles, we found that the Fed kept rates steady by an average of 11 months between the last hike and the first cut. Meanwhile, the BSP tended to pause for a longer period, 13 months on average, from the last hike to the first cut.

On policy rate guidance

When Remolona held his first Monetary Board meeting as BSP governor last August 17, he aligned his remarks with his previous statements during his first month in office, affirming that inflation will determine the central bank’s policy direction. Governor Remolona signaled that the monetary board sees no easing at least in the next meeting on September 21, and that the current policy rate is still low enough to not hurt growth.

While price pressures have significantly tempered, Metrobank expects the BSP to be vigilant on the upside risks to inflation mentioned earlier. These factors will be a major consideration for the BSP to keep interest rates higher for longer. Thus, we think the BSP will maintain current monetary policy settings until yearend to manage inflation expectations and the volatility of the USD/PHP exchange rate.

PATTY MEMBREBE and GERALDINE WAMBANGCO are Financial Markets Analysts at Metrobank – Institutional Investors Coverage Division. Patty, who is under the Market Strategy and Advisory Section, communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. Meanwhile, Geraldine provides research and investment insights to high-net-worth clients.

WHAT HAPPENED LAST WEEK

Good buying and selling interest was seen for the most part of last week as selling activity brought about by US yields trading at fresh multi-decade highs was met by opportunistic buying interest from players looking to load up on longer-tenor bonds.

Proceeds from the recent Retail Treasury Bond (RTB) 10-4 maturity, which freed up around PHP 140 billion of liquidity, also played a part in the persistent buying seen mostly in short- to medium-term bonds.

The Bureau of the Treasury (BTr) fully awarded the auction for Fixed Rate Treasury Note (FXTN) 10-71 and set the coupon of the new 10-year benchmark at 6.625%, or just in line with market expectations. Given the relatively decent auction participation, which garnered around PHP 66 billion of total tenders, spill-over demand was seen in the comparable 9-year FXTN 10-69 near the 6.48-6.55% area from those who were priced out of the auction.

Later in the week, the Bangko Sentral ng Pilipinas (BSP) held the key policy rate at 6.25%, as widely expected by the market. It also revised upward its 2023 inflation forecast from 5.4% to 5.60% and ruled out the possibility of a rate cut a

The Philippine economy posted a more muted growth of 4.3% year-on-year in the second quarter of 2023, lower than the previous quarter’s 6.4% growth and market expectations of 6.0%. This downward trend was driven by the contraction in government and investment spending, and moderating consumption spending.

Meanwhile, inflation has shown a continued slowdown in the latest July print of 4.7%. We expect this trend to persist in the succeeding months sans supply shocks. However, we also recognize looming upside risks emerging from higher rice prices which may feed into the headline inflation by yearend and until the following year.

The central bank governor recently noted that the recent economic growth performance is an indication of a broad-based slowdown in domestic demand and that the impacts of the monetary policy tightening are already manifesting in the economy.

Thus, the monetary board deemed it appropriate to keep the interest rate unchanged to allow for further moderation in inflation. The BSP further anticipates inflation to fall within its target by the 4th quarter of 2023, consistent with our view.

Lastly, hawkish signals from the US Fed amid still-stubborn inflation in the US has strengthened the dollar and led the USD/PHP exchange rate to breach the PHP 56 level. Nevertheless, the BSP remains undeterred and supportive of a market-determined exchange rate, focusing on its primary mandate.

Considering these developments, we have revised our full year GDP growth forecast for 2023 to 5.5% (from 6.0%), our full year inflation forecast to 5.6% (from 5.8%) for 2023 and to 4.6% (from 4.3%) for 2024, and our overnight policy rate forecast to 6.25% (from 6.0%) for 2023 and to 5.25% (from 5.0%) for 2024. See table below:

What can you do to boost your investment portfolio right now?

Just buy long-term peso bonds and select global emerging market sovereign bonds. You may also begin to slowly add stocks, in preparation for strong economic growth and robust earnings.

“We expect peso bond yields to fall as Philippine inflation cools sharply and as bond supply risk continues to ease,” said Ruben Zamora, Metrobank Chief Markets Strategist, during a webinar titled “2023 Mid-Year Economic Briefing: Opportunities amid growth headwinds” for high net worth clients.

“We believe that now is the time to lock in higher yields as the peak will likely be reached within the next few months, especially if the BSP decides to cut policy rates,” he added.

He explained that the government will need to issue less and less debt securities or bonds over the next few years as the fiscal deficit levels recede. Aside from that, the government’s 2023 borrowings are already well covered.

“As for sovereign bonds, we continue to see good value in Saudi Arabia, Oman, and long-dated ROPs (Philippine government bonds),” said Zamora. (More on emerging market sovereign bonds in our

Among many things one can collect, fine art is one of those that definitely requires constant dedication, large amounts of investments, and wide spaces for storage.

Whether it comes in the form of paintings, sketches, sculptures, or landscapes, art encapsulates one’s expression or creativity. Aside from its aesthetic beauty, art has the power to communicate and inspire individuals, regardless of when a piece was created and displayed. Such characteristics make pieces of art worth collecting and preserving.

Today, art investments continue to widen its range. Artworks by old masters, from art funds, and creations from up-and-coming artists are among those worth investing in.

Note that art collecting is not for the newbie nor is it for the faint of heart. It is a high-maintenance activity and requires good amount of knowledge of art history and of the artists and their techniques. For the purpose of investing, collecting doesn’t end in making a deal with a seller, purchasing the piece, and having it transferred to your own space. After the collecting comes the handling, storing, and insuring of pieces, all of which make investing in artworks expensive.

Considering the weight and responsibility of collecting art, how should one begin? Here are some suggestions:

Examples of masterpieces from Italian Renaissance artist Leonardo da Vinci. Photo by Alex Villafania

Setting up clear goals is the first step. Before fully investing in art, investors should think about what they want to get out of these investments, or whether are they more interested in collecting art than making a profit.

Getting a professional art consultant is probably a prudent step. Art consultants are deeply embedded in the art community and can advise clients on how they can proceed with their art collecting and investing goals. They can help in identifying the type of aesthetics, quality, and investment value of specific pieces and the artists who created them. Art consultants also ensure that clients are protected from purchasing fake or worthless pieces.

You can also seek the assistance of other experts, such as artists, art dealers, and even owners of collections, to have a clearer understanding of what it is you are aiming for.

Once the goal is decided with the art consultant, conducting research to determine the kind of art you want to invest in is the next step. The world of art is broad; it can range from vintage paintings, classical art, Renaissance masterpieces, modern sculptures and installations, and even digital art. All these have different values to different people so it is best to align your goals with what you want to buy.

After researching, it is critical to determine the budget or the spending limit. Budget is also crucial when making art investments, since it must be clear how much you are willing to pay. Factor in as well how much you will spend for the handling and long-term maintenance of all the pieces.

Know your space requirements and time horizons. Art pieces must have a home to be cared for, regardless of them coming from legends of the classical era or from budding modern artists. Not all art pieces can survive the test of time. Some pieces may need more space and even air conditioning to remain pristine. How long you will hold such pieces will be a huge factor in how much you will spend to care for them.

Security must also be included in your art investing plans. Like any investment, preventing theft through secure access must be ensured. Artworks can also be damaged or destroyed, either accidentally or intentionally, which means additional cost on your end.

It is important to make sure your decision is an informed one. Make sure you have fully assessed whether the artwork is investment grade and if the specific piece of artwork brings you joy and satisfaction. Money can’t buy those two, but at the very least they should be the immediate fruit of any well-thought investment.

Your latest gas expense or your latest monthly electricity bill shows just how prices have gone up. Even when doing grocery runs or eating out in restaurants, you will notice a change in your total bill.

As we have written previously (check our articles on inflation here and here), prices have gone up due to supply chain disruptions in food and energy commodities caused by sanctions and countersanctions in the ongoing conflict between Russia and Ukraine, combined with high demand.

Thus, cost-push inflation has been driving inflation in the Philippines and around the world. Because the country is a major net importer, and because of the limited global supply, we are, in a way, importing high inflation. This has caused Philippine inflation to reach 6.1% in June 2022, the highest since October 2018.

Apart from this obvious supply-side issue, did you know that a depreciating peso can impact inflation? The US Federal Reserve has aggressively tightened monetary policy by raising interest rates to quell rising prices.

Higher US interest rates mean that investors will move their money from peso-denominated assets to dollar-denominated assets. As investors get rid of their pesos in favor of dollars, the peso therefore weakens, making imports more expensive and thereby worsening inflation.

This can be seen in the graphs below, where the soaring global energy prices represented by Brent crude from June 2021 to June 2022 were further aggravated by peso depreciation. Note that there was a 64% increase in the price of Brent crude (in USD/barrel) from June 2021 to June 2022.

There was a 64% jump in the price of oil year-on-year mainly as a result of geopolitical tensions.

On top of this, more pesos were also needed to buy a barrel of said commodity in June 2022, and we can see that this peso depreciation further contributed to inflation, as evidenced in the graph below.

In addition to the 64% increase in global brent crude prices, a weakening of the peso from PHP 48.54 in June 2021 to PHP 55.02 in June 2022 contributed an additional 22% climb in brent crude prices. The total upsurge in prices of said oil commodity in the Philippines reached 86% in June 2022.

The peso depreciation exacerbated the oil price increase.

Policy actions

The BSP also needed to eventually raise policy rates to stabilize prices and the exchange rate. Doing nothing meant the possibility of capital flight due to higher rates of return for US investments (further noting that US investments are preferred than those of the Philippines as the former is seen as a “safe haven”), and dollars would leave the Philippines, thereby depreciating the peso even more.

A recent case in point would be BSP’s off-cycle policy rate hike of 75 basis points (bps) to curb inflation and support the peso amid fears of more aggressive US Fed rate hikes in the face of a continuing US inflation surge.

In essence, we can expect more rate hikes from the BSP to manage inflation and, consequently, lend support to the peso for as long as global inflation continues to escalate and the US maintains its hawkish policy stance.

This was emphasized by the Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla in the Post-SONA Economic Briefing on July 26, 2022, where he signaled further hikes in the coming months.

To sum it up, the ongoing supply-side inflationary pressures have prompted the Fed to hike interest rates, resulting in a weaker peso, which in turn worsens our domestic inflation woes as imports become more expensive. This has triggered the BSP to hike policy rates as well to temper capital outflow, slow down inflation, and prevent the peso from falling further.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

In addition, you also need to assess your own personal liquidity situation. Will you be needing your money over the next year as you plan to make a huge purchase? Will you need you money in the next few years? In general, for funds you will need in a year, it should be limited to time deposit. Funds that will be needed in the next three years should be limited to bonds, and any excess cash that will not be needed in the foreseeable future should be invested in either equities or real estate.

The problem with most investors is that they tend to stick to the asset class they are familiar with only. In some cases, most investments are lumped in Time Deposits and Bond only which, as mentioned above, hardly beats inflation. In other cases investments are limited to local currency investments only. A good mix of safe and risky investments will ensure that a portfolio can reach your desired goals.

For new and inexperienced investors, we suggest investing in a healthy mix of collective investment schemes like UITFs or mutual funds for starters. As they get more investment savvy, they can start investing on their own or hire experienced asset managers to run their investment portfolio.

Speak to the experts and continue to learn. Understand in what scenarios each asset class performs well in, who are the major players in that investment market and how do they think, the technical aspects of the investments particularly valuation (whether it’s cheap or expensive). Let the experts manage your personal investments. Hire an asset manager for this purpose as they have the skill, expertise, resources, and infrastructure to make sound investments.

At the end of the day, investing gives us an opportunity to further grow our hard-earned money to prepare us for the future.

LEANDRO ANTONIO “DONDI” SANTILLAN is Senior Vice-President and Head of the Metrobank Trust Banking Group. He sets the overall direction for the trust banking business in terms of profitability, performance, and industry ranking.

This opinion article is part of Metrobank’s Financial Education campaign series.

This article was first published on BusinessWorld.

For us, the state of “health” of our families is as important as the weather-proof portfolios that we build for them. In order to ensure the family’s well-being over time, these are some things that the first generation can reflect on:

1. How are the children being prepared to handle bigger responsibilities?
2. Are succession lines clear and defined?
3. How will the perpetuation of the family legacy be ensured?
4. Is there a STEWARDSHIP mindset in the family, or just consumption?
5. Is there an effective conflict resolution process in place?

At Metrobank, we encourage clients to think about both Family Management & Portfolio Management because each family is unique and there is no one-size-fits-all solution for a successful wealth transfer strategy in the pursuit of a happy nest.

LIZETTE PEREZ is Head of the Private Wealth Division of Metrobank and has over 20 years experience in Private Banking. She is a B.S. Business Economics graduate of the University of the Philippines and earned her master’s degree in Economics at the University of Southern California.

This opinion article is part of Metrobank’s Financial Education campaign series.

This article was first published on BusinessWorld.