|Author Name||Willem THORBECKE (Senior Fellow, RIETI)|
|Research Project||East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances|
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This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).
Macroeconomy and Low Birthrate/Aging Population (FY2016-FY2019)
East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances
The spot price for a barrel of West Texas Intermediate (WTI) crude oil rose from $11 at the end of 1998 to $140 in June 2008. It then fell to $42 in January 2009 as the Global Financial Crisis intensified. It recovered to $113 by April 2011, fell again to $33 in February 2016, and rose over $80 in May 2018. How do oil price swings affect East and Southeast Asian economies?
To investigate this, I examine how oil prices affect industry stock prices throughout the region. Economic theory implies that there is a strong link between economic activity and stock prices. Stock prices equal the expected present value of future net cash flows. Since these cash flows depend on real activity, there is a link between economic activity and stock prices. Industries that benefit from a fall in oil prices should see their stock prices rise and industries that are harmed should see their prices fall.
For Japan, the industries most exposed to oil price increases are electricity and utilities. Heavy construction and home construction are also exposed, reflecting the effect of oil prices on construction electricity and on the cost of using construction machinery. Many other individual sectors such as food, beverage, and retail are also exposed to oil price increases. This reflects the effect of higher oil prices on producing and transporting these goods and on the ability of consumers to spend on other items.
The oil and gas production and exploration sectors benefit the most from higher oil prices. The commercial vehicle sector benefits also, reflecting the increased demand for buses and public transportation when oil prices increase. Nonferrous metal stocks (e.g., gold and silver mining stocks) also increase due to a rise in oil price. This effect reflects the fact that an increase in oil prices raises inflation, and gold and silver mining stocks are a hedge against inflation. Industrial suppliers including petrochemical companies benefit as do a whole range of Japanese industrial groups that provide goods for sectors that benefit from oil price increases.
Oil prices changes could reflect changes in supply (e.g., due to increased shale production in the United States), changes in demand for commodities (e.g., due to an expansion in the world economy), or exogenous changes in oil prices. The paper decomposes the effect of oil prices on industry stock returns into those arising from changes in world oil supply, those arising from changes in global demand for commodities, and those not explained by either world supply of oil or global demand for commodities (i.e., exogenous changes in oil prices). As Figure 1 shows, exogenous changes in oil prices are especially important for explaining the reaction of Asian stocks to oil price changes. The results in the paper indicate that this is especially true for Japan, and that world demand for commodities has almost no effect on Japanese stocks. This makes sense because Japan is much more a maker of things (monozukuri) than a commodity producer. In addition, Japan has public and private strategic oil reserves that reduce concern about global oil supply.
For other Asian countries, the results indicate that oil price increases benefit mining, metals, and oil and gas, and harm airlines, utilities, and electricity. The Association of Southeast Asian Nations (ASEAN) countries could reduce the exposure of their electricity and utility industries to oil price fluctuations by increasing energy connectivity. Some countries (e.g., Myanmar and Cambodia) have the potential to export hydropower. Others (e.g., Indonesia and Thailand) use expensive gas, oil, and diesel to generate electricity. Trading across countries could reduce costs and promote decarbonization. Achieving energy integration though will require resolving issues of regulatory and price harmonization and countries' desire for energy self-sufficiency.
Integration will also require massive infrastructure investment. Public-private partnerships could be used to attract private funds into infrastructure investment. ASEAN policymakers at both the national and regional levels can help by affirming their commitment to reducing carbon emissions and maintaining stable policies. Many difficult issues remain concerning how to design appropriate incentives and attract sufficient capital to fund energy integration. Researchers and policymakers in ASEAN are focusing on resolving these issues.
For the People's Republic of China (PRC), the automobile industry is exposed to oil price increases. Producing more energy efficient cars in China would reduce this exposure. China has promoted electric vehicles (EVs) by requiring residents who want gasoline cars to participate in a lottery or pay up to 100,000 renminbi in an auction. Residents purchasing EVs face no such obstacles. Other Asian countries could learn from initiatives such as these.
The International Monetary Fund (IMF) posited that higher oil prices would roil equity markets and cause large gross domestic product (GDP) drops in oil-importing countries. The results of this research do not support this conclusion. Higher oil prices cause equity values to rise for some industries and fall for others. There is no evidence that they cause aggregate equity values to fall, and higher oil prices even cause aggregate equity prices to rise in Korea. Assuming that low oil prices will be a boon and high oil prices a bane for oil importing countries such as Japan and Korea is too simplistic. Thus, policymakers should adopt a nuanced and evidence-based perspective when considering how oil price changes affect their economies and how they should respond.