PP 7767/09/2011(028730)

Economic Highlights
Global
•MARKET DATELINE

21 March 2011

1 Group-7’s Intervention Will Likely Weaken The Japanese

Yen

2 Eurozone’s Exports Rose By 3.6% Mom In January

3 China Raised Reserve Requirement Ratio By Half A

Percentage Point

Tracking The World Economy…

Today’s Highlight

Group-7’s Intervention Will Likely Weaken The Japanese Yen

The Group of Seven (G7) agreed to jointly intervene in the foreign exchange market for the first time in more than a
decade on 18 March, after Japan’s currency surged that could worsen the Japanese economy struck by the 11 March
earthquake. The Japanese yen strengthened by 7.5% to as high as ¥76.59/US$ on 17 March, surpassing the previous
post-World War II high of ¥79.75/US$ reached in April 1995, from ¥82.33/US$ on 11 March. The yen appreciated on
speculation that investors will repatriate assets to fund the estimated ¥10 trn (US$120bn) of reconstruction and after
seeing the past experience where the yen surged by 20% in three months after the 1995 Kobe earthquake.

The yen, however, weakened back to ¥81.48/US$ on 18 March after the Bank of Japan (BOJ) began intervening in the
morning and following a concerted intervention by the European Central Bank, the US Federal Reserve, the Bank of
Canada and the Bank of England. G7 members had not entered the market together since September 2000, when they
sought to prop up the euro as it tumbled in its second year of existence. The US’s participation was its first since
September 2000, ending the longest period of US’s inaction in foreign-exchange markets since at least 1973. In the
aftermath of the collapse of Lehman Brothers Holdings Inc., the G7 also pledged to mount exceptional action to pump
in liquidity into the financial system to unfreeze money markets. The US Federal Reserve on 13 October 2008,
coordinated with counterparts to provide unlimited US dollar funds.

Historically, central banks’ intervention often has proved futile. This time around, however, it may succeed as the yen
selling was coordinated by central banks around the world. Furthermore, the BOJ has been flooding the Japanese financial
markets with excess money to help keep its economy stable. By printing more money, the BOJ is to some degree diluting
the value of existing yen.

Meanwhile, the battle to bring the troubled nuclear plant in Fukushima Daiichi under control has made some progress.
Tokyo Electric Power Co., the plant operator, said on 20 March that some reactors have been reconnected to the power
grid, greatly aiding its ability to reduce the possibility of overheating. In addition, radiation levels at the site have fallen,
while a pool of spent fuel that had generated worry from experts appeared to be immersed in water.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 21 March 2011

The Eurozone Economy

Exports Rose By 3.6% Mom In January

◆ Eurozone’s exports on a seasonally adjusted basis rose by 3.6% mom in January, rebounding from -0.2%
in December and compared with +0.4% in November, pointing to signs of an economic recovery in the region. This
suggests that Eurozone’s exporters might have relied on faster-growing markets such as China and Brazil to boost
export sales. As a result, the region’s manufacturing activities picked up in February, the fastest pace since June
2000. Indeed, reviving exports and faster output growth have driven the region’s economic expansion in recent
months, as budget cuts and the highest unemployment in more than 12 years prompted consumers to cut spending.
This prompted the European Central Bank to raise its growth forecast for 2011 to 1.7%, from 1.4%, before inching
up to +1.8% in 2012. Meanwhile, imports rose by 5.3% mom in January, rebounding from -0.9% in December and
compared with +4.8% in November, pointing to a strengthening domestic demand. As a result, the seasonally
adjusted trade balance went into a deficit of €3.3bn in January, larger than the deficit of €1.1bn recorded in December.

Asian Economy

China Raised Reserve Requirement Ratio By Half A Percentage Point

◆ China’s central bank has raised the reserve requirement ratio of banks on 18 March, by 0.5% pt, the
third increase in one year and lifting the ratio for most banks to 20%, in a move to rein in inflation. The increase,
which will be effective on 25 March, should lock-up around US$53bn or RMB350bn from the financial system that
would have otherwise been used to lend, resulting in a slowdown in money growth and subsequently dampen inflation.
Presently, China’s consumer prices held stable at 4.9% yoy in February, unchanged from January, but above its target
of 4.0% average for 2011. Its move to increase the reserve requirement, despite Japan’s disaster, signals that the
central bank views inflation as a bigger risk than an economic slowdown. Also, the tragedy in Japan will unlikely
have a significant impact on economic growth in other Asian countries. Thus far, the central bank has raised interest
rates three times and reserve requirement six times since October 2010, which will likely help to ease inflationary
pressure in the coming months.

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