Five Megatrends for Asia in 2007

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The problem: Wholesale and consumer price inflation has shifted into the 5%-plus range, which is above the central bank's comfort zone and Reddy has publicly stated that economic overheating is a now a worry. Indian salaries in service and manufacturing jobs rose about 14% this year, the highest in Asia according to a survey by the human resources firm Hewitt Associates. And it forecasts 2007 salary advances in the 12% to 15% range. That has some economists calling for another interest rate hike of 50 basis points early in 2007 to prevent inflation from really running off the rails.

Trouble is, Prime Minister Manmohan Singh's government is pressing for Chinese-style growth rates of 10% or more to help alleviate India's still considerable poverty problem, particularly in rural areas of the country. New Delhi plans to spend $20 billion-plus on infrastructure projects in the fiscal year that started in April.

When to pull the trigger on the next rate hike will be a very tough call and will test the market credibility of the central bank. The instinct to want to keep the economy in high gear is understandable, but the kind of lost purchasing power that rapidly rising prices can usher in can create political headaches, too.

Japanese Constitution: Time for a Rethink?

Constitutional reform usually elicits yawns. Not so in a Japan that has become far more assertive in its foreign and national security policy. Japanese Prime Minister Shinzo Abe has called for passage of legislation that would set the stage for changing important aspects of the country's constitution, which was basically written by U.S. Occupation authorities in Japan.

Abe thinks its time for Japan to trade in its low-key, postwar foreign policy (and guilt from its military past in Asia) for a bolder, more assertive posture in world affairs. That may mean playing a more direct role in international military clashes and hot spots, something now very difficult thanks to the Japanese constitution's war-renouncing Article 9.

Will Abe succeed? Japanese public opinion has grown more hawkish thanks to the provocations of North Korea on the nuclear weapons development front. Some officials from Abe's ruling Liberal Democratic Party have noted that the current constitution doesn't rule out Japan developing its own nuclear weapons, though the country currently has no intention of doing so.

Japan likely won't go nuclear anytime soon, but it is jointly developing and deploying high-tech anti-missile systems on some of its naval assets. For Abe, getting a national referendum passed and Diet approval likely will be a tough, multiyear effort. However, he seems serious about making this his most important goal as prime minister.

Living With a Descending Dollar

The Thai market crash turned out to be a short-term phenomenon—but the underlying cause behind it is anything but. The big decline of the dollar vs. the Thai baht and Korean won is starting to cause economic pain in some Asian economies. That's why Thai Finance Minister Pridiyathorn Devakula felt it necessary to slap on foreign currency controls to save the country's export-dependent economy.

They were quickly reversed for the most part. Yet both the Thais and the South Koreans are calling for international pressure to keep the dollar stable. After all, the U.S. is by far the region's most critical export market. Still, these countries might also put some pressure on Asia's two biggest economies: Japan and China.

Beijing monetary authorities carefully manage the yuan's trading range against a basket of foreign currencies. Japan, meanwhile, has intervened heavily in the past to prevent the yen from appreciating too rapidly vs. the dollar. All this is putting the big squeeze on middling Asia economies that don't have the monetary clout to keep their currencies stable. These tensions are bound to increase in 2007.

Toyota's No. 1! Who Cares?

Sure, Toyota (TM) will probably overtake General Motors (GM) as the world's biggest automaker by sales—and Asian auto companies such as Nissan (NSANY), Honda (HMC), and Mazda (MZDAF) will continue to make market share grabs in the U.S.

But here's a prediction: Though there will be hand-wringing in the business press and in Washington about U.S. industrial decline, ultimately this story will turn out to be a non-event. Most U.S. car buyers really don't care that much about which company produces their car, just as long as it is the product of quality engineering and design.

Also, most foreign carmakers, and certainly Toyota, have invested huge sums in U.S. plant capacity and provide well-paying manufacturing jobs all across the U.S. So there is little incentive for U.S. lawmakers, especially in states where Asia transplant factories have been located, to make a fuss. Like it or not, what's good for Toyota is now good for the U.S.

Bremner is Asia Regional Editor for BusinessWeek in Hong Kong.