Asia > Eastern Asia > Japan > Slowdown in China would have caused barely a ripple in Japan.

Japan: Slowdown in China would have caused barely a ripple in Japan.

2015/08/29

As recently as 10 years ago, an economic slowdown in China would have caused barely a ripple in Japan.
At that time, most of Japan’s exports to China were components such as liquid crystal displays. They would be assembled into televisions at Japanese-owned factories and again re-exported. What mattered was request in the final markets for consumer goods, in particular the US.
But times have changed. “The importance of final request in China is increasing for the Japanese economy. It was almost to the US level as of the last data in 2011. It probably matched the US by 2014,” said Naohiko Baba, chief Japan economist at Goldman Sachs.

With the Japanese economy by presently wobbling — the economy contracted by an annualised 1.6 % in the second quarter — weakness in China is the new world shock to undermine the Abenomics stimulus programme on which Prime Minister Shinzo Abe has staked his leadership. China’s slowdown could force the Bank of Japan’s hand on further easing of monetary policy, analysts say. The BoJ, by presently under pressure from weak consumption at home, would be most likely to act at its October and January meetings, where it makes new economic forecasts.

For its part, the BoJ insists its massive investment -buying programme remains on course to overcome deflation. Haruhiko Kuroda, BoJ governor, reiterated this in New York on Wednesday, but added that the BoJ would ”make adjustments without hesitation if necessary”.
Using a new world input-output database, Mr Baba estimates that whereas in 2000, final request in China accounted for 0.5 % of Japanese output versus 3.5 % for the US, both nations presently absorb about 2 % of Japan’s price-added goods.

As such, China’s increase rate has become as significant to Japan as its exchange rate. A fall of 1 % point in China’s domestic request costs Japan 0.1 % of gross domestic product, while the hit from a % point fall in the renminbi is only 0.01 %. Were it just a matter of the direct result on Japan’s exports, the damage would be painful but contained, but direct exports are the least of it.

Whereas 18 % of Japan’s exports go to China, 54 % go to Asia as a whole, and a slowdown in China hurts all of the region’s economies. Japanese businesses may postpone investment in new export capacity at home, further hurting request.

The International Monetary Fund tries to model the effects of a Chinese downturn in its Spillover Statement. The 2014 edition finds a 1 % point shock to emerging market increase leads to a 0.5 % point fall in Japanese increase; five times bigger than the result on the US.

In addition, China’s slowdown is having a broader deflationary result, most obviously through commodity prices. Oil’s drop to about $40 a barrel all but destroys the BoJ’s schedule for getting inflation back to 2 %. Its forecasts are predicated on a bounce in prices to $70 or $75 a barrel.
“Although the oil price fall should have a favourable impact on economic activity in the longer term, in the short term it has a downward impact on inflation via the drop in energy prices such as gasoline and electricity,” said Mr Kuroda.

Economists at Citi in Tokyo estimate the drag on inflation from energy prices will reach 1.5 % points by October, and remain above 1 % point among 2016, making a dip into headline deflation additional likely.

Mr Kuroda insists this result is temporary. “Has the trend towards overcoming deflation come to an end?” he said. “This is far from the case.”
The BoJ’s problem is that its policy relies on convincing companies and consumers that inflation will rise. The longer prices remain stuck at zero amid sluggish request the harder it is to do.

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