Daily Management Review

China's Economic Doom Looms Large Over The Long-Awaited Recovery Of Japan


China's Economic Doom Looms Large Over The Long-Awaited Recovery Of Japan
Tokyo's decision-makers fear that China's deteriorating economic conditions could harm Japan's shaky recovery, particularly if Beijing fails to stimulate demand in a major way, thereby postponing the end of ultra-loose monetary policy.
Japan's export-dependent economy would receive little external help from China's slump as the Federal Reserve's aggressive interest rate increases temper growth in the United States, another important global activity driver.
According to five sources familiar with the Bank of Japan's thinking, the risks from China will be among the main topics of discussion at the September policy meeting. These risks create new concerns about Governor Kazuo Ueda's efforts to wean the economy off the significant monetary stimulus of the previous ten years.
"What's happening in China is worrying and could deal a huge blow to Japan's economy," said one of the sources, who spoke on condition of anonymity due to the sensitivity of the matter.
"A downturn in China may diminish the chance of Japan achieving sustained wage growth," which is a crucial condition for phasing out monetary stimulus, another source said.
The government also included "concern over China's outlook" as one of the dangers to Japan's recovery in its monthly economic report for August, reflecting increased pessimism regarding China.
"China is over," a senior Japanese government official told Reuters on condition of anonymity because of sensitivity of the issue. "I think China will never return to 5% growth."
After taking action in July to make its ultra-loose policy sustainable, the BOJ is largely anticipated to maintain current monetary policy at its meeting on September 21–22.
The risks for Japan are significant, despite the fact that many Japanese policymakers anticipate China to avoid a hard landing due in part to Beijing's recent assistance measures.
With 20% of Japan's exports going to China, it has surpassed the United States as the country's top trading partner since 2020. In the first half of this year, exports to China decreased by 8.6% as weak demand for automobiles, steel, and electronics.
Fears of a protracted slowdown in Asia's two largest economies, which together account for nearly a fifth of global gross domestic product, are fueled by economists' estimates that China's downturn might reduce Japan's annual growth by 1-2 percentage points.
The appeal of China as a centre of production for Japanese businesses is waning as well; several have already scaled back their exposure there.
One of them was Komatsu Ltd. Hiroyuki Ogawa, the chief executive of the world's No. 2 manufacturer of construction machinery, informed the media this week that certain operations had been moved out of China.
According to Ogawa, Komatsu would "reduce production capacity in a way to match actual demand in China" going forward.
There may also be a role for diplomatic tensions.
Takeshi Niinami, the chief executive of Suntory Holdings, issued a warning that the "extremely difficult" economic situation in China may be influencing the growing backlash against Japan over the release of treated Fukushima water into the ocean.
These tensions between the two countries might also dampen prospects for a surge in Chinese tourists, postponing a comprehensive rebound in Japan's service industry.
The threats from China make it more difficult for the BOJ to reduce its control over bond yields, a crucial component of its monetary policy intended to sustainably boost stagnant consumer demand.
"Exports to China had already been weak and headwinds to inbound tourism are clearly bad for Japan's economy," said Toru Suehiro, chief economist at Daiwa Securities. "All in all, it's hard to justify tightening monetary policy any time soon."
Core inflation in Japan reached 3.1% in July, above the BOJ's 2% target for a record 16 consecutive months. This year, businesses also pledged salary increases not seen in the previous three decades, strengthening the argument for turning back from years of ultra-loose monetary policy.
Governor Ueda has emphasised the need to wait until local demand and wage growth take over import costs as the primary driver of consumer inflation, despite some BOJ members beginning to make suggestions of a near-term policy shift.
The date of a BOJ policy change could be delayed due to the deteriorating prognosis for Japan's recovery.
Falling demand in foreign markets like China may hurt manufacturers' profitability and deter them from raising salaries, which is necessary for gradually ending monetary assistance.Toyoaki Nakamura, a member of the BOJ board, expressed alarm last month about China's high unemployment rate and declining investment.
Analysts predict that Japan's economy would develop less quickly than it did in April through June, slowing down in the current quarter and raising concerns about the possibility of a wage and inflation spiral.
Japan's household expenditure fell by the most in over 2-and-a-half years in July, a warning that increasing inflation is already having an impact on consumption.
"China's recent weakness alone won't be enough for the BOJ to alter its optimistic projection on external demand," said former top BOJ economist Seisaku Kameda, now an economist at a think tank affiliated with Japan's Sompo Holdings.
"But China's weakness certainly heightens the hurdle for Japan to sustainably achieve 2% inflation, which is a quite ambitious goal in the first place."