Sunday, January 24, 2016

Japan's Strong Economic Link To China

Japan And China Economies Linked!
As the year began Japan's political and economic leadership announced a new resolve to further stoke consumer prices. This could fuel expectations of yet more monetary stimulus. A Reuters article titled, "Japan Leadership Pledges Bolder Steps To Hit Price Growth Target" reiterated the statement recently made by Haruhiko Kuroda, the Bank of Japan Governor stated, "We will do whatever it takes, and I want to strongly say we will absolutely meet our 2 percent price target."  While this again confirms their intent and policy it does not constitute a real change.

For years the Japanese government has made every effort to halt the deflation Japan has suffered from since the late 1990s following a property bubble that burst earlier in the decade. Still, recent comments indicate the resolve to halt deflation remains strong. With the recent fall in oil prices, their efforts should be very interesting to watch. Abe contends whether inflation accelerates depends on major capital expenditure and wage growth as he continues his efforts to pursue companies to invest more to sustain a virtuous cycle of consumption and growth. Japan's core consumer inflation was 0.1 percent in the year to November, rising for the first time in three months. A separate BOJ index that excludes oil and fresh food, but includes processed food prices, showed consumer prices rose 1.2 percent in the year to November.

Japan's industrial production continues to struggle and final data from the Ministry of Economy, Trade, and Industry showed it dropped again in November. The inventory ratio advanced 3.1 percent versus 2.9 percent increase estimated previously. At the same time, capacity utilization dropped marginally 0.1 percent in November, reversing a 1.3 percent rise in the prior month. Year-on-year, utilization slid 2.6 percent. The tertiary industry activity index dropped 0.8 percent in November from October, when it climbed 0.7 percent. On a yearly basis, growth in tertiary activity slowed slightly to 1.3 percent. Slice and dice the data as you want, but three years after Abe swept to power pledging to revive the economy with his "Abenomics" stimulus policies growth appears dead in the water.

As for the few positive signs of recovery for Japan’s slumping economy, foreign tourism remains a ray of hope. Tourism authorities, local governments, industry players as well as retailers are eagerly awaiting another possibly record-breaking surge in Chinese tourists due to the weak yen, but a tourism boom alone won’t bail Japan out of its economic plight. This means the BOJ may again be forced to lower its consumer price forecasts which many see as a precursor to the argument that extra stimulus is needed to prevent the price trend from worsening. Up until now all the massive pump priming by the government and monetary stimulus by the central bank have failed to meet the goals of reflating the economy or generating growth. Now it seems bad news flowing out of China is about to further undermine Japan's hopes for growth.

Chinese Protest Highlights Distrust 
A matter that might not be garnering enough attention or has been discounted is how the economic problems that continue to develop in China will spill over and affect Japan. The Japanese economy is very vulnerable to a negative feedback loop that could have strong ramifications on its economy. Even with a strong distrust possibly a dislike between the people and cultures years ago the two countries have joined together in an effort to maximize profiting from exporting to America. Throughout the 1980s the Japanese economy grew rapidly and appeared to be poised to surpass the United States. Then as the Japanese economy tanked into its lost decades, with the help of American investment China in stark contrast went forward in what seemed like an unstoppable economic rise. Over the years the interdependence has intensified, China and Japan have become major trading partners.

Japanese direct investments surged and Japanese technology played a critical role in the development and competitiveness of China’s global supply chains. A strong link exists between China and Japan because over the years Japanese businesses have made a major investment in China. It is clear China has exploited this relationship to learn the advanced industrial skills and production techniques of its neighbor. At call centers in China, young workers speaking flawless Japanese answer customer service calls for a Japanese insurance company. In western Japan, a new commercial Chinatown is rising in Kobe City's rebuilt port area. Instead of the gaudy restaurants in old Chinatown, the new area contains nondescript office buildings that are leased to Chinese companies focusing on everything including biotechnology. In part, it has been this increased trade with China that has bolstered the Japanese economy while cheap imports from China have driven costs down significantly for Japan's long-suffering consumers. Ironically, this has also played into the deflation factor.

While the mutual benefits derived from economic interdependence would seem to indicate all is well, but this is far from the case. Currently, Asia is the manufacturing hub of the world and it is clear as China devalues its currency all the other countries in the region will follow suit in order not to jeopardize their competitiveness. A slew of active disputes exists over territory, over blaming each other for a history of transgressions, as well as suspicions related to future military goals. This tight relationship is apparent each time trouble surfaces in China the yen jumps in value as wealth in a stealth move flees China often through business back-channels. This should not be misinterpreted as the yen strengthening, but rather a temporary bump before the wealth moves on to an even safer place. The question remains as to how well the two countries will continue to fare as economic stress and pressures build. Expect problems as each country tries to keep their economic boat afloat.

Footnote; July 22. 3016 An article appeared in the Nikkei Asian Review describing how Japan and China are locking horns over a high-speed rail link slated to connect Singapore and Malaysia in 2026 after Beijing beat out Japanese competition for a similar contract in Indonesia last year. the link is below.


  1. Nice, but your picture of an "Anti-Chinese Protest In Japan" is in fact a picture of rioters in China. There are no anti-Chinese riots in Japan. There have never been any anti-Chinese riots in Japan in recent history.

    This is important because people such as Kyle Bass perpetuate the myth that the Chinese and Japanese hate each other equally. This sort of basic misunderstanding undermines otherwise sound economic analyses. If one doesn't understand the people, how can he make forecasts regarding their economy and politics?

  2. Thanks, I should have caught that. The caption under the picture has been changed from "Anti-Chinese Protest In Japan" to "Chinese Protest Highlight Distrust."