Over a decade Chinese import composition from Japan changed from only intermediate goods to adding final consumer goods. China became one of the key contributors to Japanese exports; not only this, other small countries exporting mainly to China is also an important export destination for Japan. In this situation a slowdown in China now could create Shock Waves across Japan.
In China, post 2009 financial crisis, credit enhancement was kicked in to shield the export oriented economy from external shocks. However, the economy faced issues of massive supply of unsold houses due to cheap loan, excess capacity in the industrial sector, and asset quality, erosion in China’s banking sector having high exposure to the corporate sector. Authorities, at this juncture felt the need to rebalance the economy with high “investment to GDP ratio” to an economy with high “consumption to GDP” ratio or in other words, making it more domestic oriented. But it is a long term process.
Why it is affecting Japanese Economy and what are probable outcome?
Japan manufactured parts and components that are exported to China for the production of final goods. In other words, its value-added exports to the world often pass through China. As a result, China’s slowdown has had a noticeable effect on Japan’s export performance.
A comparison of Trade statistics over the years in terms of dollar value reveals that Japanese exports to China has fallen vs that of 2010. The Japanese trade deficit with China is gradually widened after the financial crisis until 2013. In 2015 also total trade registered double digit fall. The fall is mainly driven by the decline in Japanese exports to China.
Japan-China Trade Statistics
Some sectors, like steel, car parts, electronic equipment (including heavy electrical) and industrial & construction machinery, are falling more steeply.
Sluggishness in Chinese Industrial Production, Real Estate Investment control and dwindling Fixed Asset Investment impacted export from Japan to China. With the shifting of concentration Japan, which once provided “raw materials & machines” for Chinese economic expansion, landed itself in a disadvantageous position.
China is Japan’s second largest trading partner after the United States, a slowdown, there is bound to impact Japan. Indirectly also Japan is linked with China as Japan’s exports a substantial chunk to the Association of Southeast Asian Nations (ASEAN), which has substantial trade transactions with China.
Of late, the impact of Chinese devaluation and market movement also can be seen in Financial Market of Japan; though, historically, we don’t find very high co-relation between Japanese Financial Market asset classes and Chinese currency devaluation.
A Chinese devaluation which makes exports of the country competitive in the world arena, often leads to a severe blow to the Japanese economy through “price effect”, as Japanese imports become dearer and home (Chinese) exports become cheaper.
A decline in Yuan leads to appreciation in the Yen as demand for safe heaven asset increases, which lead to increased bond prices and yen appreciation. This subsequently leads to decline in Japan share prices as it viewed to affect country’s export performance. A weaker Yuan is also seen as eroding purchasing power of Chinese consumer which subsequently sends shock waves to Japanese retail and commodity sector. An example, may be cited from Aug’15 and Dec’15 Chinese devaluations.
A Chinese devaluation which makes export of the country competitive in the world arena,often lead to a severe blow to Japanese economy through “price effect”, as Japanese imports become dearer and home (Chinese) exports become cheaper.A decline in Yuan leads to appreciation in Yen as demand for safe heaven asset increases which lead to increased bond prices and yen appreciation. This subsequently leads to decline in Japan share prices as it viewed to affect country’s export performance. A weaker Yuan is also seen as eroding purchasing power of Chinese consumer which subsequently sends shock waves to Japanese retail and commodity sector.
Example may be cited from Aug’15 and Dec’15 Chinese devaluations, Of course China is not the sole offender for Japanese slowdown, Japan has its own economic woes as its population is aging and shrinking, its public debt stands at around 230% of its GDP! But a slowing / rebalancing, China does pose a threat to Japan’s economic revival as the two economies are intricately related. Not only is this, on political front China-Japan relationship is seen as toxic over their territorial dispute in the East China Sea.
Having said that, what is India story? Can India Become Next China to Japan?
Hence Japan might be focusing on hiving off excessive China Dependence. During mid-80s China economic makeover story contributed imports of equipment/materials from Japan. In 2011 Indian Govt, has estimated investment requirement for urban infrastructure over the 20-year period (2012-31) at over USD 650 billion with operation and maintenance cost at over USD 330 billion. The total urban infrastructure requirement works out to about USD 1 trillion. This implies the requirement of huge Capital, know-how, equipment & machinery etc., for India.
Further, the second most populous country of the world with approximately 18% of the world’s population which is poised to surpass China by 2050 offers an alternative to Japan for its retail sales/exports, but low per capita income is challenge.
Japanese companies are gradually moving out of China, the main reason seems to be rising labour cost apart from strained diplomatic ties with the country. With lower labour costs in India, it is one of the options where Japanese companies can relocate provided “ease of doing business” in India improves further. Of late, the Japanese companies are shifting their operation to other ASEAN countries.
Japan-India Trade Relation
The current partnership with Japan, prospects and future course of action includes high speed rail project, a rapid transit system etc. Japanese private-sector’s interest in India is rising, and, currently, about 1,209 Japanese companies have branches in India. Trade with Japan is increasing.
The Japan-India Comprehensive Economic Partnership Agreement (CEPA) is estimated to eliminate about 94% of the tariffs between Japan and India within 10 years. Further, Japan and India Vision 2025 stresses on improving the relationship. Going ahead, though India may not completely pose as an alternative to China, the potential for significant economic cooperation between Japan and India is immense.
Dipanwita Dutta is an economist with Punjab National Bank having more 10 years of experience. She has Master degrees in Economics and Business Administration & a Certified Associate of Indian Institute of Bankers ...
