Japan Gets Shelter via China Trade
From a U.S. Slowdown
TOKYO — Japan's economy is so dependent on exports that the whole nation traditionally frets when anything threatens its overseas markets. Now, though, with the world economy under threat from a U.S. slowdown, Japan is less worried. That is because of the exceptional speed with which Japanese manufacturers have tapped into China.
If Japan does go into recession soon, many economists say, it will be because of serious domestic weaknesses rather than export dependency.
For a long time, the U.S. was Japan's biggest export market, and Japanese businesses are concerned about the possibility of a recession in the U.S. A one-percentage-point decline in U.S. personal consumption would, according to Goldman Sachs, lower Japan's GDP growth by 0.27 percentage point.
But the share of Japan's exports going to the U.S. fell to 20% in 2007, from 30% in 2001. Last year, China (including Hong Kong) overtook the U.S. as Japan's biggest export market.
Japan is the only G-7 nation to run a trade surplus with China, as it supplies industrial equipment and parts. China imports more from Japan than anywhere else, more than from the European Union and nearly twice as much as from the U.S. That means if China and other major export markets for Japan can avoid a major impact from a possible U.S. recession, Japan would be less vulnerable to a U.S. slowdown than would be the EU and developing economies, which tend to be far more exposed to the U.S.
"Japan's economy has developed some resistance to weaker economic conditions in the U.S.," Merrill Lynch economist Takuji Okubo said.
Japan still has big economic problems of its own making, from an uncompetitive service sector to a declining work force. Wages are stagnant because of long-term job shedding by major corporations and a shift toward lower-cost, part-time workers. Last year, after the government suddenly tightened regulations on buildings' earthquake resistance, house building declined sharply.
That cut into growth in the July-September quarter, when annualized growth was 1.5%, and it could have done so again last quarter, which economists expect to have been not much better. Goldman Sachs, in one of the more pessimistic assessments so far, has said that Japan might already have entered a recession.
However, it was referring to the Japanese government definition, which is based merely on a downturn in certain indicators, and does not require two quarters of contraction, the most commonly used definition in the U.S. The consensus view is for meager growth of some 1.5% in 2008.
The question now is just how vulnerable Japan's exports are to a U.S. slowdown.
Some of the components and materials Japan sends to the rest of Asia go into products that are later exported to the U.S., and some Japanese machinery and building equipment goes into factories that make these products. Manufacturers' output is expected to fall 0.4% in January and 2.2% in February, the government announced last week. Partly because of such "triangular trade," exporters have been hit particularly hard on the Tokyo stock market, whose key index is down 9% this year.
"A lot of Japanese exports to Asia are indirect exports to America," said Takashi Omori, economist at UBS Securities Japan. "The impact of the U.S. economy hasn't declined….Recession in the U.S. would lead to a lower forecast in Japan." Mr. Omori doesn't think Japan will go into recession.
But many of Japan's exports stay in China to be used in products such as auto parts and building materials, where the final demand is from the Chinese consumer or government infrastructure projects. Such exports, however, could be ultimately dependent on Chinese exports to the U.S. Even though most Japanese auto parts that go to China tend to stay there, some of the people who buy cars in China might be able to afford them just because they are earning money from exports to the U.S.
This kind of effect means economists find it impossible to figure out exactly how much of Japan's exports rely indirectly on American consumers.
Some economists point to evidence that such impact is far less than in the past. Macquarie Securities economist Richard Jerram says U.S. world-wide import growth has slowed sharply over the past half year but Japan's total exports still have been growing strongly. Exports to China and other destinations will likely continue to contribute to Japanese growth, Mr. Jerram said, "giving hope that the slowdown over the next six months might not be too severe."
China's economy has expanded by more than 11% for the past two years. Any hiccup in Chinese growth would affect Japan. So, too, could exchange rates. The Chinese yuan is pegged to the dollar, and the Japanese yen's recent rise (to 14.86 yen to the yuan from last year's low of 16.28 on June 23) makes Japanese products less competitive and diminishes the value of Japanese export revenue when it is repatriated to Japan. However, if China lets the yuan rise, that would make Japanese exports more competitive and lucrative.