Japan - The Chinese Connection

The news that China is now the world's number one exporter to Japan has provoked considerable commentary inside Japan. From calls for a revaluation of the Chinese Yuan to recognition that the economic futures of the two countries are now inextricably linked. In particular proponents of the latter view draw attention to the fact that demand from China allowed Japan to increase its trade surplus in 2002, for the first time in four years. Among the factors that have caused the value of Japanese imports from China to rise for four straight years since 1999 is the trend among Japanese manufacturers to shift production to China to take advantage of cheap labor and resources or, to put this another way, to increasingly rely on Chinese outsourcing. And while Chinese products grab an ever greater share of global markets, as their economy shrinks under the impact of deflation Japanese products are gradually losing theirs. Japan in 2001 supplied the United States with 11 percent of its imports, down 1.4 percentage points from the year before. Over the same period, its share of South Korea's import total fell 0.9 point to 18.9 percent.

Some see a threat, others opportunity. But all agree-China can't be ignored. Already in Japan, made-in-China goods are everywhere, accounting for 18.3 percent in value of all imported goods last year. At one major supermarket chain, a full third of all imports come from China, having replaced the United States as the top source five years ago. A company executive said technical assistance from Japanese trading houses helps ensure the quality of the cheap Chinese products. The phenomenon affects all industries. Machinery accounted for 33.5 percent of total import value from China last year. Computer imports from China grew 81.7 percent in 2002 from the previous year, while semiconductor imports grew 21.5 percent.

Masaki Yabuuchi of the Japan External Trade Organization said Chinese manufacturers have become more competitive ever since a strengthening yen drove Japanese manufacturing to their shores in the latter half of the 1990s. Japanese direct investment in China surged in 1995, when the yen appreciated to 79 against the U.S. dollar, he said. The result was a massive increase in manufacturing capacity. One Japanese firm taking advantage of that capacity is NEC Corp. The company plans by March to import about 1.2 million Chinese-made personal computers, or 70 percent of its consumer PC sales for the fiscal year. By fiscal 2004, the electronics giant intends to raise that figure to 85 percent.
Source: Asahi Shimbun
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The constant inflow of Chinese products whose low prices reflect China's cheap labor and other manufacturing costs may intensify Japan's deflation problem. To cope with rising imports from China, government officials intend to seek a revaluation of the Chinese currency. Japanese calls for such a move may draw international attention. According to a preliminary report on the nation's trade in 2002 released by the Finance Ministry on Monday, imports from China rose 9.9 percent from a year earlier to 7.72 trillion yen, surpassing those from the United States at 7.22 trillion yen. Such sharp rises in imports of cheap Chinese products have provoked some observers to voice strong concerns, saying inflows of cheap Chinese goods may exacerbate deflation. Although China has enjoyed high growth rates, its inflation rate has remained almost zero. In addition, the value of the Chinese yuan is "too low compared with the currency's actual capacity," said a senior Finance Ministry official. If China's exports continue to rise, this would be tantamount to China exporting deflation to other countries, the official added. At a meeting of finance ministers and central bank governors of the Group of Seven leading industrialized nations, to be held in Paris next month, the ministry intends to place the value of the yuan at the top of the agenda, as calls mount for a concerted effort to see off the growing threat of deflation in the world economy.
Source: Daily Yomiuri
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Preoccupation Grows at Japan Government Debt


Judging by the historic low yields on Japanese government bonds (JGBs), the deflation that has racked the country's economy for almost four years is set to continue indefinitely. In interest rate terms it seems more a question of 'how low can you go'?

Expectations of a sustainable recovery are clearly nowhere in sight: the yield on the benchmark 10-year JGB on Tuesday fell to an intra-day low of 0.775 per cent, a level last seen in October 1998. It was nearly three years ago that Japan overtook the US to win the dubious honour of being the world's leading issuer of debt. This year's budget, set to total Y36,450bn ($308bn), is to be 45 per cent financed by the issuance of new bonds. But despite concern regarding the sustainability of Japan's debt - set to total a staggering 150 per cent of gross domestic product this year - JGB yields have been skirting new lows for nearly 11 months. That underscores the voracious appetite of investors, particularly banks, for government debt despite the minuscule returns. Each successive dip in yields has merely been the precursor of another rally in prices as investors bet on deflationary pressures to continue in the near-term. But that may be a brave gamble considering that the governorship of the Bank of Japan will be up for grabs in March when the incumbent, Masaru Hayami, steps down amid debate as to whether the central bank should adopt an inflation target.

Japan's city banks increased their JGB holdings - most of which are shorter-term - by one-third from January last year to about Y43,000bn at the end of December, fuelled by a dearth of attractive investment options and a decline in loan demand. Ahead of the fiscal year-end in March, banks are due to unwind cross-shareholdings and further increase their JGB purchases, which now comprise about 10 per cent of their total assets. The adoption of an inflation target would probably result in a 25 basis point rise in both the two-year JGB yield, now close to zero, and in the five-year yield, which closed on Tuesday at a record low of 0.245 per cent, according to Mr Kato. "While the banks may be the greatest linchpin of the JGB market, they are also one of its greatest sources of instability due to their weak capital structures, poor operating results and overhang of non-performing loans," says John Richards, director at Barclays Capital in Tokyo.
Source: Financial Times
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Koizumi's Now You See Me, Now You Don't On Inflation Targeting

Japan watching can be a very frustrating business for economists. Last year we had economy minister Takenaka prjecting himself as a hard-landing specialist to sort out once-and-for-all the country's non performing loan problem. Then everything went quiet and we are still waiting to see whether the current round of inspections will prove effective or not. Now it's the turn of the Bank of Japan to draw the headlines. World opinion has it that the new governor should be an 'inflation targeter'. Now leaving aside the fact that, as dedicated followers of this blog know, my opinion is that Japan's deflation problem could prove much more intractable than the now popular 'inflation targeting' mantra assumes, it seems the Japanese themselves are not really buying it. Or at least this could be the interpretation to put on Koizumi's latest comments on the topic. Speaking to a parliamentary budget committee, he said: "A target of merely achieving higher prices is not desirable." A new BoJ governor will be appointed for a five-year term from March 19, and this has triggered a great deal of speculation that Japan may be about to embark on a more aggressive monetary policy. The prime minister himself had stoked such speculation at the end of last year by saying the battle against deflation, now in its fourth year, was the most important challenge of 2003. He also allowed several close colleagues to talk openly about the benefits of an inflation target, a policy strongly opposed by the BoJ. Now it seems that opponents of this policy (or opinion polls) are having more success in winning Koizumi's ear. Of course, this oposition to provoked inflation political could be far more political than economic, in a country where there are a lot of old people (and hence votes), and where many of these have savings which would be devalued by any inflationary process.

However yesterday, Mr Koizumi said that unless higher prices were accompanied by increased economic activity, it would erode living standards. "If salary levels stayed the same and only prices rose, there would be side effects. That is why I am pursuing economic reform to reinvigorate the economy." The LDP is also thought to be concerned that an aggressive inflation policy would be electorally unpopular, since it would erode the savings of many retired Japanese on fixed incomes who are benefiting from deflation.The prime minister's comments are the clearest indication yet that he is not keen to appoint an aggressive inflation-fighter as BoJ governor. When the name of Nobuyuki Nakahara, who advocates an inflation target, was floated, Mr Koizumi received a flurry of e-mails and faxes claiming Mr Nakahara was unsuitable for the job. Several BoJ officials have said privately that Mr Nakahara, or a similar candidate, would have difficulty in leading the central bank, since the six remaining members of the board are suspicious of an inflation-or-bust policy. Of the nine-member board, the governor and two deputy governors come up for re-election in March. Minutes of the December policy board meeting, released this week, show that all but one of the existing board are opposed to an inflation target, which would set a specific goal for price rises within a specified time.
Source: Financial Times
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China Now No1 Exporter to Japan

In another sign of China's growing importance in world trade, figures released this week officially confirm what was aready becoming obvious, China is now the world's number one exporter to Japan. Given the size of the Chinese economy, and its rapid growth rate this picture is likely to be repeated across the developed world. China, despite its currently low per capita incomes is enormous due to its population size. Currently the world's number six economy, this decade should see China steadiliy climbing the ratings on all fronts. Meanwhile in Japan the deflationary forces continue their along their energy draining path as retail sales mark a 2.3% drop Y on Y in 02. Of course with the Japanese economy shrinking at 1 - 2 % a year and the Chinese one growing at 7 - 8% a little work with the calculator will show that the day when China's economy is bigger than Japan's is not too far off.

China outsold the United States in Japan for the first time in 2002, according to yearly import-export statistics released by the Finance Ministry on Monday. In a year that saw imports from China jump 9.9 percent to 7.72 trillion yen, U.S. imports fell 5.9 percent to 7.22 trillion yen. China's success was driven in part by brisk machinery sales while U.S. sales were hurt by a stagnant information technology sector.Though Chinese exports to Japan rose nearly 10 percent, Japan did even better, lifting its sales to China by 32.3 percent-a figure that helped reduce Tokyo's trade deficit with the Asian giant by 15.9 percent to 2.75 trillion yen last year.
Source: Asahi Shimbun
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Department store sales and supermarket store sales in calendar 2002 fell 2.3 percent and 2.1 percent, respectively, industry associations announced Friday. Sales at 292 department stores operated by 103 association member companies last year fell to 8.34 trillion yen, the Japan Department Stores Association said. Sales at 9,137 supermarket stores run by 102 member companies last year dropped to 14.37 trillion yen, the Japan Chain Stores Association said. In December alone, department store sales fell 4.9 percent to 972.1 billion yen, marking the ninth straight month of year-on-year decrease, the association said. Sales of clothing, especially high-priced clothing, were sluggish. Sales dropped 6.5 percent from a year ago, marking the fourth consecutive month of decline.
Source: Daily Yomiuri
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