TOKYO听–听Policymakers in Tokyo believe听颁丑颈苍补’蝉听deepening听别肠辞苍辞尘颈肠听woes could hit听闯补辫补苍’蝉听fragile recovery, especially if Beijing fails to shore up demand with meaningful stimulus, potentially delaying an exit from ultra-loose monetary policy.
颁丑颈苍补’蝉听downturn would leave听闯补辫补苍’蝉听export-reliant economy with little external support as aggressive Federal Reserve interest rate hikes cool growth in the United States, another key driver of global activity.
The risks from China will be among key topics of debate at the Bank of听闯补辫补苍’蝉听September policy meeting, say five sources familiar with the bank’s thinking, and raise fresh questions about Gover苍辞谤听聽to wean the economy off the massive monetary stimulus of the past decade.
“What’s happening in China is worrying and could deal a huge blow to听闯补辫补苍’蝉听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.
In a sign of growing pessimism听辞惫别谤听China, the government also said its monthly听别肠辞苍辞尘颈肠听report for August that “concern听辞惫别谤听颁丑颈苍补’蝉听outlook” was among risks to听闯补辫补苍’蝉听recovery.
“China is听辞惫别谤,” 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.”
Having taken steps in July to make its ultra-loose policy sustainable, the BOJ is widely expected to keep monetary settings unchanged at its Sept. 21-22 meeting.
NEW RISKS
While many Japanese policymakers expect China to avert a hard-landing, thanks in some part to Beijing’s recent support聽, the stakes for Japan are high.
China is听闯补辫补苍’蝉听largest trading partner, accounting for 20% of its exports, having replaced the United States in 2020. Exports to China fell 8.6% in the first half of this year as demand for cars, steel and electronics wilted.
Economists believe听颁丑颈苍补’蝉听downturn could knock 1-2 percentage points off听闯补辫补苍’蝉听annual growth, fueling fears of a prolonged slowdown in Asia’s two biggest economies, which combined account for about a fifth of global gross domestic product.
China is also losing its appeal as a production hub for Japanese firms with some already reducing exposure to the country.
Komatsu Ltd聽6301.T, was among them. The world’s No. 2 construction machinery maker has shifted some operations away from China, its chief executive Hiroyuki Ogawa told Reuters this week.
Ogawa said going forward Komatsu will “cut down on production capacity in a way to match actual demand in China.”
Diplomatic tensions may also be a factor.
Suntory Holdings chief executive聽听飞补谤苍别诲听颁丑颈苍补’蝉听economy is in an “extremely difficult” situation, which may be contributing to a rising backlash against Japan听辞惫别谤听the release of treated Fukushima water into the ocean.
Those bilateral strains could additionally dash hopes of a revival in Chinese tourists, delaying a broad-based recovery in听闯补辫补苍’蝉听service sector.
The risks from China heighten challenges for the BOJ in winding down its bond yield control, a key part of its monetary policy aimed at sustainably reflating stagnant consumer demand.
“Exports to China had already been weak and headwinds to inbound tourism are clearly bad for听闯补辫补苍’蝉听economy,” said Toru Suehiro, chief economist at Daiwa Securities. “All in all, it’s hard to justify tightening monetary policy any time soon.”
闯补辫补苍’蝉听core inflation hit 3.1% in聽, exceeding the BOJ’s 2% target for the 16th straight month. Firms also promised wage hikes unseen in three decades this year, heightening the case for a retreat from decades of ultra-loose monetary policy.
While some BOJ policymakers began dropping聽聽of a near-term policy shift, Governor Ueda has stressed the need to wait until domestic demand and wage growth replace import costs as a key driver of consumer inflation.
The darkening outlook for听闯补辫补苍’蝉听recovery may push back the timing of a BOJ policy shift. Falling demand in听辞惫别谤seas markets like China could weigh on manufacturers’ profits and discourage them from hiking wages – a prerequisite for phasing out monetary stimulus.
BOJ board member聽聽last month described听颁丑颈苍补’蝉听high unemployment and shrinking investment as sources of concern.
Analysts expect听闯补辫补苍’蝉听别肠辞苍辞尘颈肠听growth to slow in the current quarter after a brisk expansion in the聽聽period, heightening uncertainty on whether a spiral of higher wages and inflation could take hold.
In a sign rising inflation is already taking a toll on consumption,听闯补辫补苍’蝉听聽suffered its biggest drop in nearly 2-1/2 years in July.
“颁丑颈苍补’蝉听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听闯补辫补苍’蝉听Sompo Holdings.
“But听颁丑颈苍补’蝉听weakness certainly heightens the hurdle for Japan to sustainably achieve 2% inflation, which is a quite ambitious goal in the first place.” – Reuters
