Japan Nervously Watches China’s Economic Woes Amid Fragile Recovery

Economists believe that China's downturn could potentially reduce Japan's annual growth by 1-2 percentage points, contributing to a slowdown in Asia's two largest economies.

Tokyo policymakers are growing increasingly concerned that China’s ongoing economic troubles may have a detrimental impact on Japan’s fragile recovery.

This is especially true if Beijing fails to inject significant stimulus into its economy, potentially leading to a delay in Japan’s exit from its ultra-loose monetary policy.

The potential downturn in China would leave Japan’s export-dependent economy with limited external support.

Additionally, the aggressive interest rate hikes by the Federal Reserve in the United States, another major driver of global economic activity, are already cooling down economic growth.

These concerns regarding China’s economic situation are expected to be central topics of discussion at the upcoming Bank of Japan’s September policy meeting, as confirmed by sources familiar with the bank’s internal discussions.

This development raises questions about Governor Kazuo Ueda’s ongoing efforts to reduce the massive monetary stimulus measures implemented over the past decade.

One anonymous source expressed their concerns, stating, “What’s happening in China is worrying and could deal a huge blow to Japan’s economy.”

Another source highlighted the potential impact on Japan’s wage growth, a crucial condition for phasing out monetary stimulus.

The Japanese government’s August economic report also acknowledged the risk posed by China’s economic outlook to Japan’s recovery, reflecting growing pessimism.

An anonymous senior Japanese government official went as far as saying, “China is over,” expressing skepticism about China’s ability to return to high growth rates.

Japan’s economic dependency on China is significant, with China being its largest trading partner, accounting for 20% of its exports.

The decline in exports to China, especially for products like cars, steel, and electronics, has already affected Japan’s economy.

Economists believe that China’s downturn could potentially reduce Japan’s annual growth by 1-2 percentage points, contributing to a slowdown in Asia’s two largest economies.

Japanese companies are also reevaluating their production strategies in China, with some reducing their exposure to the country.

For example, Komatsu Ltd, one of the world’s leading construction machinery makers, has shifted operations away from China to match actual demand more closely.

These challenges from China further complicate the Bank of Japan’s efforts to wind down its bond yield control, an essential component of its monetary policy aimed at revitalizing consumer demand.

It may also delay any potential tightening of monetary policy.

The darkening economic outlook for Japan could postpone the timing of a policy shift by the Bank of Japan.

Falling demand in foreign markets, particularly China, could impact manufacturers’ profits and discourage wage hikes, which are necessary for phasing out monetary stimulus.

The situation in China has raised uncertainty about Japan’s economic growth in the current quarter, particularly concerning the possibility of higher wages and inflation taking root.

Rising inflation has already started to affect consumption, as seen in the significant drop in household spending in July.

In conclusion, Japan is closely monitoring China’s economic woes, as they could have far-reaching implications for Japan’s own economic recovery and its monetary policy decisions.

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