Explained: How China Is Setting The Stage For Japan¡¯s Next Big Recession in 2024
At a time when global recession fears are rising, every country is trying to avoid falling into it, right? But what if some other country's economy lands in a recession? That's what seems like a possibility for Japan next year. The reason? China's economy.?
At a time when global recession fears are rising, every country is trying to avoid falling into it, right? But what if some other country's economy lands in a recession? That's what seems like a possibility for Japan next year. The reason? China's economy.
What's The Connection Between China & Japan's Economy?
As China's prospects for 2024 dim, its biggest trading partners are preparing for the unintended consequences. Amid numerous global headwinds and other dynamics, such as debates over patents, Japan is particularly vulnerable to China's downshift. According to economist Richard Katz, publisher of the Japan Economy Watch newsletter, "looking further into the future, China's economy will be hurt by a lasting deceleration in Chinese growth and the techno-war and geopolitical tension between China and the West that has led to de-risking and Chinese intellectual property theft from Japanese firms located inside China." Exports have the biggest immediate impact, according to Katz. According to his calculations, every 10% decline in exports to China directly lowers Japan's GDP by 0.4%.
That is roughly the decrease in exports from Japan to China in the first eight months of 2023. Of course, as U.S. bond yields rise and tensions around the world rise, things could get worse. Katz also points out that every 1% decline in Chinese GDP growth reduces Asia's overall GDP by 0.3%. These factors provide an explanation for the Bank of Japan's continued monetary acceleration.
Also Read: Why China Is Facing World's Biggest Millionaire Exodus This Year
Why Are Global Markets Betting Against Japan's Governor?
Since April, the world's financial markets have been incorrectly betting that Kazuo Ueda, the new governor of the BOJ, will start the 23-year process of ending quantitative easing. Ueda had been taking precautions in the hopes that the data would show that wages in Japan are increasing. It wasn't to be. The BOJ is now even less likely to apply the brakes as the turmoil in the Middle East rattles global markets. This is true despite the fact that Japan's inflation reached 30-year highs this year, in part due to a weak yen.
Japan's import costs have increased as a result of the yen's 14% decline this year and the rising cost of food and energy.
Up until last weekend, the post-Covid-19 supply/demand imbalances and Russia's invasion of Ukraine were the main factors driving the increase in oil prices. Corporate executives, investors, and households are all preparing for new waves of commodity-driven inflation in the wake of Hamas' shocking attack inside Israel.
It is completely understandable if BOJ head Ueda feels bad about answering Prime Minister Fumio Kishida's call earlier this year.
The BOJ is understandably eager to make a turn towards some semblance of normality after more than two decades of borrowing costs that are zero or negative. When given the chance late last year to start, or even to hint at a policy shift, Ueda's predecessor declined. After all, it was the governor, Haruhiko Kuroda, who led the BOJ further down the QE rabbit hole. Kuroda began to increase the BOJ's balance sheet in 2013 in ways that no other central bank had ever done. By 2018, the balance sheet of the BOJ had grown so large that it exceeded Japan's $5 trillion GDP as a result of Kuroda's policy of stockpiling bonds and stocks. The problem is that Tokyo didn't really do much else to revive Japan's animal spirits. In a way, the governing Liberal Democratic Party left Kuroda hanging.
When Can Japan Enter Into Recession?
Given that Japan is battling both inflationary and deflationary forces at once, a possible recession can happen in 2024, so it is up to Ueda to find a solution.
The job of monetary policymakers may be more difficult in Japan than anywhere else, according to Gavekal Dragonomics economist Udith Sikand. "This is a tough time to be a central banker everywhere in the developed world, but the job of monetary policymakers is possibly harder in Japan than anywhere else," he adds.
The issue, according to Sikand, is that the depreciation of the yen as a result of this inflation of the wrong kind¡ªimported inflation¡ªhas caused real wage growth to be negative, suppressing consumer demand and making the BOJ's policy objective ever less attainable.
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It's unlikely that any economist would enjoy sitting in Ueda's chair right now, especially given the growing fallout from China's slowdown. Ironically, the more China stumbles, the more Japan's economy is at risk of experiencing a slump similar to China's.
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