Japanese exports hit by China dispute

By Ben McLannahan in Tokyo

Japan’s exports to China fell sharply last month from a year earlier, highlighting the impact on trade of a territorial dispute between Asia’s two largest economies.

According to Monday’s preliminary data from the Ministry of Finance, shipments to China from Japan dropped 14.1 per cent in September from a year earlier, accelerating from a 9.9 per cent fall in August.

The figures show that the tense stand-off over a group of islands in the East China Sea, administered by Japan but also claimed by China and Taiwan, is exacerbating difficulties for exporters already hit by sluggish demand in developed economies and a persistently strong yen.

Overall, shipments from Japan slid 10.3 per cent in September from a year earlier, knocked by enduring weakness in Europe, resulting in a trade deficit of Y559bn ($7bn), slightly wider than expected. Imports rose 4.1 per cent, as Japan bought more oil and liquefied natural gas to offset lost nuclear capacity.

The subdued data raise the risk of a recession in the world’s third-largest economy in the third and fourth quarters, said analysts, while adding pressure on policy makers at the Bank of Japan to come up with further stimulus in a meeting early next week.

The dispute over a group of islands – called the Senkaku in Japan and the Diaoyu in China – led to mass anti-Japanese protests across China after Tokyo announced its purchase of three of the islands from their private owners in September.

While Japan’s imports from China were up 3.8 per cent, boosted by shipments of Apple’s iPhone 5, exports of branded consumer goods such as cars and motorcycles collapsed, dropping by 45 per cent and 31 per cent respectively. Exports of electrical apparatus and photographic supplies also recorded double-digit percentage falls.

The biggest contribution to the overall 14.1 per cent fall in exports, however, was made by the industrial machinery sector. Weakness in that area, which is less sensitive to subdued data, suggests that the Chinese economy has yet to pull out of a slowdown, which has extended to seven consecutive quarters.

Because of the “severe political turmoil,” the outlook for demand from China, Japan’s most important trading partner, remains “very pessimistic,” said Takahiro Sekido, Japan strategist at Bank of Tokyo-Mitsubishi, and a former central bank official.

According to Kyohei Morita, chief Japan economist at Barclays, export figures for the month of November – when China’s Communist party is due to hand power to a new generation of leaders – will be critical in determining the outlook for the Japan-China trade relationship.

“I think that demonstrations will taper off, going forward. But the attitude of Chinese consumers is something that politics cannot control. That is where we see the risk of prolongation,” he said.

Meanwhile, the shaky trade picture raises expectations of further stimulus from the Bank of Japan when it meets to present its semi-annual outlook on the economy on October 30. The central bank refrained from easing at its first meeting this month, after expanding its asset-purchasing programme – its main easing tool, with interest rates near zero – in September.

Speaking on Fuji TV on Sunday, economy minister Seiji Maehara said Japan was “falling short” of the aggressive commitments of other major central banks to revive their economies.

Continued pressure on the BoJ to ease further “is a certainty,” said Masamichi Adachi, a senior economist at JPMorgan in Tokyo, in a report last week.

JPMorgan is one of several investment banks to predict a recession in Japan in the third and fourth quarters.

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