Japan’s Exports Suffer from Territorial Dispute with China

Japanese exports data showed exports to China fell sharply in September compared to a month earlier, bringing into sharp focus the negative impact of the territorial spat between Asia’s largest economies, the Financial Times reported on 22 October 2012. The reported decline of Japanese exports combined with the yen’s appreciation increases the likelihood of contraction in the world’s third largest economy and adds pressure on the Bank of Japan to introduce further stimulus at its next policy meeting.

**Japan’s Exports to China Fall Sharply**
The FT quotes preliminary data from Japan’s Ministry of Finance showing that shipments to China, Japan’s most important trading partner, plunged by 14.1 percent in September, relative to a year earlier. The figures are indicative of the impact which the dispute over a group of islands in the East China Sea has had on Japanese exporters who are already troubled by a persistently strong yen and sluggish demand in developed economies. Bloomberg notes that the observed decline in exports is the biggest since May 2011, when Japan was rebuilding supply chains wrecked after the March earthquake and tsunami.

!m[World’s Third Largest Economy Faced With Increased Odds of Contraction ](/uploads/story/611/thumbs/pic1_inline.png)The territorial spat which concerns a group of islands called Senkaku in Japan and the Diaoyu in China led to anti-Japanese protests across China after Japan announced the purchase of three of the islands from their private owners. The FT quotes Takahiro Sekido, strategist at Bank of Tokyo-Mitsubishi, as saying that that the outlook for demand from China remains “very pessimistic” due to the “severe political turmoil”.

Yet, the decline in exports was led by the industrial and machinery sector, viewed as less sensitive to consumer-led boycotts, suggesting that the slowdown in China’s economy contributed to the weaker export data.
**Increased Likelihood of Contraction**
Bloomberg quotes JPMorgan (NYSE:JPM) as saying that the territorial dispute will knock 0.8 of a percentage point off Japan’s GDP over the October-December period. JPMorgan, along with Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS), expects Japan’s economy to contract in the third and fourth quarters of 2012.

In addition, in October, Japan’s government cut its economic assessment for a third consecutive month, the longest streak since the global recession in 2009.
**Bank of Japan Faces Pressure**
On October 21, Japan’s economy minister Seiji Maehara noted that the country needed more monetary easing and policy efforts to spur growth. “There are fiscal-easing moves worldwide, but on a monetary basis Japan is falling short,” commented Mr Maehara in an interview with Fuji Television, as quoted by Bloomberg. While saying that he did not view easing as a “panacea”, Mr Maehara pointed out that without that and without policy moves “Japan’s sovereign credit rating may face a downgrade.”

Mr Maehara’s comments come ahead of a Bank of Japan’s policy meeting on October 30, when the central bank has to present its semi-annual outlook on the economy. The Bank of Japan refrained from introducing additional monetary stimulus earlier in October after expanding its asset-purchasing programme in September. Bloomberg, however, quotes Naoyuki Shinohara, deputy managing director of the International Monetary Fund, as saying that the Bank of Japan had room for further monetary easing, adding international pressure on the central bank.