Dispute Casts Shadow on China-Japan Trade

Dispute Casts Shadow on China-Japan Trade

The ongoing dispute between Japan and China over an East China Sea island chain will continue to cast a shadow over the Japanese economy and trade outlook into next year, according to leading operators and analysts.

“The volume between China and Japan has dropped significantly both by air and sea,” said Paul Tsui, chairman of the Hong Kong Association of Freight Forwarding and Logistics. “Traffic is also being affected by the soft economic situation in Japan, which has taken volumes down even lower.”

Japan nationalized the Senkakus islets on Sept. 11 this year, sparking protests and boycotts of Japanese products in China, which claims the islands and calls them Diaoyu.

China’s imports from Japan subsequently plunged 9.6 percent in September, and total trade between the two countries, the world’s second- and third-largest economies, dropped 4.5 percent, according to Chinese customs data. This was followed in October by a 12 percent year-over-year drop in Japanese exports to China as Japan reported its biggest monthly trade deficit with its neighbor since records began in 1979, if the distorting impact of Chinese New Year holidays is discounted.

Some industries are being affected more than others. Japan’s car exports to China, for example, plunged 82 percent in October year-over-year, following the 40 percent drop recorded in September.

Rahul Kapoor, Singapore-based analyst at Drewry Maritime Services, said the huge drop in Japanese auto and electronic items exports to China was negatively affecting trade volumes and also straining the supply chains of Japanese original equipment manufacturers. “In an environment where weak global demand is hurting both Chinese and Japanese exports and re-exports, the island dispute further exacerbated the problems for Japanese exporters to their largest export market — China,” he said.

“I believe continued tensions over disputed islands will have further negative repercussions for container trade volumes as falling Japanese investments in China and consumer boycotts of Japanese goods keep demand muted.”

The dispute with China, allied to slower demand from the EU, is now threatening the Japanese economy with a technical recession driven by the export downturn, which saw overall exports fall by an estimated 6 percent year-over-year in October.

A report by analysts Nomura predicts that Japan’s economy will continue to worsen during the next two to three months because of the slump in Chinese consumption of Japanese products. “We expect the impact of the boycott on Japanese goods to gradually fade, but, given the recent decline in domestic demand, we think that the December Reuters Tankan (which measures manufacturing sentiment in Japan) will show a further chill in sentiment,” Nomura said. 

The recent leadership change in China and Japanese elections in mid December could diffuse tensions, however, possibly enabling trade volumes to recover next year, according to Kapoor. “The general trade outlook in the medium term continues to be cloudy with recent economic data out of the U.S. mixed,” he said. “But positively, there are early signs of the Chinese economy stabilizing. Rising industrial production and a recovery in PMIs could lead to a better demand environment in the coming months.

“But for China and Japan to benefit from any improvements in fundamentals, trade has to take precedence over politics.”

Contact Mike King at michael@borderline.eu.com.