China Isn’t Out Of The Economic Woods, Just Ask Japan And South Korea

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In all the market excitement over recent policy moves in Beijing, global investors are missing out on signals coming out of Tokyo or Seoul.

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Japan’s economy shrank unexpectedly in the July-September quarter. annualized 1.2% contraction This came despite a 30% depreciation of the yen in GDP at the time. Although the yen has recovered nearly 10% since then, its highly competitive level during the third quarter did little to support growth through exports.

This shows that the post-Covid-19 recovery in global growth is not happening as expected. And for that, officials in Tokyo can thank Chinese leader Xi Jinping. Xi’s massive Covid lockdown has effectively put Asia’s biggest economy and top trading nation into neutral, if not outright reverse.

South Korea can attest. A 5.7% drop in Korean exports in October year-on-year bears the Chinese fingerprints. so does 2.8% On-Ear Slide In overseas shipments in the first 10 days of November.

The caveat, of course, is that Xi’s government appears to be finally easing its “zero Covid” policy. His economic team also recently unveiled a 16-point plan to stabilize a cratering property market. We will see, as new Covid cases rise in major cities like Beijing and Guangzhou. We will also see more, as Xi’s reform team realizes the gravity of the troubles facing the property industry, which can generate up to 30% of GDP.

Nor does the People’s Bank of China have good options to support Chinese growth through fresh liquidity. Yuan’s 11% decline This year has been under increasing pressure on highly indebted developers struggling to avoid defaulting on overseas borrowings.

This leaves Japan in a particularly tough spot. The Bank of Japan’s balance sheet has already crossed the size of the $5 trillion economy. Meanwhile, inflation is running well above the 2% target at a time when a weak yen is causing Japan to import goods at higher prices.

Not surprisingly, the government of Prime Minister Fumio Kishida is hinting at even bigger stimulus packages. For now, Tokyo is waiting to see how an additional budget of 29.1 trillion yen ($208 billion) due in late November affects growth.

At the time, Kishida said, “I will do my best to deliver the various measures in this comprehensive economic package to the people so that they can feel that we are supporting their lives,” just as in October. Prices were rising in Tokyo. Fastest speed since 1989

Odds are, Kishida’s team will send more in the coming months. china flatline And a Federal Reserve rate hike increases the risks of a US recession.

Japan is facing an unexpected reversal: The weak yen is doing more to hurt business and domestic confidence than to boost exports or corporate profits. The problem, as Harumi Taguchi at S&P Global Market Intelligence told Bloomberg: “When the yen falls so sharply, companies face a difficult situation, as they are hit by higher import costs of materials, while They simply cannot pass the cost on to exports when foreign economies are slowing down.

Again, the yen corrected slightly in recent days as US inflation eased year-on-year to 7.7% in October. This reassured markets that the Fed’s days of tightening in 75 basis-point intervals were over. hopefully. But then the Covid surge in China could easily rekindle supply chain-related inflation. and in between Vladimir Putin’s Ukraine War And OPEC’s doggedness, energy prices could explode anew.

This will make Fed Chairman Jerome Powell’s team tap the brakes even harder. The yen, in turn, could easily return to the 145 to 150 range versus the dollar, setting off a fresh cycle of nail-biting concerns about the health of Asia’s second-largest economy.

“While there are calls for the BOJ to raise interest rates, a quarter century of near-zero interest rates has accustomed Japan to low interest rates,” says Richard Katz, who publishes The Oriental Economist Report. “With 16% of all loans charging less than 0.25% interest and 70% less than 1%, a bunch of companies would suddenly go bankrupt if they were forced to pay higher rates. Currently, the economy is so fragile that raising rates isn’t enough to make much of a dent in the US-Japan rate differential.

4 economy, Bank of Korea governor Ri Chang-yong has come under fire for raising rates aggressively. Such apprehensions also bear Chinese fingerprints. as china grows slowest in 30 yearsKorea is walking in the face of acute adversity.

Seen in the context of Japan’s troubles, the idea that China’s economy has come out of trouble needs revision.

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