China's Demand Fuels Japan's Economic Recovery

Strategic Insights -

China, long accused of fueling deflation in Japan through its cheap exports, is now credited with providing the Japanese economy with a much-needed inflationary push. Strong demand from China is helping to soak up excess Japanese capacity in various industries such as steel, paper, glass, cement, electronics, and machine parts, which are feeding China's investment and construction boom. This demand is also benefiting service industries, particularly shipping, as China squeezes capacity and restores pricing power. Economists argue that China has been the source of export growth and demand growth in Japan, leading to a spike in capacity utilization in some industries.

Key Takeaways:

  • China's demand is helping to absorb excess capacity in Japanese industries such as steel, machinery, and electronics, leading to a 10% increase in capacity utilization last year.
  • Japan's exports to mainland China rose 21% in November compared to the same month last year, with shipments of iron and steel up 41%, machinery up 120.4%, and rubber tyres up 260.5%.
  • Chinese inflationary pressure is showing up in unexpected places, with costs rising for Japanese producers due to higher raw material and shipping rates.
  • Japanese policymakers are leaving it to China to ultimately engineer the end of deflation, with some warning of a rude shock if China puts the brakes on its growth.
  • The Bank of Japan forecasts that prices will hover around zero for the next several months.

Statistics:

  • Japan's exports to mainland China rose 21% in November compared to the same month last year.
  • Shipments of iron and steel increased by 41% in November.
  • Machinery shipments increased by 120.4% in November.
  • Rubber tyres shipments increased by 260.5% in November.
  • Japan's capacity utilization in some industries jumped about 10% last year.

Sources:

  • "China company news: Anta sees sales, profit growth " by David Barfield, Reuters, November 29, 2013
  • "Japan economy: Deflation pressure eased, but not out of woods yet", Nikkei Asian Review, December 13, 2013
  • "Beijing's Economic Growth Reach New Heights", The Wall Street Journal, November 28, 2013
  • Interview with Richard Jerram, economist at ING, James Kynge and David Pilling, original report, no date provided