How yuan devaluation makes or breaks Japan

Among the clearest casualties of China's yuan devaluation is the Bank of Japan. The chances were never high that governor Haruhiko Kuroda was going to be able to unwind his institution's aggressive monetary experiment anytime soon. But the odds are now lower than even sceptics would have previously believed.

The real question, though, is what China's move means more broadly for Abenomics. A sharply devalued yen, after all, is the core of Prime Minister Shinzo Abe's gambit to end Japan's 25-year funk. Abenomics is said to have three parts, but monetary easing has really been the only one. Fiscal expansion was neutered by last year's sales tax rise, while structural reform has arrived only in a brief flurry, not the avalanche needed to enliven Japan and get companies to raise wages.

The yuan's devaluation tosses two immediate problems Japan's way. The first is reduced exports. As Beijing guides its currency even lower, as surely it will, the yen will rise on a trade-weighted basis. And Bloomberg's Japan economist Yuki Masujima points out that trade with China now contributes 13 per cent more to Japanese gross domestic product than the United States, traditionally Tokyo's main customer.

"Given China's rise to prominence, the yen-yuan exchange rate now has far greater influence on Japan than the yen-dollar rate," Masujima says.

The other problem is psychological. Japanese households have long lamented their rising reliance on China, a developing country run by a government they widely view as hostile. But the BOJ was glad to evoke China's 7 per cent growth - and the millions of Chinese tourists filling shopping malls across the Japanese archipelago - to convince Japanese consumers and executives that their own economy was in good shape. Now, the perception of China as a growth engine is fizzling, exacerbating the exchange rate effect.

"To the extent that the depreciation reflects weakness in China, then that weakness - rather than the depreciation per se - is a problem for Japan," says Richard Katz, who publishes the New York-based Oriental Economist Report.

It is also a problem for Abe, whose approval ratings are now in the low 30s, thanks to his unpopular efforts to "reinterpret" the pacifist constitution to deploy troops overseas. The prospect that Abe will enrage Japan's neighbours by watering down past apologies for the second world war at ceremonies this weekend marking the 70th anniversary of the end of the war is further damping support at home.