Japan's GDP faces contraction over island row with China

Japan's territorial spat with China might cause the Japanese economy to contract this quarter and hasten a current-account slide as exports decline and Chinese tourism to Japan drops off, according to a JPMorgan report.

The dispute would knock 0.8 percentage point off Japan's gross domestic product in the October-December period, economists Masaaki Kanno and Masamichi Adachi said.

They estimate fourth-quarter GDP will contract 0.8 per cent from the previous quarter, compared with a previous estimate of no growth.

The squabble over islets imperils a US$340 billion trade relationship ahead of China's power transition and a possible general election in Japan this year. Carmakers are hardest hit, with Mazda Motor deliveries in China last month falling 35 per cent.

JPMorgan joins Morgan Stanley and BNP Paribas in predicting Japan's economy will shrink for two consecutive quarters to December.

Japan's exports fell 5.8 per cent in August from a year earlier, the third consecutive monthly decline, with shipments to China, its largest trading partner, dropping 9.9 per cent and those to the European Union slumping 22.9 per cent.

Mitsubishi Motors on Friday reported Chinese sales fell 63 per cent last month from September last year, while the Yomiuri newspaper reported that Toyota Motor's deliveries in China halved from August.

South Korea's carmakers, meanwhile, reported record sales in China last month while their rivals suffered.

"Anti-Japan sentiments in China began to affect car sales from September, and Korean carmakers were one of the beneficiaries with other global companies," said Eric Choi, an analyst at Shinhan Investment Corp.

Nissan Motor, which has the highest market share in China among Japanese carmakers, expected anti-Japanese sentiment to hit sales, vice-president Takao Katagiri said last week.

The dispute over the islets caused cancellations of 40,000 seats on All Nippon Airways flights between the two countries, the airline said last month.

JPMorgan said it was assuming a 70 per cent fall in the number of Chinese tourists to Japan this quarter, compared with the average first-quarter figures for last year and this year, lowering receipts by 67 billion yen (HK$6.6 billion), or 38 per cent of the expected drop in exports.

China's economy might also be adversely affected, as the unrest might prompt Japanese companies to accelerate the diversification of investment and trade in Asia away from the nation, the JPMorgan economists said.