US-China trade war impact on Japan limited but risks high if United States imposes new tariffs, analysts say
- New American tariffs would hit smartphones, computers and other products for which Japan is a large supplier of components and fabricating machines
- Beijing expected to enact more economic stimulus measures to offset impact of any new American tariffs imposed by US President Donald Trump
The US-China trade war has so far only had a limited impact on Japan’s lukewarm economic growth, but the affect is likely to grow if Washington imposes further sanctions on Chinese imports, Japanese analysts said.
The downward pressure on Japanese growth over the last year, in fact, has been less to do with the trade war and more to do with declining global demand for smartphones, which has hit Japanese exports. The lingering effects of China’s deleveraging campaign to reduce debt and risky lending that has cooled Chinese investment in new equipment, much of which is manufactured in Japan, has also played a part.
The stakes are high not only for Japan, but for global trade as Japan is the second largest economy in Asia and the third largest in the world behind the US and China.
“The US-China trade dispute so far has had hardly any impact on Japan,” said Mitsubishi UFJ Research and Consulting economist Shinichiro Kobayashi. “If anything, Chinese companies have been cautious about capital investment in anticipation of an escalating trade dispute, which has lowered demand for Japanese machines.”
But the actual impact could remain relatively modest if Beijing, as expected, enacts additional fiscal and monetary stimulus to ensure domestic growth does not slow significantly, Japanese analysts added.
“Looking ahead, there will be a greater impact if the US imposes higher tariffs on exports from China as planned because the trade sanctions will target smartphones, laptop computers and apparel,” for which Japanese manufacturers supply crucial electronic parts and fabrication devices, Kobayashi added. “But stock market investors are largely optimistic that the US will delay [the tariffs] or make exceptions to avoid hurting its own companies like Apple, Dell, Hewlett-Packard and Gap, all of which produce in China.”
Japan’s economy has become less reliant on exports for sustained gross domestic product growth, but a sharp decline in consumer spending or business investment in China would still hurt Japanese firms, both directly and indirectly.
Stock market investors are largely optimistic that the US will delay [the tariffs] or make exceptions to avoid hurting its own companies like Apple, Dell, Hewlett-Packard and Gap, all of which produce in China.
The US and China are the top destinations for Japanese exports, with varying shipment patterns due to different product cycles. While US demand for Japanese cars remains healthy, the appetite for semiconductors and chipmaking equipment in China and other Asian economies has waned along with smartphone demand.
In April, Japanese exports to the US rose 9.6 per cent from a year earlier, the seventh straight monthly gain, but shipments to China were down 6.3 per cent, the second consecutive monthly decline.
The impact of US tariffs on Chinese growth so far has been modest due to the stimulus measures implemented by Beijing, with growth stabilising at 6.4 per cent in the first quarter, the same rate as in the fourth quarter, and Japanese analysts expect the impact of the increase in US tariffs to remain modest.
“The US-China trade dispute could dampen spending on smartphones and automobiles in China, but the Chinese government is likely to offset the slowdown with targeted tax cuts for small businesses and households,” predicted Yuji Miura, senior economist at the Japan Research Institute.
To date, the trade war has had some impact on the Japanese economy, mostly through the slowdown in global growth, with Japan’s economic growth in the first quarter of 2019 hitting a higher level than forecast at 0.5 per cent, or an annualised 2.1 per cent. But that was led by the first net-export gain in a year due to a sharp drop in imports and a smaller-than-expected decline in capital investment.
Economists see modest but sustained Japanese growth of around 0.5 per cent in the next several years, supported by improving employment conditions and spending around the 2020 Olympic Games in Tokyo.
“Until six months ago, we saw a 70 to 80 per cent chance that the economy will grow at 0.8 per cent in fiscal 2019 [year through to March 2020] on the assumption that there will be no huge external shocks like a global slump and a sharp yen appreciation,” Kobayashi said. “Now we see that chance is down at around 60 per cent.”
Production by Japanese companies in China has been largely insulted from the US tariffs because it is mainly produced for the domestic Chinese market.
“Only 1 per cent of sales by Japanese firms in China is shipped to the US market. Japanese companies are producing goods in China mostly for local consumption, which is a huge market,” said a senior Japanese government official who oversees economic assessment. He said roughly 70 per cent of sales at Japanese firms in China are goods sold locally, with most of the remaining 30 per cent sold to other non-US markets.
Meanwhile, those Japanese companies with exposure to the US tariffs and with existing production capacity in Southeast Asia are moving production out of China.
Japan’s leading office equipment maker, Ricoh, is shifting production of its multifunction printers for the US market from China to Thailand in the next two months in a bid to minimise the fallout from the escalating trade dispute. Electronics manufacturer Sharp is also planning to shift production of laptop computers, digital signage and multifunctional copiers destined for the US market out of China to avoid higher tariffs.
The shift is accelerating because of many factors, not just the US-China trade war, according to Japanese government officials and private-sector economists.
“A shift of factories from China to other countries had been happening [before the trade war}. The tariffs are the last push,” said Shunsuke Kobayashi, economist at the Daiwa Institute of Research. “Labour costs [in China] are rising and business taxes are not cheap in China, and now tariffs on Chinese exports to the US are higher.”
Labour costs in China’s coastal cities have surged, pushing them closer to those seen in Japan, while China’s business tax rate of 25 per cent has become uncompetitive with the US and other advanced economies cutting their rates.
