Can China save the Sun?

DailyFx: Japan’s Merchandise Trade Balance saw the surplus shrink further in July, registering at 91.1 billion yen versus 235 billion expected and 138.6 billion in the preceding month. The contraction in the trade surplus came courtesy of a spike in imports: inbound shipments rose at the fastest pace in two years at an annualized rate of 18.2% on higher oil prices. However, exports surged 8.1% having fallen -1.8% in the last release, the largest drop in seven years. Exports to Asia surged 12.7%, with China leading the way seeing outbound shipments rise 16.8%. By comparison, exports to the EU rose just 4.1% and those to the US fell -11.5%. This comes on the heels of yesterday’s JPMorgan report saying China will introduce a fiscal stimulus package in the near term.

All this adds up to very good news for Japan: the external sector is a major driver of growth for the world’s second largest economy, which inched closer to recession having seen GDP shrink -0.6% in the second quarter. The top question going forward will be whether Japan can sustain such favorable trade results as the world economy decelerates. Slowing global demand will not leave China unscathed, and it remains to be seen if their hunger for Japanese goods will remain as robust after the Olympic Games are over.

MyTake: Bloomberg also reported today that China has marginally overtaken the US as Japan's largest customer in July. The export to China in July amounted to 1.29T Yen as compared to export to the US of 1.28T Yen. The exports to the US have been on a declining rate for the passed 11 months. Will this new finding coupled with the fact that China will soon introduce an economic stimulus package worth RMB400b pull Japan from its brink of recession? To me, Japan will not be able to leverage on China to get them out of this eminent recession. Japan's economic policies have all this while rely on the US and largely ignored China and I believe this realisation that "China cannot be ignored" comes in a bit too late as other countries like S.Korea and Taiwan have taken the early start advantage. Furthermore, I do not think China need to start its economic surplus as the economy is still growing at a pace of 10% pa. Even if the stimulus is effected the RMB400b against China's GDP of around RMB30T is rather small as it represents only 1% of the GDP. The effect of such stimulus package like the ones given out in the US are at best temporary and may not even spill over the countries like Japan. Japan does not need to be too bothered with recession as it will definitely sluggishly goes into it, but while it goes into one, it really needs to start having structural changes, improving FDIs and consumer spending, reforming the capital markets, improving on its productivity and ensuring their property market does not come crashing down. Then at least the pain of recession will not be that bad.


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