Who realized Abenomics really hung on the Chinese economy?

Abenomics, Japanese Prime Minister Shinzo Abe’s plan to stimulate Japan’s economy, is a three-pronged mélange of fiscal and monetary policy. Parts of it, such as devaluing the yen, are focused on making Japanese exports more attractive to global markets.

Of course, the flip side of this is needing countries that have the money to buy Japanese products. With China’s economy slowing down, this could have big repercussions for Japan’s economy.

Ten years ago, China wasn’t a big trading partner with Japan. Everything was focused on the US. But today, Japan sells nearly as many of its exports to China as it does to the US.

“The importance of final demand in China is increasing for the Japanese economy. It was almost to the US level as of the last data in 2011,” Naohiko Baba, chief Japan economist at Goldman Sachs, told the Financial Times. “It probably matched the US by 2014.”

Using a new global input-output database, Baba estimated final demand in China accounted for just 0.5% of Japanese output in 2000, compared with 3.5% for the US. Today, both countries purchase about 2% of Japan’s value-added goods. This means if China’s domestic demand falls 1%, Japan’s gross domestic product declines 0.1%.

Even before China’s latest turmoil, Abenomics appeared to be sputtering out. Japan’s economy contracted by an annualized 1.6% in the second quarter. So, this doesn’t bode well for the rest of the year.

Then, of course, there’s the recent devaluation of China’s currency, the yuan. A weaker yuan steals Japan’s competitive advantage of cheaper goods.

But when you dig deeper, it gets even worse. While 18% of Japan’s exports go to China, according to the FT, 54% go to Asia as a whole. Since China is the economic driver of Southeast Asia, a slowdown in China will spread, hurting demand for Japanese goods throughout the region.

According to the International Monetary Fund’s 2014 Spillover Report, a one percentage point shock to emerging market growth leads to a 0.5 percentage point drop in Japanese growth — five times bigger than the effect on the US.

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