China grows 6% year after year regardless of whether supply and demand match the numbers that statisticians produce to make President Xi Jinping happy.
Yet there’s no massaging the dramatic China-driven slowdown hitting Asia, where exports are down, on average, 13% year-on-year. Those downshifts from South Korea to Singapore to Australia belie Xi’s reassurances that China will continue to power ahead in 2019.
Perhaps the most damning rebuttal to date comes from Tokyo. Though China has long since surpassed Tokyo’s gross domestic product, Japan’s $4.9-trillion economy can portend major growth shifts. Just-published figures show that in January, Japanese exports to China plunged 17.4%.
And as per the same data, Japan’s 8.4% drop in overall overseas shipments left the country with the kind of trade deficit few policymakers saw coming.
In fact, Japan’s deficit exploded by 49% in January from a year earlier. That suggests the collateral damage from Donald Trump’s assault on Chinese trade is having an intensifying and accelerating effect on Asia’s prospects.
Things could get worse
Even as export engines sputter, governments are looking at a year in which US President Trump might raise the ante. There’s little evidence that Xi’s Communist Party is about to cave in trade negotiations after the March 1 deadline for new tariffs.
Nor does anyone – not even Trump, probably – know if Washington is going to slap taxes on the imports of cars and auto parts. If he does, the blow to Asia’s supply chains would be immediate and painful.
Raising the stakes further is the fact that Japan’s trade data shows that Tokyo’s surplus with Washington rose for the first time in seven months. Even worse: That 5.1% jump was mostly in the car sector, which is a particular Trump obsession. This news alone could have Trump prodding his negotiators to move forward on bilateral trade talks.
Another potential tripwire: rising concern at the Bank of Japan’s headquarters. On Tuesday, BOJ Governor Haruhiko Kuroda surprised markets with hints that Tokyo might act to weaken the yen. On Wednesday, news of the giant export drop showed why he’s so spooked by the about-face in conditions.
During his six years at the helm, Kuroda has been as reticent and cautious a central banker as you’ll find anywhere.
BOJ’s shock news
Hence, markets’ astonishment to hear Kuroda tell parliament that the BOJ might need to switch on the stimulus machine again. He even detailed what his team might do – from increasing asset purchases to lowering bond yields. Sure, he couched it in macroeconomic terms. Action might come, he stressed, if the economy and inflation were affected by a rising exchange rate.
Thing is, the latest precipitous drop in exports shows that is very much the case. It far exceeded the consensus view of economists for a roughly 5% decline. At the very least, the downshift silences the wishful thinkers hoping for a Japanese snapback from the second half of 2018. It turns out the 2.5% drop in annualized third-quarter growth could set the tone for what’s ahead in 2019.
Any move by Japan to weaken the yen would enrage Trump, who’s been browbeating his Federal Reserve to stop raising interest rates. If the BOJ provokes Trump, expect the US Treasury Department to make it known it favors a weaker dollar. That would put the Korean won, Chinese yuan and other Asian currencies under upward pressure, producing new headwinds.
There’s ample blame to go around, of course. After Asia’s crisis in 1997, governments from Korea to Indonesia to the Philippines to Thailand pledged to wean economies off exports. Had they acted faster and more boldly to develop stronger domestic demand-led growth engines, the region wouldn’t be so vulnerable to US actions.
That goes, too, for Japan. Since 2008, when the “Lehman shock” slammed Asia anew, Tokyo pledged to create a vibrant services industry to supplement industrial exports. All Japan did, though, was ride on China’s coat-tails. Voracious mainland demand for the “Made in Japan” label deadened the urgency to recalibrate growth drivers.
Yet here Asia is, caught in the crossfire between a mercantilist American economy and a lopsided Chinese one. Japan’s trade numbers show that the incoming is only just beginning.