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Japan Still Dependent on West for Growth

Steep decline in Japanese exports shows that talk of the economy’s decoupling from the West is premature at best.

Japanese exports have fallen at their fastest pace in six months, highlighting weakness in the global economy and calling into question the idea that the Japanese economy has become immune to trouble outside Asia.

July’s 8.1 percent year-over-year drop in volumes sent stock markets falling across the world on Wednesday. Signs of weak Chinese demand for Japanese goods prompted a drop in the Shanghai Composite index to a near three-year low. By the end of Asian trading it was down 0.5 percent on the day to 2,108. Japan’s export-focused Nikkei 225 index ended 0.3 percent lower at 9,131.

Japanese equities have had a bad run since March, hit by the progressive decline in exports and by investor fears that the strong yen and continuing lack of resolution to the euro zone debt crisis may continue to hamper sales abroad. The Nikkei 225 is 10 percent below its March peak.

It was difficult to find silver linings in the export numbers.

Analysts have suggested that Japanese exports could become more resilient during periods of sluggish growth in the global economy, because they are increasingly dependent on China. In 2011, 19.7 percent of the total value went to the Chinese mainland — making the country its largest export partner by far. If one includes Hong Kong and Taiwan, exports to the greater China area accounted for 31.1 percent. More broadly still, exports to Asia as a whole, whose long-term growth prospects are relatively more promising than the West’s, have risen to 56.0 percent from only 40.3 percent 10 years ago. By contrast, the share of Japanese exports accounted for by the EU, where many countries are flirting with or already in recession, is small and shrinking: It was a mere 11.6 percent last year, down from 15.9 percent in 2001.

Japan’s decreasing dependency on Europe is cheering, given that exports to the EU have plummeted 25.1 percent year-over-year according to Wednesday’s figures. However, exports to China also slumped by 11.9 percent — the fastest decline in five months.

One bright spot was the sharp upturn in some raw materials exports to China — double-digit month-over-month percentage increases in exports of metal and metal products to the country enabled this sector to buck the trend by showing an overall month-over-month rise in total Japanese exports to the world as a whole. This suggests a possible divergence in prospects for different types of Japanese exporters. On one side are exporters of iron, steel and other materials that have benefited from China’s continuing infrastructure boom. China’s previous fiscal stimulus, in response to the global economic shock in the wake of the Lehman collapse of 2008, was engineered largely through relaxing the constraints on infrastructure investment by local government. The government is widely expected to use the same strategy in the coming months, in an effort to boost economic growth that, by recent Chinese standards, is flagging.

On the other side are sectors that are more reliant on the global manufacturing sector, which is extremely sensitive to economic downturns. Export volumes of general machinery, which is dependent on demand from manufacturers, slid 4.5 percent month-over-month according to Nomura, Japan’s biggest securities house, compared with an overall month-over-month decline across all sectors of 3.5 percent.

Wednesday’s numbers dampened recent talk that China’s increasing economic power may allow the Japanese export market to “decouple” from the west and continue to expand despite low or zero economic expansion in North America and Europe. Although exports to the U.S. were up 4.7 percent on the year in July, this was the slowest growth in six months.

The notion of decoupling had raised the prospect that the Nikkei 225 might change from its historical position as a play on global growth, to a position more akin to copper or the Australian dollar — a proxy for Chinese economic performance. Investors are constantly seeking indirect ways of gaining exposure to Chinese growth, such as commodities and commodity-based currencies, because of a wariness about investing directly in China’s opaque and hard-to-access equity market.

However, responding to Wednesday’s figures, Asuka Tsuchida, economist at Nomura in Tokyo, said: “We think Japanese exports are likely to recover only when the global economy as a whole recovers.”

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