Japanese Economy Slammed by Chinese Economic Slowdown
Nippon Steel & Sumikin Research Institute Corporation
The Japanese economy was sluggish in 2015 due to the plunging resource prices accompanying China's economic slowdown and a decline in US-bound exports. It should pick up again in 2016, but a simultaneous slide into recession by China and the US may be waiting in 2017.
Primary product prices weaken, resource investment plummets
While the Japanese economy showed signs of picking up in early 2015, it was forced into a slowdown as of spring. Personal consumption has held reasonably strong, but an export decline and the concomitant postponement of capital investment in the manufacturing industry are weighing heavily on economic recovery.
Looking first at trends in the export volume index, while this lifted 6.6 percent at an annualized rate compared with the previous quarter in the first quarter of 2015, it then entered a nosedive for the next two quarters, dropping 13.3 percent for the second quarter and 10.6 percent for the third. This was primarily due to the slower pace of Chinese economic expansion flattening resource imports, which in turn caused primary product prices to plummet and decimated resource-related investment worldwide. Economic conditions deteriorated rapidly particularly in Brazil and Russia, which are heavily dependent on resource and energy exports, dragging down with them Japan's exports to both countries.
Official statistics released by the Chinese government indicate that the Chinese economy is currently growing at around seven percent. The manufacturing industry, however, has undoubtedly lost considerable momentum, leading resource imports to flatten. Softening domestic demand saw production volume for steel in particular slip 2.1 percent year-on-year in October 2015. This has of course dampened iron ore import volume, and iron ore import price plunged from US$140 per ton in early 2014 to US$37 in early December 2015. Agricultural products, minerals and energy are in similar shape, with soybean prices dropping from US$480/ton to US$320/ton, coal prices (US futures) from just under US$60/ton to just over US$40/ton. In the case of crude oil prices, China's imports have maintained an upward trend as the government boosts its strategic petroleum reserves (SPR), but softening demand worldwide and the high oil production levels of the US and OPEC have caused prices to crash from US$110/barrel to less than US$40/barrel.
Unsurprisingly, plunging primary prices have prompted a massive drawback on resource investment, with global mining equipment demand slipping 75 percent from 7,200 units in 2011 to 1,800 in 2015. The number of crude oil and natural gas drilling rigs too has declined from 3,700 units in early 2014 to 2,000 in November 2015. The slump in resource investment and the export slowdown caused by falling primary product prices have therefore impacted heavily on resource nations, and relatively fragile Brazil and Russia have already plunged deep into recession. In October, the IMF was forecasting a 2015 growth rate of minus 3.0 percent for Brazil and minus 3.8 percent for Russia, but even greater drops are in fact expected, and Brazil may even slide into its most severe depression of the postwar period, topping the 4.4 percent negative growth recorded in 1981 during the Latin American debt crisis. Given this situation, it is hardly surprising that Japan's exports to Brazil and Russia have slumped, while exports not only to China but also to the NIEs and ASEAN, which are heavily dependent on the Chinese economy, have also inevitably stagnated.
US-bound exports decline, manufacturing capital investment flattens
The second factor behind the export decline is the slump in US-bound exports. The US economy has in general maintained a steady expansionary trend. However, the export volume index for Japan's shipments to the US, having risen 12.1 percent at an annualized rate compared with the previous quarter in the first quarter, proceeded to fall away steeply to minus 10.1 percent for the second quarter and minus 24.6 percent for the third. In addition to the growing tendency of Japanese manufacturers in the US to use local production to cover robust domestic demand, the other cause of this drop has been machinery-related capital investment weakening now that it is back up to the pre-Lehman collapse level and the government's string of investment promotion policies such as accelerated depreciation are losing their effect.
One result of the export slump has been to flatten capital investment in the manufacturing sector. According to the results of a Development Bank of Japan questionnaire survey, major manufacturers had planned to boost their capital investment by 24 percent year-on-year in FY2015, but that was presumably premised on exports maintaining a certain momentum and manufacturing production continuing to expand. In fact, however, fewer exports pushed manufacturing production down by 5.6 percent at an annualized rate compared with the previous quarter in the second quarter and 4.8 percent in the third quarter, with operating ratios also falling. The planned investment in maintenance and renewal was naturally postponed, with manufacturing capital investment looking decidedly lackluster.
Leisure-related investment props up economy, primary product prices plummet
However, the Japanese economy was able to avoid recession thanks to relatively robust personal consumption growth, with leisure and other service-related consumption looking particularly strong. The number of hotel guests, for example, continued to grow at close to 10 percent on the previous year in September and October 2015, due partly to increased foreign tourist numbers, and city hotel operating rates topped levels last recorded during Japan's economic bubble period. The ongoing vigor of personal consumption in services in particular is the result of more middle-aged women and older people taking jobs as labor demand tightens, as well as rising hourly rates for part-time and contract workers. However, greater utilization of middle-aged women and older people has put better compensation for full-time workers on the backburner, and employee wages as a whole have remained flat.
For the Japanese economy, the drop in primary product prices may have meant a slowdown in exports to resource nations, but that slowdown has brought its own merits. Lower prices for crude oil and other forms of energy have reduced Japan's energy imports by just under 10 trillion yen from an annualized 28.1 trillion yen for the third quarter of 2014 to 19.3 trillion for the third quarter of 2015, effectively underpinning the Japanese economy.
Chinese economic stimulus and last-minute demand to spur a recovery in 2016
The Japanese economy should move out of its current stagnation and head toward recovery in 2016, due primarily to the Chinese economy picking up. The Chinese government has been instituting some fairly extreme stimulus measures since mid-2015 to address the slowing recovery particularly in the manufacturing industry. In terms of monetary policy, lending rates have been slashed to an historic low, while the reserve requirement ratio was cut from 18.0 percent in early 2015 back to 15.5 percent. On the fiscal policy front, government spending was more than 30 percent up year-on-year in October 2015. The effects of these stimulus measures have already begun to manifest in, for example, improved housing investment, and the Chinese economy should grow more quickly across 2016, arresting the slide in primary product prices.
Within Japan, the consumption tax hike from eight to 10 percent scheduled for April 2017 will again create last-minute demand. Labor supply will also become even tighter, and if the unemployment rate drops below three percent, wages will rise not just for part-time and contract workers but also full-time workers. This should lift Japan's economic growth rate from less than one percent in 2015 to over two percent next year.
Prospects are not looking nearly as rosy for 2017 onward, however. With the economic stimulus effect wearing thin, the Chinese economy will lose momentum again, and the US economy is highly likely to enter an adjustment phase as it moves into its ninth year of recovery. Meanwhile, Japan will be dealing with the backlash from last-minute demand. It may therefore be wise to regard 2016 as a brief respite before the arrival of a reasonably serious recession.
(original article : Japanese)