ANALYSIS: China slowdown overshadows Japan economy

October 02, 2012

THE ASAHI SHIMBUN

Japan’s economy is leveling off as China’s slowing growth casts a deep shadow over production and exports.

The Bank of Japan’s quarterly Tankan survey released Oct. 1 showed a sharp loss of business confidence among automakers and steelmakers.

The diffusion index for large automakers plunged from 32 in the previous June survey to 19, while the diffusion index for large steelmakers sank from minus 17 to minus 28.

The 13-point drop for large automakers was the steepest among all industry sectors. Automakers are key customers for steelmakers.

The diffusion index for all large manufacturers, the headline component of the Tankan survey, dipped 2 points to minus 3, for the first fall in three quarters. The index stayed below zero for the fourth consecutive quarter.

The index is calculated by subtracting the percentage of companies reporting unfavorable business conditions from the percentage of companies reporting favorable conditions. A negative reading means pessimists outnumber optimists.

In August, exports to China, covering everything from vehicles to steel products, fell 9.9 percent from a year earlier.

The sovereign debt crisis in Europe, China’s largest trading partner, has put a brake on China’s economic expansion. In August, China’s industrial production grew 8.9 percent from a year earlier, its slowest pace in more than three years.

On the domestic front, automakers have been dealt an additional blow from the expiration of eco-car subsidies in September. New vehicle sales in September fell 3.4 percent from a year earlier for the first drop in 12 months.

Some automakers are planning to cut back on production, projecting weaker demand in the coming months.

The Tankan survey found that the diffusion index for large automakers is expected to fall to minus 5 in the next survey in December.

The latest survey may not have fully factored in the impact of recent demonstrations that swept China over Japan’s decision to purchase three of the disputed Senkaku Islands from private ownership and make them state property.

The companies were asked to respond between Aug. 28 and Sept. 28, but the BOJ received many responses before anti-Japanese protests intensified in mid-September.

At a news conference on Oct. 1, Hiroyuki Sasa, president of Olympus Corp., said, “Our sales in China have been affected (by worsening Japan-China relations).”

Some companies are worried that consumer boycotts of Japanese products may spread in China.

Meanwhile, personal consumption, which has held up well since the March 2011 Great East Japan Earthquake, has shown signs of losing steam.

The diffusion index for large retailers fell from 8 in the June survey to 3 partly because of a cutback in summer bonus payments.

“Many employees have seen thinner paychecks, and post-quake reconstruction has stalled,” Masato Nonaka, president of low-priced clothing retailer Shimamura Co., said. “We are in a severe environment as far as consumption is concerned. We cannot even whistle in the dark.”

The diffusion index for all large nonmanufacturers was unchanged at 8, but is expected to fall to 5 in the December survey.

The BOJ is expected to revise down its economic forecast as the Tankan survey showed that the economy is leveling off.

The central bank will likely lower its forecast of real gross domestic product growth in fiscal 2012 from 2.2 percent to between 1.5 percent and 2 percent in its semiannual report to be released on Oct. 30.

A key focus will be the BOJ’s projection of the consumer price index for fiscal 2014, which will be released for the first time in the Outlook for Economic Activity and Prices report.

In February, the BOJ introduced a price stability goal to overcome deflation, saying it will ease monetary policy with the hope of the consumer price index increasing 1 percent from a year earlier.

BOJ Governor Masaaki Shirakawa has suggested the goal may be achieved as early as fiscal 2014, but some central bank officials say a weakening economy is making it increasingly difficult.

That could even delay the government plan to raise the consumption tax rate from the current 5 percent to 8 percent in April 2014 because an upturn in economic conditions is a legislative precondition for the tax hike.

THE ASAHI SHIMBUN
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Automakers emphasize a tax cut for eco-friendly vehicles after eco-car subsidies ended in September. (The Asahi Shimbun)

Automakers emphasize a tax cut for eco-friendly vehicles after eco-car subsidies ended in September. (The Asahi Shimbun)

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  • Automakers emphasize a tax cut for eco-friendly vehicles after eco-car subsidies ended in September. (The Asahi Shimbun)

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