China’s COVID-19 Policy and Rising Yuan Against Yen Could Weigh Japanese Economy

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The Japanese economy, which has already come under downward pressure amid the Ukraine crisis and the depreciation of the yen, could also be plagued by China’s radical “zero COVID” policy and the bullish yuan trend.

As energy and commodity prices rise globally following the large-scale attack on Ukraine by Russia, a major oil and gas producer and exporter, Japan, poor in resources, could experience “bad inflation” – a combination of an economic slowdown and a fresh rise.

The yen is certain to extend its losses against other key counterparts, notably the US dollar and the euro, as the Bank of Japan has maintained its ultra-loose monetary easing, likely pushing up import prices and accelerating inflation in the country.

A supermarket in the western part of Shanghai is closed on March 29, 2022, ahead of the area being locked down from April 1 to combat the spread of the novel coronavirus. (Kyodo)

Under such circumstances, the business environment in China, often influenced by the Communist-led government’s anti-epidemic restrictions, and the strength of the yuan known as the renminbi, are expected to deal another blow to the Japanese economy. , the third in the world.

Even after the end of the Beijing Winter Olympics and Paralympics in 2022, China has pledged to continue taking drastic measures to combat the spread of the new coronavirus, such as imposing lockdowns on cities in the event of an epidemic. and quarantine foreign travellers.

At the end of March, Chinese authorities decided to lock down Shanghai, which has a population of around 25 million, with each half of the city being closed in turn for nine days until next Tuesday.

Speculation is also rife that China, Japan’s biggest trading partner, is reluctant to implement measures to depress the yuan to curb a surge in domestic prices, as the prolonged pandemic has severely undermined consumer morale. consumers and businesses.

The yuan jumped 6.4% year-to-date to 19.26 yen on Thursday, while the dollar climbed 6.0% to 122.41 yen in the same period, according to Mizuho Bank, the main banking arm of Mizuho Financial Group Inc.

“We don’t know when China’s business and transportation hubs will suddenly be locked down and we will be forced to suspend operations. We can’t develop a management strategy,” said Hiroshi Nakano, a 43-year-old worker. for a Japanese. maker.

“Additionally, the sharp drop in the yen against the yuan has reduced our profits, as our local company manufactures products here in China and ships them to Japan. We have become reluctant to step up investment and production in China,” Nakano added.

A weak yen against the yuan pushes up the prices of goods imported from China to Japan, although it supports Japanese exporters as they can sell their products cheaper at home and increase the value of their overseas earnings by yen terms.

Japan’s imports to China, however, rose 16.4% from a year earlier to reach 20.4 trillion yen ($166.6 billion) in 2021, while its exports to the country fell. increased by 19.2% to 18 trillion yen, posting a trade deficit of over 2 trillion yen.

The People’s Bank of China said it was working to keep the yuan stable against a basket of trading partner currencies. So far, the country’s central bank has also expressed its willingness to make financial market conditions more accommodative.

In 2021, the world’s second-largest economy grew 8.1% year-on-year, but only grew 4.0% in the October-December period as concern grew over a new wave of coronavirus infections.

At the ruling Communist Party congress in the fall, Chinese President Xi Jinping is poised to secure a controversial third term as leader of the country.

In a bid to ensure Xi has been able to trumpet his achievements in containing the virus, the zero-COVID policy is likely to remain in place, weighing on the wider economy, foreign affairs experts have said.

China set a gross domestic product growth target for 2022 of around 5.5% when it opened an annual session of parliament in early March, but Premier Li Keqiang said it was “not not easy” to achieve this goal given “many growing complexities and uncertainties”. “

The pace of China’s economic slowdown triggered by tough COVID-19 restrictions has been “faster” than expected, said Naoto Takeshige, a researcher at the Ricoh Institute of Sustainability and Business in Tokyo.

Meanwhile, China’s producer price index, a measure of the prices of goods traded between businesses, climbed 8.8% from a year earlier in February.

The rising yuan could lead to lower exports from China, dubbed “the factory of the world”, but the country’s monetary authorities could refrain from stemming the appreciation to avoid “stagflation”, where economic stagnation is accompanied by higher inflation.

While global energy prices will certainly continue to rise for the time being amid escalating tensions between Russia and Ukraine, China could “accept the strength of the yuan”, said MUFG Bank, l main banking unit of Mitsubishi UFJ Financial Group Inc., in a report. .

Yuzo Sakai, chief director of foreign exchange business promotion at Ueda Totan Forex Ltd., also said investors have shown little sign of active redemption of the yen against the yuan as they believe the BOJ will maintain its monetary easing. aggressive.

“Recently, many market participants have become more convinced that the BOJ won’t start tightening monetary policy anytime soon, unlike the US Federal Reserve and European Central Bank. There is no incentive for them to increase their yen holdings” , said Sakai.

“Rising import costs are expected to weigh on the household and business sectors in Japan going forward,” he added.

Business confidence among major Japanese manufacturers deteriorated for the first time in seven quarters in March, dragged down by energy and raw material costs, the BOJ’s Tankan survey showed on Friday.

In 2021, the Japanese economy grew by only 1.6% compared to the previous year in inflation-adjusted terms.

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