China’s ‘Zero COVID’ and Rising Yuan Against Yen Add Pressure to Japanese Economy

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The Japanese economy, which has already been under downward pressure amid the war in Ukraine and the depreciation of the yen, could also be affected by China’s radical “COVID zero” policy and the upward trend yuan.

With global energy and commodity prices rising in the wake of Russia’s invasion of Ukraine, a major oil and gas producer and exporter, resource-poor Japan, could experience “bad inflation” – a combination of economic slowdown and higher costs.

The yen is certain to extend its losses against other key counterparts, including the US dollar and the euro, as the Bank of Japan has maintained its ultra-loose monetary easing, likely leading to higher prices on the euro. imports and an acceleration of inflation in the country.

Under such circumstances, China’s business environment, 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 economy. Japanese, the third in the world.

Even after the end of the 2022 Beijing Winter Olympics and Paralympics, China has pledged to continue taking drastic measures to combat the spread of COVID-19, such as imposing lockdowns on cities in case of epidemics and by imposing quarantines for travelers from abroad.

Late last month, Chinese authorities moved to lock down Shanghai, which has a population of about 25 million, with each half of the city being locked 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.

On Friday, workers and volunteers watch a compound where residents are being tested for COVID-19 during the second stage of a pandemic lockdown in Shanghai’s Jing’an district. | AFP-JIJI

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 grew only 4.0% in the October-December period as concern grew over a new wave of coronavirus infections.

At the ruling Communist Party’s two-decade congress in the fall, Chinese leader Xi Jinping is poised to secure a controversial third term as the nation’s leader.

To try to ensure Xi can trumpet his achievements in containing the virus, the zero-COVID policy should remain in place, weighing on the wider economy, foreign affairs experts said.

China set a gross domestic product growth target for 2022 of around 5.5% at the opening of an annual session of parliament in early March, but Premier Li Keqiang has said reaching the target will not would not be “easy”, 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 commodity 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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