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Japan’s rugby players celebrate after their shock victory over Ireland on September 28. Japan is having a successful stint as host of the World Cup but its economy is in a ruck. Photo: Reuters
Opinion
Neal Kimberley
Neal Kimberley

Rugby World Cup and US trade deal successes can’t hide Japan’s economic troubles

  • Japan has much to celebrate, in rugby and trade. But challenges remain: its cars are still exposed to US tariffs, exports are plummeting and interest rates are due to stay flat, driving banks to greater risks in search of profit
Neal Kimberley
Neal Kimberley
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Japan’s hosting of the Rugby World Cup already looks to be a success . Tokyo and Washington have agreed to a partial trade deal . On the surface, things are looking up for Japan. But appearances can be deceptive. The Japanese economy is not in great shape.

The successful hosting of major sporting events does wonders for public morale but the economic positives can often be short lived. Tournaments come, tournaments go.

As for the partial deal with the United States, what is immediately noticeable is that it does not include clauses covering Japanese car exports. That issue has been parked, so to speak. While Japanese Prime Minister Shinzo Abe has received verbal assurances from US President Donald Trump that Washington will not impose additional tariffs on vehicle imports from Japan, nothing has been put in writing.

 The issue of Japanese car exports to the US will be addressed in a further round of trade negotiations in April 2020. US policymakers, conscious of the importance of the export sector to the Japanese economy, may be tempted to play hardball, even though Tokyo is a key US ally in the Asia-Pacific.

Japanese exports are already falling off a cliff. Finance ministry data released on September 17 showed Japanese exports in August dropped 8.2 per cent year on year. Falling sales of cars and car parts made a material contribution to the poor data.

Japanese exports have fallen for nine straight months. On a geographical basis, Japan’s exports to China, its biggest trading partner, fell by 12.1 per cent in August year on year, while its exports to the US dropped by 4.4 per cent. Additionally, the poor state of relations between Seoul and Tokyo certainly contributed to the 9.4 per cent slump in Japanese exports to South Korea.
Of course, Japan’s export competitiveness is not helped when the yen trades on the strong side in the currency markets, leaving products made in Japan more expensive for overseas buyers. In the case of South Korea, there is some evidence to suggest that Korean consumers are boycotting Japanese products.
Meanwhile, Japanese monetary policy remains ultra-accommodative as the Bank of Japan steadfastly continues to try to reach a target of 2 per cent for inflation. Data released on Friday showed core consumer prices in Tokyo, generally regarded as a leading indicator for Japan, rose by just 0.5 per cent year on year in September, a deceleration from the 0.7 per cent increase in August.
The sales tax hike kicking in this month could give inflation a temporary lift but it could also adversely affect consumption if consumers rein in spending in response.
Either way, the combination of poor export data and renewed evidence of subdued inflationary impulses are sure to increase the likelihood of yet more monetary easing by the Bank of Japan this month, though with no guarantees that even-looser policy will have the desired impact.

Nor will a further loosening of Japanese monetary policy necessarily be welcomed by either Japan’s mega banks, with their global footprint, or its regional banks with their local emphasis.

Japan’s big gamble on negative interest rates

Ultra-accommodative monetary policy has made domestic lending less profitable for all Japanese banks. Japan’s financial regulator, the Financial Services Agency (FSA), already has concerns about the country’s regional banks.

“The environment around regional banks has become increasingly severe,” the FSA’s annual report said in August. “Regional banks need to establish a sustainable business model and secure financial health.”

Japan’s MUFG has once again become a major banking force in emerging Asia

As it is, Japan’s regional banks are adjusting their business models, increasing their risk exposure in new areas to improve profitability. How successful they will be in managing those higher risks remains to be seen.

Mega banks, in the face of unattractive lending conditions in Japan, have in recent years centred their efforts on an expansion of their international loan portfolios, with an emphasis on US dollar-denominated loans.

Yet, the success of such a strategy rests on securing ample short-term US dollars at a reasonable price to fund long-term loans. Tighter US money market conditions, as have recently been seen, increase short-term US dollar borrowing costs. That is likely to complicate matters for Japan’s mega banks.

Japan is having a pretty decent Rugby World Cup but the nation’s economic problems are mounting.

Neal Kimberley is a commentator on macroeconomics and financial markets

This article appeared in the South China Morning Post print edition as: Partial US trade deal can’t hide Japan’s economic woes
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